Tencent and Universal Music to take Chinese artists global under joint label

Digital entertainment titan Tencent continues to drum up its music ambitions. On Tuesday, Tencent Music Entertainment, majority-owned by Tencent with a 55.6% stake, announced establishing a new joint label with its licensing partner Universal Music Group to discover, develop and promote Chinese artists domestically and to the world.

TME, which spun off from Tencent and went public in the U.S. in 2018, commands the lion’s share of China’s music streaming industry through three apps — QQ Music, Kugou and Kuwo. It also operates other music-related businesses, including live events and a popular karaoke app.

Although 651 million users streamed music through TME services in the second quarter, only 47.1 million were paid subscribers, signaling a much lower conversion rate compared to Spotify, which did a share swap with TME in 2017.

Licensing fees take up a big chunk of streaming services’ expenses. Cultivating its own artists will give TME more control over music content and eventually reduce dependence on content IP owners.

TME hopes that the new label will enable it to “produce new music loved by the younger demographic, bringing in iconic music stars, innovative music works and more breakthrough music genres to the global music market, ultimately providing music fans in China and around the world with a spectacular music entertainment experience,” said TC Pan, the group’s vice president of content cooperation.

The partnership can potentially close “an undeniable gap between China’s music market and the rest of the world,” suggested Andrew Spalter, founder of East Goes Global, an agency bringing Western artists to China. “This partnership further legitimizes China as the fastest-growing music market in the world. The overall resistance in tapping into and collaborating within China’s music ecosystem is no longer an option for those who want to succeed on a truly global scale.”

Break with precedent

As part of the announcement, TME also said it signed a multi-year extension of its licensing agreement with UMG.

Concurrent with the news is, noticeably, UMG’s licensing deal with TME’s Chinese rival NetEase Cloud Music. This departs from the precedent of TME’s monopoly on streaming Western mainstream music in China. For years, TME had spent heavily on exclusive rights from UMG, Warner Music and Sony Music Entertainment. It further deepened ties with WMG and SME, which bought shares of TME when it went public.

The setup triggered an antitrust investigation into TME last year. It forced TME’s domestic rivals, including NetEase, to sublicense its catalogs, often at above-market rates, and indirectly prompted smaller players to develop their own artists. NetEase, for instance, is known for developing indie musicians.

NetEase CEO William Ding has been a critic of exclusive music rights. In a February analyst call, he labeled the practice “unfair and unreasonable” and called for an end to it. He achieved his goal.

Speaking on NetEase’s latest licensing tie-up with UMG, Ding remarked: “The partnership further strengthens NetEase Cloud Music’s position as a go-to platform for high-quality international music and marks a great step forward for China’s music industry as a whole.”

Updated with expert comment on August 12, 2020.