Tencent’s acquisition of Sogou was unconditionally approved, but the music business was required to rectify

Tencent's acquisition of Sogou was unconditionally approved, but the music business was required to rectify

On July 13, the closely watched case of Tencent’s acquisition of Sogou was finalized. The State Administration for Market Regulation (hereinafter referred to as the “General Administration of Market Supervision”) issued an announcement stating that Tencent’s acquisition of Sogou was unconditionally approved, and a total of 20 transactions were unconditionally approved. .

This is good news for Tencent. Tencent initiated a takeover offer for Sogou in July last year. It has been a whole year since Tencent was Sogou’s largest shareholder. On July 7 this year, the State Administration of Market Supervision made an administrative penalty decision on Tencent’s acquisition of Sogou’s equity and imposed a maximum fine of 500,000 yuan. This fine is aimed at Tencent’s acquisition of a 36.5% stake in Sogou in 2013, not a wholly-owned acquisition.

A Tencent source told a reporter from Caijing that Tencent is fond of Sogou’s search technology and recommendation algorithm capabilities. A wholly-owned acquisition is more conducive to business integration. An investor told the Caijing reporter that Tencent’s acquisition of Sogou added the search business. In the search field, Tencent does not have a monopoly.

However, on July 10, three days ago, the State Administration for Market Regulation issued an announcement prohibiting the merger of Huya Company and Douyu Company . The merger of Huya and Douyu involves the possible monopoly of Tencent in the two major areas of gaming and live broadcasting.

The regulation and adjustment of Tencent’s business scale is only the beginning.

On July 9, Tencent Music Group (TME) issued an internal email to adjust the business lines of QQ Music and Kuwo Music.

On July 12, it was reported that the State Administration for Market Regulation would require Tencent Music to give up its exclusive copyright. A person familiar with the matter told the Caijing reporter that at least two months ago, the State Administration of Market Supervision and the Office of the Cyberspace Administration of China both interviewed Tencent Music Group. The focus of the interview was twofold. One is that Tencent Music Group is suspected of being a monopoly; the other is Many copyright owners have reported that Tencent Music Group has problems such as overlord clauses and opaque information.

Tencent Music Group was established in July 2016 and listed on the US stock market in December 2018. The latest market value is US$20.9 billion. Its rectification involves Tencent’s monopoly in the fields of music broadcasting and music copyright.

A person familiar with the matter told the Caijing reporter that Tencent must be prepared to face a series of regulations. Tencent Group (0700.HK) , which was established in 1998, is one of China’s largest technology companies, with the latest market value of HK$5.35 trillion. The technology giant is involved in a wide range of businesses and is growing rapidly, including games, social networking, entertainment, financial technology and corporate businesses.

Tencent’s 2020 financial report shows that its annual revenue is 482.064 billion yuan, a year-on-year increase of 28%, and its net profit (Non-IFRS) is 22.742 billion yuan, a year-on-year increase of 30%. The main revenue contributors to Tencent are game business (156.1 billion yuan) , financial technology and corporate services (128.1 billion yuan) , and social network business (108.1 billion yuan) .

Tightening regulation of games and live broadcast services

In October 2020, Huya, Douyu, and Tencent have already established a merger. In August of that year, Tencent issued a non-binding proposal, suggesting that Huya and Douyu carry out a strategic merger.

On January 4, 2021, the State Administration of Market Supervision conducted an anti-monopoly review of the concentration of undertakings in accordance with the law on the merger of Huya and Douyu declared by Tencent.

The review shows that Tencent has more than 40% of the upstream online game operation service market share, ranking first; Huya and Douyu have more than 40% and 30% of the downstream game live broadcast market share, ranking first and second, totaling more than 70%. The merger will further strengthen Tencent’s dominant position in the gaming and live broadcast markets, while giving Tencent the ability and motivation to implement closed-loop management and two-way vertical blockade in the upstream and downstream markets, which is not conducive to market competition.

Subsequently, the General Administration of Market Supervision asked Tencent Group to rectify this. People close to the merger told Caijing reporter that the General Administration required the new platform after the merger to abandon its exclusive rights to some game content. But until July 2021, Tencent failed to come up with a solution, and the State Administration for Market Regulation issued an announcement prohibiting the merger.

On July 12, 2021, Huya Company, Tiger Company Ltd., a wholly-owned subsidiary of Huya, Douyu and Nectarine Investment Limited, a wholly-owned subsidiary of Tencent Holdings, signed a “termination agreement.” According to the termination agreement, the “merger agreement and plan” signed by the above parties on October 12, 2020, including all schedules and attachments, and all ancillary agreements drawn up or signed therefrom, shall be terminated immediately.

After the merger was suspended, Tencent issued an announcement stating that it will earnestly abide by the review decision and actively cooperate with regulatory requirements. Douyu issued an announcement stating that as an independently operated and managed company, it will continue to expand its influence on the upstream and downstream of the game industry chain. The announcement issued by Huya to the reporter of Caijing stated that it fully respects the review decision, actively cooperates with regulatory requirements, and operates in compliance with laws and regulations.

In the field of game live broadcast, Tencent is also a shareholder of Station B and Kuaishou in addition to Huya and Douyu. Tencent’s game-related live broadcasts, including event live broadcasts, will be authorized to these live broadcast platforms, but not to platforms such as Douyin, Momo, and YY Live.

Even if Huya and Douyu do not merge, the impact on these two companies and the entire industry will not be significant. Tencent is already the largest shareholder of these two companies. The main purpose of Tencent’s proposed merger is to reduce the internal friction caused by the competition between the two platforms. It is hoped that they will focus on business and improve operational efficiency.

A Douyu employee told a reporter from Caijing that their daily work has not been affected when they propose to merge to the present. “It turned out to be a little nervous and wants to be a colleague with a competitor. Now it should be considered that there is no such thing as a merger. What to do or continue to do.”

Regardless of the merger or not, Tencent still has a dominant position in the field of game live broadcast. A person in the live broadcast industry told the Caijing reporter that although Huya and Douyu have high market shares, they are only in the subdivision of game live broadcasts. In the entire live broadcast field, game live broadcasts are mainly used to increase the viewing time and pay. The average income of users (ARPPU) is not high. “The Douyin live broadcast is more focused on the ability to bring goods, and it is not good. It will not have much impact on the entire live broadcast industry.”

However, if the focus of supervision is on “exclusive rights of game content,” the suspension of the Huya and Douyu merger case is only the beginning.

Tencent Music adjustment is put on the agenda

Tencent Music Group has three major music playback platforms, QQ Music, Kugou Music and Kuwo Music. In addition, it also includes the music social platform “National K Song” and the overseas version “WeSing”, and the audio entertainment platform “Kuo Wo Chang Listen”.

According to the 2020 financial report of Tencent Music Group, Tencent Music Group has the largest music content library in China. As of December 31, 2020, it has more than 60 million tracks. The financial report also mentioned that Tencent Music Group accounted for four of the top five music apps for mobile monthly activity in 2020. In 2020, Tencent Music Group will have 644 million monthly active users on the mobile terminal of online music, and 240 million monthly active users on the mobile terminal of social entertainment.

Since Xiami Music shut down in February this year, only NetEase Cloud Music can compete with Tencent Music Group, but the gap between NetEase Cloud Music and the former is obvious. NetEase Cloud Music submitted a prospectus to the Hong Kong Stock Exchange in May this year. The prospectus shows that in 2020, NetEase Cloud Music will have 180 million monthly active users, with revenue of 4.896 billion yuan in 2020 and a net loss of 2.95 billion yuan attributable to the company’s shareholders. The financial report of Tencent Music Group shows that in 2020, revenue of 29.15 billion yuan and net profit of 4.16 billion yuan.

High copyright fees are the collective pressure that music broadcasting platforms face. Especially in the past few years, music copyright fees have indeed increased substantially. Netease CEO Ding Lei mentioned at the third quarter 2020 financial report that copyright purchases have always been the most important cost of NetEase Cloud Music. “The copyright shortcomings encountered by NetEase in the past are actually due to some companies monopolizing copyright transactions and not transferring. Sale.”

A typical case is Jay Chou’s music copyright. In 2015, QQ Music obtained Jay Chou’s song authorization from JV Company in the form of an exclusive copyright. In the following three years, QQ Music reselled Jay Chou’s songs to NetEase Cloud, and the authorization was stopped after 2018.

However, in the eyes of copyright owners, they have not received considerable income, or even reach a reasonable level.

A person in the music industry told a reporter from Caijing that in the eyes of many copyright owners, Tencent Music Group is a major obstacle to the music industry. When the copyright owner or individual uploads music works, they must agree to accept the exclusive agreement, that is, they can only be exclusively authorized to Tencent Music Group, and it is a “full platform sublicense.” But “the agreement does not specify a specific sharing mechanism, the only clear is exclusive.”

The aforementioned people in the music industry said that due to the opaque sharing mechanism, many ways of operation of Tencent Music Group left the copyright owner “speechless.” For example, if a song is licensed to it, if it is sub-licensed to other commercial purposes, the profits obtained need to be distributed to the copyright owner, but the copyright owner does not know how many times the song has been authorized and how much profit has been generated.

If the copyright owner discovers that some platforms have used the songs without authorization and request to be removed and compensated, Tencent Music Group will issue an authorization contract afterwards to prove that there is no infringement. As a result, the copyright owner not only spent litigation costs, time and energy, but also had difficulty in obtaining compensation.

The aforementioned people in the music industry said that Tencent Music Group signed a framework agreement with other commercial platforms. The agreement did not specify the specific songs authorized. If it encounters infringement problems, it will add another agreement.

The relevant person in charge of Tencent did not respond to the Caijing reporter on this matter. Regarding the situation regarding Tencent Music Group being supervised and starting rectification, the relevant person in charge of Tencent stated that there is no official announcement yet.

Many people in the music industry mentioned to the Caijing reporter that today, it is difficult for musicians to earn considerable income directly through copyright. A large amount of traffic is gathered on music broadcasting platforms, but these traffic cannot help musicians directly make money. They can only convert traffic into personal popularity, and then realize it through live broadcasts and commercial performances.

The aforementioned person familiar with the matter mentioned, “The way music platforms operate has led many musicians and music companies to choose to make short-term hit songs, and the appearance of these hit songs will affect the sharing of other classic songs.”

For some headline copyrighted content, Tencent Music Group’s approach is to first pay a “guarantee fee” and then determine the proportion of shares based on the proportion of traffic in a certain period of time. “It doesn’t look at your overall playback volume. It only looks at a period of time. It is very likely that one or two songs will suddenly become popular. If a part of the short-term playback volume is lost, then the copyright owner will not be able to divide the money.”

According to the person familiar with the matter, the biggest demand of the regulatory authorities is how to ensure the healthy and sound development of China’s music industry. “It is not only Tencent Music Group who was interviewed, but NetEase Cloud Music was also interviewed. The two of them faced the same problem in terms of copyright sharing.”

However, the NetEase Cloud prospectus and Tencent Music Group’s financial report both mentioned this issue. Both said that they are committed to supporting musicians and protecting creators. NetEase Cloud stated that most of the income has been returned to music artists as copyright fees, and NetEase Cloud is very strong in supporting musicians.

Tencent Music Group wrote in its financial report: TME respects music creators and defends the cause of copyright protection-only when creators get the rewards they deserve can the music industry achieve sustainable development. TEM is a good partner for content owners.

On July 10, Zhang Gong, Secretary of the Party Leadership Group and Director General of the State Administration for Market Regulation, publicly stated that he would resolutely prevent the disorderly expansion of capital and various monopolies and unfair competition, and unswervingly build a pattern of intellectual property protection.

An investor told the Caijing reporter that Tencent’s investment in the past few years has been very aggressive, and it has invested in many leading companies in the subdivisions. Starting this year, Tencent’s investment has obviously become low-key, but it does not affect the number of shots. .

Business card data shows that if you compare the number of investment moves, Tencent ranks third with a total of 1,256 foreign investments, second only to IDG Capital (1329) and Sequoia Capital China (1329) . There were a total of 516 foreign investment incidents from Ali Department.

Tencent’s foreign investment continues to increase. According to corporate business card data, Tencent has made 175 foreign investments in the whole year of 2020. As of 2021, Tencent has disclosed a total of 170 foreign investment incidents.

This article comes from WeChat public account: CaijingEleven (ID: caijingEleven) , author: Liu Yiqin , Zheng Keshu (Interns)

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/tencents-acquisition-of-sogou-was-unconditionally-approved-but-the-music-business-was-required-to-rectify/
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