People visit the Tencent QQ Music booth at the Beijing Music & Life Show 2016 on July 3 (IC)

Music has always been an integral part of the life of Bai Haixia, a 27-year-old translator at a Beijing-based pharmaceutical company. On weekdays, she listens to music during her one-hour commute to work, making the crowded rush-hour subway ride bearable. On weekends, she blares her favorite songs while doing household chores.

Bai uses Kugou—one of the most-used online music apps in China—on her mobile phone to enjoy free music. That's why she has become concerned over the possibility of being charged for listening following the merger of QQ Music, Kugou and Kuwo, the top three most-used online music streaming service platforms in China.

China's Internet giant, Tencent Holdings Ltd., which operates instant messaging apps QQ and WeChat, announced in July it would merge its QQ Music with China Music Corp. (CMC), which owns Kugou and Kuwo.

The strategic merger combines the two to form a new company, with Tencent as the majority shareholder. Tencent will fully support the new company to develop its digital music business, paving the way for an initial public offering, according to a joint statement by Tencent and CMC posted on July 15. In addition, QQ Music, Kugou and Kuwo will continue to manage their existing brands and operations independently.

In the statement, Tencent said the merger will foster an ecosystem that facilitates the healthy development of digital music and related businesses in China. It also may help fight piracy and benefit music lovers, composers, artists, record companies and distribution platforms.

Major online music platforms in China (IC)

Industrial consolidation

Analysts said that the merger will turn Tencent into a dominant player in China's flourishing online music market, not only because QQ Music, Kugou and Kuwo are the three most-used music streaming service platforms in China, but also because they are able to become a large licensed music library. This may give Tencent enough clout to drive the market away from free services toward a payment-based model.

Kugou is the largest mobile music service platform in China, with a 27.8-percent market share in terms of music downloads through cellphone apps, followed by QQ Music's 15.3 percent and Kuwo's 13.1 percent. The three also lead the market in the number of active users, according to data from iiMedia Research.

Analysts claim that there is tremendous potential lurking in China's digital music market, which has yet to fully mature.

The State Administration of Press, Publication, Radio, Film and Television of China forecasts that the value of the country's music industry will reach 300 billion yuan ($45 billion) by 2020.

Furthermore, the number of users of online music services in China reached 500 million in 2015, generating a market valued at 4.02 billion yuan ($603 million), a figure that has surged 67.2 percent from 2014, based on a report on the industry released by Beijing-based consultancy firm iResearch.

According to Cai Ling, a researcher in the culture industry with CIConsulting, a Shenzhen-based industry research firm, several factors contribute to the digital music market boom.

"First of all, as Chinese people have higher living standards, their demand for high-quality music is increasing, and online music has increasing significance in the entire music industry. In addition, as China steps up efforts to protect intellectual property rights, authorized distributors have more opportunities in the market, fortifying their confidence," Cai said in a research note posted on CIConsulting's official website.

The digital music market, like many other markets in China, has become a major battleground for China's top three Internet giants—Baidu, Alibaba and Tencent. Baidu is China's leading search engine, Alibaba is the country's e-commerce king, and Tencent is the nation's biggest social-networking and online games company.

Tencent's latest acquisition puts it at the helm of what is now undoubtedly the largest music streaming empire in the country. Alibaba and Baidu have also worked on consolidating their respective music assets over the past year.

In December 2015, Baidu announced a merger between Baidu Music and Taihe Entertainment Group, a traditional music company. Last year, Alibaba also made a series of investments under its newly created Alibaba Music Group.

Those enterprises have been signing licensing deals voraciously in order to distribute more songs and movies through their platforms. Tencent, for example, has secured deals with Sony Music Entertainment and Warner Music to become their exclusive online distributor in China.

"The competition in digital music in the end is the competition for the intellectual property (IP) rights of music. Through the merger, Tencent and CMC can open the music IP pool to each other, which will eventually cut costs in the cash-burning competition to obtain licensed music," said Xue Yongfeng, an analyst with Beijing-based Internet consultancy Analysys International.

A girl listens to music at an exhibitor’s stand at the Beijing Music & Life Show 2016 on July 3 (IC)

Pay fee or free?

Although China's digital music market is huge in terms of its user base, the sector's revenue is still small compared with those in the United States and Europe. Paying for music online hasn't gained traction in China in the past due to a lack of industry consolidation and rampant piracy.

Despite a market valued at over 4 billion yuan ($600 million), only a small fraction of that income is generated from pay-to-listen fees. The value of the paid online music market totaled 1.05 billion yuan ($158 million), up 121.8 percent from 2014, based on iResearch report figures.

According to the report, advertising and distribution through online games have accounted for the bulk of online music platforms' incomes. While streaming and fees paid by users are witnessing rapid growth, online-to-offline transactions and sales of music-related products only account for a small percentage of industry revenues.

Tencent has been trying to persuade its QQ Music users to pay for premium memberships that offer perks such as an extended music library, higher-quality sound and members-only concerts at a small monthly fee.

In recent years, China has stepped up the regulatory requirements for its online music streaming platforms, forcing service providers to comply with royalty laws and to crack down on piracy. The move has caused rapid consolidation in the market, favoring companies with deeper pockets.

In July 2015, the National Copyright Administration unveiled a regulation demanding that online music providers stop offering unauthorized music to their users.

Within two months, over 2.2 million illicitly posted music pieces were removed from online music platforms, including the top market players such as Kugou and QQ Music.

Zhu Wei, Deputy Director of the Communication Law Research Center at the China University of Political Science and Law, said the merger between QQ Music and CMC will help create an ecosystem beneficial to the protection of intellectual property rights.

"Against the backdrop of the Internet Plus strategy, the development trend of China's music industry is to create an ecosystem based on creativity and sharing. Innovation in the music industry is based on proper protection, and the key lies in business model innovation," Zhu told China Culture Daily.

"The merger will help create an ecosystem beneficial to innovation and will help ideas turn into business value at a faster pace and push forward the self-discipline of the entire music industry," Zhu said.

Gao Xiaosong, a renowned music composer and producer, said domination of China's music industry has transitioned from TV stations to record companies to piracy and now, finally, to the three Internet giants.

"With piracy being basically wiped out of the market, the best is yet to come," Gao wrote in his Sina Weibo microblog.

CMC Chairman Xie Guomin said China is likely to become the world's largest digital music market in the next three to five years.

"China is entering an era of paid music services," Xie said at the 2016 China Internet Conference in June.

"In the past, there was a lack of industrial consolidation in the online music industry, wherein content providers and distributors were highly scattered, leading to a lack of leadership and rules. Combined with rampant piracy, a paid model can hardly have a foothold in China," he said.

"However, things are rapidly changing. With more industry consolidation efforts, through mergers and acquisitions among music platforms and exclusive licensing deals between content providers and platforms, and increasing government efforts to crack down on piracy, China is likely to become the largest digital music market," Xie predicted.

"China has about 688 million Internet users and 501 million music service users. There are tremendous business opportunities. The general trend is heading toward the paid model," he said.

As promising as it sounds, changing consumer habits could be a challenging task, and it could take time.

Take Bai, the 27-year-old translator, for example. Despite her long-lasting love for music, she said she would never accept any charges from music platforms.

"I won't pay a penny for listening to music," she told Beijing Review. "I only listen to whatever's free."

Copyedited by Bryan Michael Galvan

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