Tencent’s attempt to acquire a minority stake in Universal Music Group (UMG) is a red flag for China's music streaming platforms as it may prevent them from entering into any licensing deal with the world’s largest record label.
French media giant Vivendi said on Tuesday that it is in talks to sell a 10% stake in UMG to the Chinese tech heavyweight in a deal that would value the music company at €30 billion ($33.6 billion). If the transaction goes through, it would be the first case of a Chinese company owning a stake in one of the world’s three biggest music companies.
Tencent already benefits from exclusive licensing agreements: its US-listed music business Tencent Music Entertainment signed a deal to distribute UMG record labels in China two years ago and has similar agreements in place with Sony Music Entertainment and Warner Music Group.
For Tencent’s rivals in the music industry, that's not the end of the world. Music licensing deals tend to be renewed every two or three years, so rival distributors such as NetEase Cloud Music and Baidu Music could still get a second shot once the current deals expire.
However, that may no longer be the case if Tencent elevates its relationship with UMG from business partner to shareholder. By taking a stake in UMG, it's likely the Chinese tech giant will secure all licensing deals from the music label going forward – even if they come up with lower bids than their rivals.
That would be a disastrous blow to NetEase and Baidu, which are already struggling to compete with Tencent in terms of both number of songs and users. Tencent’s top three music platforms – QQ Music, Kugou and Kuwo – generated 78% of the market’s revenue, according to analysts from Chinese securities firm Soochow Security.
IS IT WORTH IT?
Tencent’s potential investment in UMG is a signal that it is determined to pay a high price to edge out its competitors and become the dominant force in China’s music industry.
Neither party has disclosed the details behind their licensing agreement in 2017, although Chinese media has suggested that Tencent paid about $300 million for a two-year deal.
If that figure is true, Tencent could have entered into exclusive licensing agreements of over 20 years with the same amount it is paying for a 10% stake in UMG. If so, it appears Tencent has made an expensive bid.
From Tencent’s perspective, it could be an effective way to squeeze out competitors and end their hopes of ever securing any licensing deal with UMG. As its portfolio of songs gets larger, Tencent will also have more bargaining power when it comes to renewal talks with Sony Music and Warner Music.
Perhaps most importantly, the chance to buy a stake in the world’s “Big 3” music labels doesn't come around very often.
Some analysts believe Vincent Bollore, Vivendi’s former chairman, is pushing the UMG stake sale in order to fund the company’s $7.5 billion share buyback, which could eventually see him take a majority stake in the media giant.
Buying a stake in UMG would also allow Tencent to expand its music business aboard and provides it with opportunities to collaborate with renowned Western artists like Ariana Grande, Drake, Eminem, Lady Gaga and Kate Perry.
While it will take time to tell whether Tencent’s strategy will be successful, it is almost certain that rival music distributors in China will find it more difficult to operate if the deal goes through.