China: Moving towards paid services

China remains a music market of enormous untapped potential, with an online user base of 650 million people and a growing number of licensed digital services. However, an undeveloped culture of paying for music and a history of piracy makes progress slow. The market increased in value by 5.6 per cent in 2014, helped by an increase in streaming revenues. The hope is for further growth in the years ahead as labels and services roll out initiatives to establish a paid model for music.

The cause for optimism dates back to 2011, when the major recording companies, through subsidiary One-Stop-China, licensed the music service operated by Baidu, the country’s largest online search engine. Before this the only significant source of licensed digital income for rights holders was ringtones, with the digital market dominated by unlicensed players. Andrew Chan, ‎SVP, digital & strategic planning, Universal Music China, says: “The Baidu deal was the milestone that changed the whole ecosystem. Since then the government has said that it is stepping up its commitment to protecting intellectual property rights and that the development of the music industry is a major priority.”

In 2014, after a period of intense activity by several services to try and introduce paid offerings, there was major consolidation in China’s digital music market. Three major internet companies, Alibaba, CMC and Tencent, have made several acquisitions to dominate digital music distribution. Alibaba operates the XiaMi and Ttpod internet portals, and CMC acquired the Kuwo and Kugou music services. These major internet companies have also started to move to secure licensing deals with major recording companies. Sony and Warner and a number of leading Taiwanese independent labels signed an agreement with Tencent in 2014. Stu Bergen, president, international, Warner Recorded Music says: “Our partnership with Tencent is aimed at harnessing the incredible demand for music in one of the world’s most rapidly changing territories. Together we can help create a sustainable, legitimate music ecosystem that encourages artistry and entrepreneurial investment.”

These players have continued to operate a number of paid music services, but these have been held back by the ubiquity of free licensed alternatives. The most popular paid-for tier, charging RMB10 (US$1.60) per month, is Green Diamond, owned by Tencent, with an estimated three million subscribers. However, overall subscriber numbers remain low due largely to a combination of free licensed offerings and online piracy.

Ed Peto of the China-based music industry consultancy Outdustry Group says: “Just the simple fact that there is a paid model in China now is an incredibly positive development, but it was always going to need time to develop. The difficulty at the moment is that consumers can still get everything they want for free.”

There is optimism also around China’s progress towards joining the 147 other countries that currently have full performance rights. A proposal in its final draft of the amendment of the law by the National Copyright Administration of China (NCAC) remains under consideration by the Legislative Affairs Office of the State Council and it is hoped it will be enacted in 2016. A glimpse of the potential offered can be seen in China’s karaoke market, with performers and producers currently earning an estimated 140 RMB (US$20 million), from the 10 per cent or so of karaoke bars that are currently licensed.

International record companies have gained a firm foothold in China and are looking to step up their ownership and investment in local music. This was illustrated in 2014 by Warner Music’s purchase of Gold Typhoon, one of the best known and largest independent record labels for the Greater China Region. There is no reliable data available on the breakdown between local and international repertoire in China. Informal industry estimates suggest Chinese-language music accounts for around 80 per cent of the market and K-Pop and J-Pop for 10 per cent, with the remaining 10 per cent going to international repertoire.

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