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Tencent Music Targeted for China Competition Regulator Crackdown: Report

The regulatory action could result in Tencent’s music arm, which has grown into a powerhouse since being spun off and listed on the New York Stock Exchange in 2018, becoming a smaller company once the dust settles. The Chinese regulator is looking to loosen the company’s stranglehold on the streaming market, which has tightened since Tencent Music acquired competitors Kuwo Music and Kugou Music in 2016.

Those acquisitions helped Tencent to pursue exclusive streaming rights with the major record labels, which have been eager to push deeper into China’s burgeoning streaming market. Streaming revenue in China, the world’s seventh largest music market, grew by 34% to $718.1 million in 2020, according to the IFPI.

Reports of looming regulatory action in China sent shares of Tencent Music (TME) down 5.4% to $17.80 on Thursday. The stock has fallen almost 17% over the past month.

The regulatory crackdown is part of a broader push by the government of China’s president Xi Jinping to clip the wings of the country’s internets giants, which grew rapidly under looser regulation earlier in his administration, which began in 2013. Under Jinping and former president Hu Jintao, the Chinese government adopted a somewhat hands-off approach toward the nascent e-commerce, internet and digital-finance areas of the economy.

But lately Xi Jinping’s government has been looking to limit the economic and social influence of China’s most powerful corporations and their billionaire founders like Jack Ma, founder of Ant Group Company.

Companies that concern the Communist Party include Tencent and Alibaba Group Holding, private internet firms that collect valuable data from hundreds of millions of consumers which the party can’t easily control. Tencent, Ant and Alibaba had a combined market capitalization of nearly $2 trillion in early November, according to Bloomberg, a sum that surpassed state-owned Bank of China as the country’s most valuable companies.

Tencent’s sprawling businesses include content steaming, video games, social media, advertising and cloud services. Its messaging app, WeChat, has over a billion users in China. Tencent Music’s three music services — QQ Music, Kugou and Kuwo — had 42.7 million paying users at the end of March, up 50% year-on-year, and 657 million monthly active users, the company reported in its latest quarterly results.

Like Spotify, which owns 8% of TME’s shares, Tencent Music is also expanding into non-music content. Tencent said last week that the number of users of long-form audio — which includes audiobooks, comedies and audio dramas — had surpassed 100 million, a jump of 230% year-on-year. The company said it was seeking to “expedite [its] evolution into a leading all-in-one music and audio entertainment platform in China.”

Against that backdrop, China’s government crackdown picked up steam in March when SAMR said it had fined 12 companies over 10 deals that violated anti-monopoly rules, including Tencent, SoftBank and a ByteDace-backed firm. Xi Jinping ordered regulators to target monopolies, boost their oversight of internet companies and foster fair competition, Chinese state broadcaster CCTV reported.

Then earlier this month regulators slapped a record $2.8 billion fine on Alibaba after an investigation concluded it had abused its market position for years. The fine amounted to about 4% of the company’s fiscal year 2020 revenue. The government also gave Tencent, Meituan and TikTok owner ByteDance one month to “heed Alibaba’s example” and cut back on anti-competitive practices such as exclusivity requirements.

Now Tencent appears to be in regulators’ crosshairs. Reuters reports the regulator has informed Tencent Music it should expect a fine, be prepared to give up exclusive streaming rights and possibly even be forced to sell Kuwo and Kuguo to other investors. (Tencent Music did not respond to Billboard‘s requests for comment.)

Following the acquisition of the steaming apps, Tencent drew controversy for sublicensing some of its exclusive rights to competitors like NetEase Cloud Music, which accused Tencent of unfair terms and high pricing.

The competition regulator launched an earlier probe into Tencent in 2018, but ended it in 2019 after the company said it would stop renewing some of its exclusive rights, which normally expire after three years. But Tencent apparently held on to its exclusive rights to Taiwanese pop star Jay Chou, and leveraged the arrangement against competitors NetEase and Alibaba-backed Xiami Music, Reuters reported.

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