On July 24, China's State Administration for Market Regulation condemned Tencent Music Entertainment (TME) 's acquisition of China Music Corporation(CMC) and ruled that the transaction “limited fair market competition”. The corresponding penalty includes a fine of RMB 500,000 and the prohibition of any exclusive copyright contracts.
On August 17, TME published its Q2 results. showing total revenue for the quarter of RMB 8.01bn, which exceeded expectations. This sort of performance shows the token nature of the fine itself, but the ruling has created immense uncertainty regarding the future of the company. Recent share price volatility is reflecting this and more.
The National Copyright Administration announced efforts to constrain piracy in July 2015. Since then, a music-streaming firm in China, like TME or Alibaba Music, puts a record company's songs on its music App only if it purchases the record company's copyright. Ideally, from a competition perspective, multiple music-streaming firms can hold a record company's copyright, but platforms are looking for exclusivity. No other music-streaming competitors are allowed to play the record company's music products if exclusive rights are granted. Exclusive music rights turned out to be the key to success in the online music-playing platform market.
Competition amongst streaming platforms was fierce. In 2015, Baidu Music decided to quit and sold itself to Taihe Rye Music, a famous music studio in China. TTPod and Xiami Music, the music-playing Apps from Alibaba, have announced their shutdown in2016 and 2021 respectively. Now only TME and NetEase Music remain.
Tencent's acquisition of CMC in 2016 brought TME a substantial advantage. The combined entity now has the exclusivity of more than 80% of music products in China. TME also accounts for about 70% of the total market revenue, It is hard to deny a trend of monopoly. While we often can accuse the Chinese government of behaving arbitrarily when it comes to enforcing anti-competitive behavior, the penalty on TME is justifiable in maintaining fair market competition.
As the penalty bans businesses associated with exclusive rights,TME has lost its ability to corner the market for music content. Where does this leave the company? TME has established a plan, which can sustain itself completely without its exclusive copyright businesses. Winning the copyright fight has bought TME a 5-year-long period to explore a brand-new business model, including the tryout of online karaoke and audiobook platforms. Content innovation and long-audio services are the two pillars for TME's future strategy.
TME plans to cooperate with new trend music studios, which the Gen Z favors, to ensure its prospective primary users differ from NetEase Music's. In addition, the penalty does not forbid contracts with independent musicians. Now 230,000 musicians are publishing their products through Tencent's music App. NetEase Music has no way to compete with TME in terms of the enormous body of independent musicians.
TME will launch its online long-audio services. A podcast App is the most likely approach. Entering this sector will be challenging since it will confront Ximalaya, China’s largest podcasting service. However, TME's clever move is to integrate the long-audio services with its online karaoke service, which TME has developed for five years. TME will also use WeChat as the secondary long-audio platform to guarantee a sufficiently large user body. Ximalaya has never engaged in online karaoke and has much fewer users than WeChat does. As such, Tencent has a chance to thrive in the long-audio market.
Currently, TME’s regulatory struggles and depressed share price are a concern. But the company can pivot and adapt to the new regulatory framework. TME's new strategy has the potential to beat its competitors in both online music playing and long-audio services in the future.
The company’s prospects are much less dire than the prevailing narrative and share price would indicate.