China is preparing to hit Tencent Holding Ltd. with a fine of at least $1.54 billion (RMB10 billion) as part of a larger antitrust crackdown on its major internet firms, according to a report in Reuters. That sum would be large enough to serve as a strong warning to the industry, but less than the record $2.75 billion penalty fine slapped on Alibaba earlier this month.
China’s State Administration of of Market Regulation (SAMR) is investigating Tencent for anticompetitive practices, probing its music-streaming business and Tencent Music Entertainment Group (TME) in particular, according to the report. The conglomerate also faces fines for not properly reporting past acquisitions and investment for antitrust reviews, each case of which can yield a fine of up to RMB500,000 ($77,000).
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“The attitude from the regulator is that, unlike Alibaba, you are not the biggest target here, but it would be impossible not to penalize Tencent now that the campaign is in action,” Reuters cited one of its sources as saying.
Tencent and Alibaba Group are China’s two biggest tech giants, with market values of $776 billion and $642 billion, respectively. Tencent is involved in a wide array of entertainment sector businesses, its core sectors of video games and social media to content production, video streaming, and music.
Although Tencent’s main video game and social media businesses may come out of the probe unscathed, the company will likely be asked to give up its exclusive music rights and possibly even forced to sell its Kuwo and Kugou music apps, Reuters said.
TME spun off and listed separately in the U.S. in 2018, and currently has a market cap of $32 billlion. Its music apps include QQ Music, the online karaoke platform WeSing, and rival streamers Kuwo and Kugou, which it acquired in 2016. Its biggest local competitor is NetEase Cloud Music, given that its other rival, Xiami Music, shuttered in February. It also owns stakes in two of the three major labels as well as the world’s largest music subscription service: 20% of Universal Music Group, around 9% of Spotify and a $200 million stake in Warner Music Group.
For years, TME kept a strangehold on the rights to major catalogues in China by signing exclusive streaming contracts with Universal, Warner and the third major, Sony. Portions of those rights are then sub-licensed to other competing streamers, who continue to rail that the set-up is unfair and forces them to pay much higher prices than they should.
A 2018 SAMR investigation led Tencent to drop some of its exclusive rights contracts at the end of their three-year duration; the probe was suspended in 2019. Tencent has made good on those commitments, signing new contracts over the past year with Universal and Warner that do not include exclusive sub-licensing rights. Last year, rival NetEase for the first time signed a deal to directly license songs from Universal, chipping away at Tencent’s iron grip on China’s music market.
Now, however, Tencent may be asked to give up even more of its exclusive rights — such as those to the catalogue of Jay Chou, the world’s biggest Chinese language pop star, Reuters said. At the moment, Tencent is fighting for better terms as it awaits the Chinese authorities’ final say-so.
“Tencent doesn’t mind paying a hefty fine and is willing to pay more if it needs to, as long as its core businesses [of video games and WeChat] remain intact,” a Reuters source said.
The Chinese government has grown increasingly worried about the influence of its powerful and data-rich tech giants. In recent weeks, China gave 34 of its biggest tech firms, including Tencent, a month to correct any anti-competitive business practices. Earlier this week, SAMR said it would investigate the Tencent-backed food delivery company Meituan for potentially forcing clients to use its platform exclusively.
Tencent may also be required to heed certain concessions, such as giving up exclusive rights to broadcast games in order to go ahead with a planned merger of top video game streaming platforms Huya and Douyu.
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