Tencent Music Entertainment: will they stop at Universal and Spotify?

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Tencent Music Entertainment, China’s largest music streaming company, is in trouble. Since the company entered into a sublicensing agreement with Warner Music Group (WMG) in November 2014 – the first of its kind – it maintains privileged relationships with the world’s largest music rights companies.

This special relationship is now the subject of close scrutiny. In January, Chinese State Administration of Market Regulation launched an investigation into Tencent Music Entertainment and its current contracts with the three major record companies: WMG, as well as Universal Music Group and Sony Music Entertainment.

As part of these contracts, it is understood that TME not only obtains the possibility of licensing the catalogs of these companies for its own platforms (QQ Music, Kugou and Kuwo), but also of sub-licensing this material to its services. competitors, including NetEase Cloud Music and Alibaba’s Xiami. If it turns out that TME is unfairly advancing itself in this situation – by “raising the prices” of its competitors to an anti-competitive degree – then the Chinese market regulator could attack the company as a ton of bricks.

While this kerfuffle continues, Tencent – specifically, TME’s majority owner, Tencent Holdings, valued at $ 430 billion – seems to be finding a more legitimate way to slip into the majors’ bed. Tencent is currently in talks to buy between 10 and 20 percent of Universal Music Group, in a deal worth around $ 3 billion. If this transaction goes through, it will give Universal a valuation of over $ 33 billion, and the three majors combined will be worth, in terms of market, over $ 85 billion.

The days when Tencent could sub-license music from majors in China may be over, but Tencent’s approach of buying a minority stake in UMG could bring other serious benefits, especially for UMG artists. TME’s three services claim an 83.8% Chinese music streaming market share, according to Quest Mobile and Macquarie ResearchChina. If Tencent gets a direct monetary interest in the success of UMG artists, it could quickly accelerate the prospects of non-Chinese stars in the territory. (Leading the way, Taylor Swift just showed said non-Chinese stars what they’re currently missing: her latest album, Lover, achieved more than one million “equivalent” sales in China at the end of its first week, a record-breaking performance for an international artist.)

“I’m really excited about the Tencent / Universal deal – it’s an incredible potential intersection not only between two strategically aligned companies, but between East and West,” says Jordan Bromley, music lawyer at Manatt , Phelps & Phillips. LLP, which represents multi-platinum artists and songwriters from Los Angeles, and has a keen interest in the development of China’s entertainment industry. “If this agreement is concluded, I imagine that the artists of Universal will naturally benefit from preferential treatment. [on Tencent services] based on the greatest financial reward Tencent will receive when this happens. It sounds like a strong synergy strategy.

The question is, what happens now? My Money says Tencent’s long term strategy is, in essence, to own the international music business in China. And that he will attempt to do so by accumulating minority stakes in the most powerful musical societies in the United States and Europe. Why minority stakes? Because, in a practical way, they’re much less likely to trigger anti-competitive watchdogs.

On the one hand, Tencent already owns nine percent of Spotify (while Spotify owns nine percent of Tencent Music Entertainment), thanks to a “Stock swap”, noted in 2017. It sounds a bit like a “gentlemen’s agreement”, in which Spotify gives up any previous plans to annoy TME by trying to get into China. At the end of 2018, Spotify’s CFO, Barry McCarthy basically confirmed this, telling the media during a closed-door call: “Our strategy in mainland China is our investment in Tencent Music. We don’t intend to compete with them in China. (This adds complexity to the situation: Universal still owns around 3.5% of Spotify, which means that if Tencent bought 20% of UMG, it would also buy around 0.7% of Spotify as part of the OK.)

If Tencent were to execute this strategy, its next natural target after buying a minority stake in UMG would be Sony Music Group (owner of Sony Music, the Sony / ATV record company and publisher) – which is publicly traded through Sony Corp. . in Japan. – or Warner Music Group, wholly owned by Access Industries of Len Blavatnik. Due to the simplicity of its ownership, Warner may prove to be the more attractive of the two. Tencent could also review the status of the next two largest global music rights companies: BMG, headquartered in Berlin, and Kobalt, headquartered in London. Interesting way, Tencent already has a working JV label with Sony Music, Liquid State, which launched in early 2018 from Hong Kong and focuses on dance / electronic artists.

Tencent will know that if he wants to acquire new minority stakes in the music business, he may have to work quickly. NetEase Cloud Music Just Raised $ 700 Million by selling part of its business to Alibaba, one of the richest companies in the world. And the likes of Apple and Google / YouTube – which were both rumor has it she is considering an offer to buy a piece of Universal at various times – may feel they need to respond to a Tencent-Spotify-Universal link in the future by gaining their own interest in a music rights company.

Speaking ahead of Alibaba’s investment in NetEase this month, Jordan Bromley told me, “NetEase in particular could meet the [Universal] bid. All of these companies – Tencent Music, NetEase Cloud Music and Alibaba’s [Xiami] – are supported by a huge amount of money. Tencent dominates the music right now, but they are all major players. I could see NetEase attempting some sort of similar arrangement with music [rights] business in the future.

He added, “China is such a huge country, and everything in it is moving into the music business – copyright law is moving in. [the industry’s] favor, and the data reports we’re seeing on feeds are really improving.

“There is still a lot to discover. But with the Tencent deal, Universal is going to be placed right in the center of this incredible market as it all starts to happen. For artists [that company] working with it is an extremely valuable perspective.

Tim Ingham is the founder and publisher of Music trade in the world, who has served the global industry with news, analysis and jobs since 2015. He writes a weekly column for “Rolling Stone”.

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