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Tech Giants Are Creating Their Own Labels To Conquer China's Digital Music Market

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What does it take to reach music–loving fans in the world’s most populous country? To China’s web giants, the answer goes beyond streaming the latest songs from established artists such as Rhianna and Katy Perry.

Like their American counterparts, China’s younger generations have developed diverse music tastes and want something fresher than simply following better-known celebrities, prompting digital music services to create their own labels and set aside funds to support new independent artists. 

By offering this sense of exclusivity, companies are jockeying for the attention of an estimated 500 million users, who are finally starting to embrace paid subscriptions after years of rampant piracy stalled China’s online music market. According to PricewaterhouseCoopers (PwC), the country’s digital music platforms are expected to earn $1.06 billion in total sales by 2020 -- making China the fastest-growing music market worldwide.

Tencent, for example, announced on January 31 that its music arm, Tencent Music Entertainment Group (TME), will work with Sony to create the company’s first original music label, Liquid State. It is dedicated to promoting electronic and dance music across Asia by signing up talent, as well as showcasing world-renowned DJs such as Norwegian DJ Alan Walker and Korea’s Junkilla. TME is widely expected to list in Hong Kong this year, raising $1 billion at a valuation of at least $10 billion, as the company tries to scoop up more content for the combined 700 million monthly active users on its QQ music, Kugou an Kuwo streaming apps.

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Other Chinese companies aren’t to be left behind. Chinese gaming giant NetEase, which has attracted 400 million users to its popular music service NetEaseCloud Music, has announced plans to allocate 200 million yuan ($32 million) for the training and promotion of independent artists, before hosting a music ceremony for them. And, sensing the opportunity, venture capitalists want a slice of the pie: The company managing SNH48, a popular Chinese all-girl troupe, raised “hundreds of millions of yuan” in its series C round last year, using the proceeds to expand into other entertainment sectors such as gaming and TV.

“China’s web companies want to get into the entire music industry chain,” said Chen Yuetian, a partner at China’s S.Capital, which focuses on the entertainment and media industry. “They have realized that simply being a distribution portal is no longer enough, and they want to use original content to build up competition barriers.”

Popular approval

These moves are likely to resonate with users. According to iiMedia, a Guangdong-based consultancy, electronic and dance music has almost 200 million fans in China, and the number is expected to reach 400 million next year. Zhao Lei, an independent artist from Beijing, has close to three million followers on Alibaba, Tencent and NetEase’s music streaming apps, where users can not only listen to music -- they can leave comments, interact with other users, and tip their favorite artists via e-wallet services. Wilson Chow, who leads PwC’s technology, media and telecommunications practice, estimates that a top-tier artist can earn millions a year from tips, as well as sales of digital albums and participation in talk or variety shows.

“I like independent artists because they are more like friends,” said Luo Shichuan, 25, a co-founder of online startup Poputar,which makes smart guitars that can be connected to smartphones for remote control. “We look up to celebrities as idols, but the independent artists are our peers.”

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Popularity also means potentially better monetization prospects. China’s largest music streaming apps are now profitable, but face rising content costs as they sign licensing deals with major record labels such as BMG and Warner Music Group. While there is no public breakdown of those sums, they are likely far higher than the costs associated with nurturing their own artists. And these musicians offer a greater return from performing live concerts online, producing short-form videos, and interacting online with fans, PwC’s Chow said.

“Independent artists have more ways to monetize than international labels,” he added. “They won’t ask a lot; they just want to gain fame and popularity.”

Piracy challenge

The approach, however, isn’t without challenges. Piracy is still an issue -- though Xu Bo, general manager of independent music platform Douban Music, said the situation is much better than before, as the streaming model makes it difficult to sell pirated discs and songs. However, PwC’s Chow said not everyone is willing to pay for music, with 40% of Chinese users only listening to free content.

Censorship is also an issue, with authorities keeping tabs on current and emerging music trends, identifying problematic content. For example, censors last year lashed out at a couple of popular hip-hop artists for their “low-taste” content, which they say was at odds with Communist Party values.

As for the web giants, competition is already on the horizon, and it doesn’t come in the form of Apple Music or Spotify, which is either not popular or available in China. While Tencent currently dominates the country’s digital music market, a free music app called Dou Yin has quietly surpassed in early Feburary the company’s instant-messaging app WeChat to become the top downloaded free app in China iOS Store, according to App Annie, a market intelligence firm. Dou Yin, developed by Beijing Bytedance, which is better known for popular news app Toutiao, is an original music platform similar to the lip-syncing app Musical.ly. Bytedance acquired Musical.ly for up to $1 billion last year.

“People are still choosing which platform is best for them,” said Ken Xu, a partner at Chinese investment firm Gobi Partners. “As users continue to pay for content, any music platform with a large user base can get a slice of this market.”

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