Hello, hello, hello! Today I’m hosting the Penny Fractions Reader Call at 7 pm EST, which you can sign-up for here. Over the last month, I’ve mentioned the idea of wage transparency in the music industry. In that spirit, here is the Penny Fraction budget, so y’all can see where the Patreon money is going. A minor gesture but I figured I should practice a bit of what I preach. If you enjoy my work and would like to support it, recommend the newsletter to a friend or support via Patreon. Okay, let’s talk about Tencent.
Tencent: The Early Years
When the record industry was most worried about the alleged threat of Napster, across the globe, a company, whose reach would one day surpass the dreams of the tech bubble’s poster child, was just getting started. Tencent was founded in late 1998 and launched OICQ, an online messaging platform later renamed QQ, in 1999. During the height of the internet bubble it received investments from the Hong Kong telecommunications firm PCCW and IDG Ventures, one of China’s oldest venture capital firms. The funding helped the company float into the new millennium but in 2001, the South African publisher Naspers bought a 46.5% chunk of the still unprofitable company. (Only a few years prior the publisher faced an external and internal reckoning for its 20th century funding and support of apartheid.)
Throughout the rest of the 00s, Tencent built upon its messaging services and started to find ways to make money through selling digital goods. In 2011, the company launched what would be known as WeChat, its most successful product, which amassed a billion users by the end of the decade. This is the abridged version of this story, because Tencent’s forays into video games (Riot Games, Epic Games, Ubisoft, etc.), Indian tech firms, American tech firms (Snapchat, Tesla), and NBA partnerships could fill a book. This is to say that while Tencent’s reach into recorded music is deep, it’s only one of many industries finding a secure home. So, what about music?
Tencent’s Endless Expansion
Before Tencent could envision investing across the entire music supply chain, its ambitions were much smaller in scope. QQ Music started back in 2005 and would, over the next decade, morph into a traditional music streaming platform with allegedly over 800 million users. 2014 proved to be a major year for Tencent, as it signed a number of major deals with international record labels. First up was a distribution deal with Warner Music Group; South Korea’s YG Entertainment followed next, and Sony also signed on before 2014’s close. These deals signaled that China, a country often written off by the rest of the industry due to piracy, might be open for business to international record labels.
That same year in September, Tencent launched WeSing, a karaoke app that would hint at how the company would see profits return within a business where others struggled to achieve such a feat. WeSing made money through virtual gifts rather than relying on advertising or subscriptions. Tencent looked to expand that model when it merged with the Chinese Music Company, who operated, not owned, Kugou, the world’s largest music streaming platform, and Kuwo, another major music platform. I’ll note here what Cherie Hu wrote in March: Tencent Music isn’t based in China and is incorporated in the Cayman Islands, and thus doesn’t directly own any of these firms. CMC worked in a similar arrangement with its companies, which carried over post-merger.
This new venture created Tencent Music Entertainment Group, which by the sheer number of users, is by far the world’s largest digital music firm. It was tipping and livestreaming on apps like Kugou, Kuwo, and WeSing that carried the company, though it's still aimed to increase paying subscriptions through platforms like QQ Music or the highly popular Hong Kong-based Joox, which launched in 2015. It’s from this position of relative strength that the next few years see Tencent embark on a series of expansions.
In the summer of 2017, TechCrunch reported that Tencent was interested in purchasing Spotify. Neither company commented on the story but clearly it was asking the right questions, because a few months later in December Tencent Music, not Tencent, and Spotify announced a 10% stock swap. The music business and tech press treated this news with a fairly warm reception, suggesting that it was a good deal for both companies. While the press was still chomping at the bit for Spotify’s eventual launch in India, Tencent, not Tencent Music, invested $115 million in Gaana, a music streaming platform backed by India’s largest media company, Times Internet.
Around the same time, a slightly less high profile deal was announced between Tencent Music and Sony Music Entertainment that created Liquid Audio, an EDM-centered record label. The depth of Tencent’s entrenchment within the international record industry was seen when Music Business Worldwide reported in June 2018 that Sony/ATV owned a small part of Tencent Music. This was because Sony previously invested in the Chinese Music Company prior to Tencent’s 2016 merger, but again Sony/ATV’s investment isn’t directly in any of the platforms that Tencent Music operates. A bit confusing, I’ll say.
In July 2018, after that MBW report, Tencent Music filed for an IPO in the United States. Quartz noted unlike Spotify that Tencent Music, proved to be profitable as it looked to IPO but this is a rather poor comparison of firms. Tencent Music, a fusion of various decade-plus old music platforms, was able to offer freemium content and subscriptions. With WeSing, Kugou, and Kuwo, livestreaming and virtual tips brought alternative forms of revenue that are still slow to emerge in western markets. Even if Tencent Music and Spotify are both considered music streaming platforms, a direct comparison between the two ignores the fairly different approach each company is taking towards the business. Before moving into Tencent’s most recent deals let's look at Tencent Music’s F-1 filing (emphasis mine):
There may arise business opportunities in the future that both we and Tencent are interested in and which may complement each of our respective businesses. Tencent holds a large number of business interests, some of which may directly or indirectly compete with us. For example, Tencent currently owns equity stakes in certain music streaming businesses operating outside of the PRC. See also “Our Relationship with Tencent.” Tencent may decide to take up such opportunities itself, which would prevent us from taking advantage of those opportunities.
The two companies that fit this description are Gaana and Smule, a San Francisco-based music startup. Tencent led a $54 million round of investments in Smule in 2017, and in 2018 the startup received another $20 million led by...Times Internet to help with its Indian expansion. So far, it seems Tencent has at least kept Tencent Music out of its Indian music investments and remains closely aligned with the Times Internet. This presents a different strategy than what the company’s done with western music labels.
In late 2019, Tencent led a group of investors including Tencent Music to buy 10% of Universal Music Group, with an option to purchase an additional 10% in 2021. This inspired Cherie Hu’s graphic on the various stakeholders between record labels and music platforms, just displaying the interconnected web of these businesses. Last month, that meshing only continued after Warner Music Group’s IPO led to Tencent and Tencent Music getting a $200 million stake in the company. Thus in 2020, it’s almost impossible for a major record industry transaction not to involve Tencent in some capacity. With this web of investments as the backdrop, where does this leave the record industry going forward?
Antitrust Dreams and Nightmares
Last August we got a hint of how external forces might slow down Tencent's growth. MLex reported that China’s newly established State Administration of Market Regulation (SAMR) was seeking to investigate the potential anti-competitive behavior of Tencent’s licensing with international major labels (including Sony, UMG, and WMG). The implications for the inquiry were fairly broad, as the agency wasn’t looking strictly at market share. Tencent, with its over 50% control over the Chinese streaming market already exceeds the point beyond which they could be suggested for regulatory oversight.
Rather, the concern was that the deals the company set-up forced non-Tencent music platforms to pay increased fees to license music, because Tencent was able to markup the price based on their licenses with major labels. If sheer market dominance wasn’t a concern of anti-trust, then Tencent’s monopoly on these licensing agreements and its practice of sublicensing them at a higher rate to smaller streaming platforms would be in consideration. Yet, in February this year, SAMR suspended its investigation, which led to reports speculating that it was because of Tencent’s agreement to license music to Bytedance, the owner of TikTok. Either way, the stock drops that followed the initial investigation shows that any regulation applied in the company’s direction could be a major concern.
The European independent trade group IMPALA voiced concerns about Tencent’s investment into UMG on the grounds that it was already a dominant player in China and buying into the world’s largest record label. Variety expressed skepticism about American regulators being able to do much about Tencent, specifically if the company wanted to purchase Spotify. Last month, the Music Industry Blog asked Just What is Tencent’s End Game?, but the publication laid out its mission back in early 2018, when it compared the company to Liberty Media, which owns parts of LiveNation, SiriusXM, Pandora, iHeartradio, etc. If this is the scale of music firms in the 2020s, what’s the proper way to deal with them?
Tencent Music’s earning’s last year showed slower growth in Kugou, Kuwo, and WeSing, which could offer hints at there being a ceiling to digital goods revenue. There are also Tencent’s expiring deals with the major labels that could offer a bit of reprieve for other Chinese platforms that were forced to sublicense through them. Still, the fact Tencent holds investments within all of these record labels would hint at them retaining some amount of bargaining power in ongoing negotiations. Even though American and European regulators may not be able to directly address Tencent’s control over the Chinese music industry, the companies that invest in record labels could be more heavily scrutinized. The current environment not only makes it impossible for firms to compete unless they’ve reached this scale, but it completely drowns out the demands that could be heard by artists on these platforms. Hard to affect change in an industry where every billion dollar corporations colludes with each other.
A Note of Financialization
I’m honestly a bit torn in providing a round-up of song rights acquisitions since this is always happening...but Hipgnosis acquiring the catalog of RedOne makes me want to share some thoughts. These stories are generally just press releases with a little bit of commentary added, but I appreciate the thought of taking at face value a quote like this from RedOne: “Merck is absolutely someone who really understands the art of music and appreciates the value of hit songs. After speaking to him I knew Hipgnosis is the Company I would be happy to sell my music catalog to.” The tone is so amusing to me, as if someone needed a bit of extra assurance as a company throws them who knows how much for their hard-earned music royalties. Last note: Google invested $4.5 billion in Reliance Jio Platforms, which owns the massive Indian telco Jio, the parent company of music streaming platform JioSaavn. The endless knot of investment continues.
Universal Music Group announced that the 2020 November election will be a company holiday, which is good. Elections should be federal / state holidays, so my next question is if this can trickle down to local and state elections because those are ones that have a more direct impact on people’s lives. This idea came from a company group that emerged from the George Floyd protest, so while I’ve been critical of the industry’s response to the on-going protests this is a nice gesture.
6 Links 2 Read
Regulation? Does the current United States government even care about regulation in 2020? According to this piece I’d wager: no. The complex web of Tencent is certainly distressing, but Liberty Media’s no better as it stretches across live music, terrestrial radio, and digital platforms.
Ed Peto's wide-ranging interview here touches on several things I mentioned earlier, in particular Tencent’s major label deals. It was interesting to see just how much space there is to grow within the world of publishing, which is a topic I write about more and more. This is a good deep dive into publishing outside of the United States.
The Era of State-Monopoly Capitalism - Tribune
I’m a rather big fan of Grace Blakeley’s writing, and this is no exception. In a way, this piece influenced what I wrote above in that antitrust and calls to break-up large firms are necessary but are increasingly not able to meet the demand of the moment.
Money, Music & Method with Alex Williams - Monthly Review
I don’t recommend podcasts too often, especially not ones where I’m not talking. Yet, this conversation takes an interesting turn in the second half as it discusses an artist-specific job program and how that’d differ from simply giving your favorite artists a couple thousand bucks a month to just make art. An interesting proposal that I’d love to explore more.
Why Spotify Needs Russia - The Music Industry Blog
The word “needs” is doing a lot of work right here. Certainly Spotify would like to see its real subscribers continue to grow in new markets, but I highly doubt the firm’s livelihood would be on the line.
I appreciate Billboard crunching these numbers but I don’t think anyone is stressing about the immediate return value of this particular deal. Though, I’m sure if someone did they would appreciate the reverse engineering here.