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China's Two Largest Tech Companies Sign A Deal Over The West's Biggest Music

Sep 12, 2017
Originally published on September 12, 2017 12:25 pm

Among the deals being signed that shape the way the world experiences culture, a new partnership will exert a great influence on the flow of content from the world's three remaining major record labels to an enormous and growing marketplace — as long as everyone plays by China's opaque rules around expression.

Last night, China's two largest tech companies, Tencent and Alibaba, announced a deal centered around the world's largest catalogs of music. Tencent, which runs three of the country's most-popular music apps (QQ Music, Kugou and Kuwo) as well as the massively popular WeChat, will license the catalogs of Universal Music Group (UMG), Sony Music and Warner Music Group (WMG) to Alibaba, the online retail giant founded by Jack Ma.

(Below, watch Ma celebrate his birthday with a unique tribute to Michael Jackson.)

This deal allows Tencent to make deals the labels normally forge with their own hands. In May, Tencent's subsidiary music division, Tencent Music Entertainment (TME), signed a licensing deal with UMG, the last major label to do so with the company. As with its deals between Sony Music and WMG, Tencent is also charged with brokering those companies' catalogs when licensing them in China.

"TME will also be UMG's master distribution and licensing partner to exclusively sub-license UMG's content to third-party music service providers in China," the company wrote in a press release on the UMG news.

Spotify, when it launched stateside in 2011, promised to bring growth back to the record business after a decade of contraction. It did, though artists have sometimes objected to the terms. The same promise lies eastward.

Because of this, and in spite of myriad issues — mostly ethical and legal — China is a coveted place to be in the content business. China's massive population and rapidly legitimizing digital streaming market yielded a 20 percent year-over-year growth in music revenues last year, according to the International Federation of the Phonographic Industry. A big jump, but one that's only scratching the surface; the country has been a bastion of piracy and paid streaming is still in its infancy.

"It is an important and dynamic time for music in China," said Cussion Pang, CEO of Tencent Music Entertainment, in a recent statement. "The market is developing quickly and we are on the cusp of a dramatic transformation."

But why would the world's most powerful music companies give a Chinese intermediary — one that is vastly successful, sure — the keys to their catalogs, instead of administering them themselves? Normally, this is not how things are done; these companies spend months, sometimes years, striking deals directly with services like Spotify and Apple Music. This ceding of control is due to innumerable factors but one central reason: The Chinese government wants its successes in technology and entertainment to be homegrown, or at least strictly home-controlled.

This is accomplished, in part, through opaque laws governing the content companies are allowed to offer customers. In late 2015, the government issued a new rule that placed the responsibility of policing their offerings for music that may have a "destabilizing" effect on the country; earlier that year, it also required companies remove 120 rap songs from their catalogs. Another new rule, issued earlier this year, covered very similar territory but over film in the country. Movies must "serve the people and socialism," the law read. These rules, however do not come with clear guidelines, leaving Western companies relatively in the dark.

There is, of course, a way to know what the government wants to see, and what it doesn't — by knowing who within it to ask. So, in order to police content effectively, media companies appear all-but required to have a close relationship with the government, which would, of course, favor companies native to it.

On top of all this is the stark fact of Tencent's most popular product, WeChat — the country's "everything" app, which had 963 million monthly active users in the second quarter of this year. Where do most of those customers get their cell phone data service? China Mobile, the state-owned wireless carrier, which has 849 million customers. Verizon Wireless, the most popular carrier in the U.S., has around 145 million. (The relationship between China Mobile and the government isn't as simple as "owned by the government," but that's a discussion for another time.)

And so we have companies like Universal Music, Warner Music and Sony Music taking lump sums of cash, partially to make money where there previously was none, and partially to further foster the country's still-nascent market for legal media consumption. (After all, the country only began the process of recognizing Western intellectual property rights in 1992.)

Of course, none of this addresses censorship and state control. Facebook was dragged last year for developing tools that would comply with state censorship laws, while Google opted out (but is said to be preparing for re-entry).

In entering the Chinese market, these and other Western companies including the major record labels may find themselves in a relationship described by the artist Ai Weiwei in a New York Times op-ed as a form of voluntary censorship: "Whenever the state controls or blocks information, it not only reasserts its absolute power; it also elicits from the people whom it rules a voluntary submission to the system and an acknowledgment of its dominion."

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