Comment: what’s next for digital music in China?

This Thursday sees the launch of Nokia’s MixRadio service, its first foray in China. Times are changing in a country once blighted by rampant piracy, so much so that January also saw CISAC (the International Confederation of Societies of Authors and Composers) relocate its APAC office to Beijing. Ed Peto is a music industry specialist working in the capital. Here he tells TMN what’s happening next in the Chinese digital music space.

As minimum wages rise and exports soften, China’s glory days as the factory of the world are looking decidedly limited. The new regime, however, is increasingly aware of the importance of patents, IP, and innovation in a post-manufacturing economy as the country tries to move up the value chain. While China already has a recognisable legal infrastructure in place relating to copyright, it is also taking steps to further reform the law as we speak.

The issue in the past has always been enforcement. So while there are DMCA-like takedown provisions within existing Chinese law, the proof of ownership has always been so onerous and the re-posting of infringing content so fast that this has been a losing battle.

A quick look at the online video space gives cause for hope. The government sees its domestic film industry as a shining star of this new economy and, perhaps as importantly, its soft power abroad (note China’s recent wins at the Berlin Film Festival) and has shone its light onto the film and video industry as a whole. Online, where there was once a total ubiquity of video content – meaning it was almost impossible for the major video portals to differentiate themselves from each other – we now see the platforms securing exclusive licenses to premium content, then protecting that exclusivity via takedowns. This is a boon for video content owners who still enjoy somewhat of a ‘licensing bubble’.

When combined with the portals’ concern that advertisers were potentially pulling out due to contributory copyright infringement lawsuits, we see a market that has effectively self-regulated for purely commercial reasons, but only made possible with the eventual support of the government and the enforcement of latent copyright laws. The question is this: is the music industry next in line for this kind of reform?

In the first half of 2013, we saw a number of the major digital services add paid premium tiers into their offering in order to satisfy contractual obligations with content providers – typically at a cost of 5-10RMB/month ($0.8-1.6/month) for added mobility, higher audio quality, downloads and exclusive content. Three years ago this would have been a laughable proposition – charging the consumer for access to music – and while the take up of these premium tiers is by all accounts “negligible”, the concept of premium music is now at least on the consumers’ radar.

Meanwhile, behind the scenes, we are seeing competition and consolidation similar to the online video market of yesteryear. As the CEO of music service Xiami memorably phrased it, “independent copyright fiefdoms” are emerging: vast pools of exclusive rights being built up by big industry players like Tencent, China Music Corporation and Alibaba (who recently bought Xiami). Tencent, the parent company of market leading streaming service QQ Music, also now doubles as one of the largest digital aggregators in China and is actively protecting its exclusive rights – e.g. suing rival DSP Kuwo within the last couple of months.

It is impossible to make a concerted switch into a paying model when there are hundreds of sites with freely available music. While there are definitely fierce rivalries at play here, the key stakeholders are making an aligned move towards addressing this, including setting up bodies like the Alliance of the Digital Music Industry (ADMI), representing both content and service providers.

In the next few years, we will see these few major players – with the support of the government – being able to shut down or license any rogue sites or apps, leaving a handful of services who will in turn most likely have been consolidated into one of the fiefdoms. At this point, with the market largely under control, there will be a concerted push towards more realistic freemium structures in which paying money does actually add value. It is worth noting that the online video services have succeeded to the degree where they have now introduced pay-per-view elements to some TV shows and films.

Another area to watch is mobile data bundling, which is shaping up to be the new battleground for music industry value. As government-owned companies, the imperative for the three large telcos is not necessarily revenues – it is customer acquisition. As we move into 4G, and content is consumed increasingly voraciously via mobile, it is the highly desirable 31m-strong university student demographic (source: National Bureau of Statistics and based on 2010 numbers) who see the most value in unlimited data packages surrounding their favourite music services. China Unicom, for example, has these packages for Douban, Xiami and Duomi, among others, with a reported 50/50 deal with the digital services.

This is an excerpt from China music market specialist Ed Peto’s article on the China Music Business site. It originally ran as a feature in the March 5th edition of the Music Ally report.