In recent years, China has welcomed a flurry of investment from the Western music industry as the region shows signs of emerging as a key player in the international paid streaming business.
The recorded music industry has long been on board, with all three major labels agreeing exclusive licensing deals with streaming giant Tencent, and independents like Beggars and Merlin securing non-exclusive deals with both Tencent and rivals Alibaba and NetEase.
Given the historical ubiquity of piracy in China, such licensing deals weren’t an easy win, and getting royalty reports isn’t a given (the exclusive arrangements signed between the major labels and Tencent, which are said to be expiring in 2020/2021, pay out ‘minimum guarantee’ advances instead of royalties).
Still, it’s a marked improvement for labels from the past situation in China – no income and no licenses, thanks in part to a government that didn’t much care for copyright.
Industry services company Outdustry has been a pioneer during this process, helping to secure non-exclusive licensing deals and transactional royalty-based income for independent clients like Beggars and Merlin over the last decade.
Now, as CEO Ed Peto tells us, the company is setting out to do the same for publishing with the launch of Outdustry Songs — an independent publisher specializing in the Chinese market.
“Given the hype around China it tends to surprise people that full-service, independent publishing companies are barely existent there,” he explains.
“In china, Publishing has always been a misunderstood tag-along of the master recording. The idea that songwriters and songs, in and of themselves, deserve separate administration across multiple ongoing revenue streams is in its infancy.”
“Publishing has always been a misunderstood tag-along of the master recording: poorly defined in law, even more poorly defined in the marketplace. The idea that songwriters and songs, in and of themselves, deserve separate administration across multiple ongoing revenue streams is in its infancy.”
Just like Outdustry has done for Beggars and Merlin, Peto tells us that accessing publishing revenue is going to be the result of the “hard work of building the ingestion, matching, reporting and accounting processes that ultimately ensure artists are paid fairly”.
He continues: “And I don’t mean [getting] paid a non-itemised chunk of an advance with no reporting attached, I mean actual royalties from the transactional use of those copyrights. This transactional reporting will be a marathon process, but we’ve done it before for recordings, and we are now backing ourselves to do it again for publishing.”
Recently, Outdustry’s A&R team have provided songs for star artists like Chris Lee, Tia Ray, Bibi Zhou, TF Boys, NINEPERCENT and KUN (with whom the company recently had a No.1 hit in China across all platforms), all of which are now in the Outdustry Songs catalog.
This year, its marketing team has overseen album release campaigns for Lauv and Dua Lipa on behalf of clients Kobalt and Warner respectively. In addition, its recording division, Outdustry Masters, distributes the likes of Major Lazer, Diplo and Flume.
Outdustry Songs has non-exclusive direct licenses with all major digital service providers in China – Kugou, QQ Music, Kuwo (Tencent), Netease Cloud Music (Netease) and Xiami (Alibaba).
The company is also the exclusive sub-publisher in the region for Reservoir’s roster of writers and catalog of 126,000 copyrights, which include songs recorded by The Beatles, Elton John, Michael Jackson, Camilla Cabello, Eminem, Travis Scott and Post Malone.
Here, we chat to Peto about the current state of play in the China music market, what stands in the way of generating publishing revenue, and his perspective on exclusive licensing deals.
How is Covid-19 having an impact on the music industry in China?
The Chinese digital experiment has definitely entered a new phase. You could argue there were already two internets in the world: the internet, and the Chinese internet. The latter had developed completely distinct characteristics and consumer behaviours prior to Covid-19 — most notably a fully developed live-streaming and virtual-gifting economy — and these have come of age while the rest of the world is tentatively discovering them for the first time. In general, it seems, anecdotally at least, that ad-supported music has stalled during Covid-19, while paid subscriptions and virtual-gifting have grown throughout. That suggests that casual listeners are levelling up during lockdown.
Can you tell us about your ambition for Outdustry Songs, and what point of difference the company is providing?
Songwriting has historically been a thankless work-for-hire/buyout scenario, a service to record labels who ultimately own all rights in perpetuity. This fact alone means there has never been much of a need for infrastructure to administer song rights separately as they were not treated as separate rights. This obviously causes problems downstream amongst the broadcasters, shopping malls and purveyors of digital music when it comes to licensing.
With Outdustry Songs, we are on the frontline trying to change a lot of this thinking. Firstly, our A&R team work at the highest level of Chinese pop, licensing songs into major releases, specifically not doing buyouts. This has allowed us to build up a catalogue of major Chinese repertoire and it gives us the mandate to go out and help develop the market for songs as a distinct right on behalf of our global network of songwriters. We are also beyond excited to be launching as Reservoir’s sub-publisher in the market, which lends huge weight to the project.
Our rights consultancy team have a long history of making music rights work on the recording side. That same team also have a long history of consultancy in the publishing space. Now we have simply poured all of that experience into our own publishing business. The years of experience really show. This is the beginning of a marathon, not a gold rush. Accessing publishing money in China is incredibly complex and getting a DSP license in place is just the beginning of the race.
Can you give us an overview of the state of the music industry in China today?
The Chinese industry of today is really powered by the twin engines of technology and demographics, best expressed in its largest form by the 900m mobile internet users currently in China. According to government statistics, around 70% of these use the internet to consume music, giving us around 630m digital music consumers. Mobile payment now has around 85% penetration so, of these 630m digital music consumers, approximately 540m have the ability to pay for music frictionlessly should the value proposition be right. It is certainly a lot less than the almost 1.4bn total population, but it is arguably the most exciting starting point for an industry — and we are just at the start — of any in the world.
Despite this fully primed audience, China is only just starting to shake off hangovers from the era of 99% piracy. Songs have huge cultural and social importance but the value perception of recorded music has historically been very low, having been abundantly free since the dawn of the Chinese internet in the early ‘00s. Recorded music has been a driver of celebrity rather than a commercial good in its own right, to a much higher degree than in developed markets. It is understood that money comes from fame, not from making records, with obvious implications for the diversity and quality of the music being made.
It is still highly unusual, for example, for an act to break through outside of the dozens of TV talent shows in which artists become stratospherically famous before they even release any music. In this model, artist development is pretty linear, basically an exercise in matching young, newly famous TV talent show contenders with a target demographic and building and leveraging their celebrity from there. This factory line of talent is guzzled up by 600m+ digital music consumers through entirely local, next-generation social entertainment platforms in which streaming, social, e-commerce and live-streaming are often combined in the same ecosystem.
“It is still highly unusual for an act to break through outside of the dozens of TV talent shows in which artists become stratospherically famous before they even release any music. But over the last few years we have seen alternative routes to market slowly becoming more viable.”
All this being said, over the last few years we have seen alternative routes slowly becoming more viable. More and more independent artists are able to build significant audiences online and leverage this to make money directly from the fans, from performances, brand deals and now, at last, from streaming directly. As the value of recorded music increases via streaming (and its content wars), we see more money coming in and therefore more reason to invest in recorded music. We are starting to see what a healthy, diverse record industry might actually look like in the future, albeit still some way off.
There is now an ocean of live-streamers, bedroom creators and emerging artists who have enough traction or a broad enough sound for the DSPs themselves to start placing bets on, ultimately to feed into DSP exclusive deals. This results in a rising flood of investor-backed money pouring into the creator community. The terms are usually onerous, and acts aren’t consistently breaking out of this new independent wave without recourse to the TV talent shows yet, but it will happen. As the streaming and fan economy revenues take-off, this area will become increasingly flush with money, increasingly competitive (thereby giving artists more bargaining power), and increasingly supportive of more diverse genres of music. China has always had amazing musical subcultures — from punk to electronic to folk. Hopefully, we will see this rising flood lift all boats, to exhaust the metaphor.
How far along is the China music market on its path to becoming a fully licensed and lucrative country for the Western industry? Where will income come from?
Almost the entirety of those 630m digital music consumers are already on one or more of China’s many DSP free tiers, generating $300m in trade revenues from ad-supported music (according to IFPI figures). That gives us some pretty grim per-user revenues in this space. The last few years have seen the arrival of premium subscriptions costing around $1.4 (10 RMB) per month. Total IFPI 2019 trade revenues of $232m from the paid tiers suggest there are now north of 50m monthly subscribers in China with TME alone claiming to have 42.7m of these across their three DSPs: QQ Music, Kugou and Kuwo.
TME’s quarterly reports, however, have provided the first glimpse of the elephant in the room. Two-thirds of their more than $1bn in revenues last year came from ‘Social Entertainment Services’, also known as live-streaming and, more importantly, virtual-gifting, on platforms such as WeSing. Put another way, the average revenue per paying user (ARPPU) of a premium subscriber on TME audio streaming platforms was $1.33 (9.4 RMB) per month. The ARPPU within the live-streaming/virtual gifting space was almost 12 times this at $15.66 (111 RMB).
There are two numbers to watch here: a) premium streaming subscriber numbers, the currency of the global digital music industry to date, and b) social entertainment revenues — aka the fan economy — the currency, I believe, of the global industry going forward.
Goldman Sachs project that China will have almost 250m paying subscribers by 2030 which is an exciting thought, but in context of the fan economy it may be a drop in the bucket. There is a kind of phantom industry that lives above the artificial ceiling of the monthly DSP subscription, and this industry is unlocked by enabling fans to impulsively express their fandom to its fullest — eg. via virtual gifting — with no upper limit. When you gamify this open space, adding in fan wars, bragging rights and other social currency elements, it goes ballistic, and this is what we are already seeing in China. From a rights owner perspective, the frontline then becomes the licensing of these types of consumer behaviour which, frankly, has a long way to go.
As a snapshot of where we are now, China’s recorded music market was worth $591m last year, growing 16% YoY and retaining the No.7 spot globally. It’s likely to overtake South Korea next year. There are no official numbers, but we estimate the publishing industry to be worth sub $150m. Given the size of the market and the exuberant user behaviour highlighted above, these are incredibly low numbers. Over the next five years, though, beyond simple user growth, we expect to see several step changes occur to unlock the true value of the market: more and more music moving behind a paywall; increase in monthly subscription rates; the gradual licensing of the short-form video and fan economy spaces.
What challenges currently stand in the way of that happening?
There is a huge amount of money being generated around music, with huge growth ahead, but it is not all recognised at a licensing level. The China fan economy, in particular, is one of the greatest challenges and growth opportunities for the global music industry in the next five to ten years but it is currently largely unrealised from a rights perspective.
Looking at publishing specifically, the good news is that songs, lyrics and karaoke are cultural mainstays. Strong melodies, strong lyrics and the ability to sing these with friends, or for a crowd, is basically what is underpinning this explosive fan economy. The original recording often present, but just as often not. As mentioned previously, publishing is incredibly poorly understood, historically represented by an 8% digital revenue share paid to the label in a chunk with the 42% recording share. Chinese copyright law covers all digital use of underlying works with one frustratingly vague clause, 10.12. “the right of dissemination through information networks”.
“In a fully mature publishing market like the US, publishing trade revenues are actually half that of the record industry. In China, it is currently a quarter.”
The official English WIPO translation calls this a “communication”, but the actual Chinese is closer to “dissemination”, or “transmission”, either way, no-one really knows what it means in practice. The concept of mechanical and/or performance is moot, a cultural import largely met with shrugs, as is the concept of a writer’s share. So, when you consider the fragmentary nature of song copyright ownership and the precise language and conventions usually required to parse the royalty streams, the 8% becomes a battlefield for multiple stakeholders — some claiming mechanical, others performance, yet others dissemination — resulting in multiple claimants for each song. Oh, and the DSPs don’t have any song copyright databases. And this is all for just plain vanilla streaming. When applied to next-generation licensing conundrums like short-form video or virtual-gifting you have a real project on your hands. Luckily, this is precisely the kind of project we love at Outdustry.
In a fully mature publishing market like the US, publishing trade revenues are actually half that of the record industry. In China, it is currently a quarter. While we do not expect public performance or broadcast revenues to materialise in China in a meaningful way in the next five to ten years, and we see sync as an interesting area, it is the digital space that has potential for explosive market growth given the standing start and the primacy of songs in the emerging fan economy.
The CEO of NetEase, William Ding, was recently asked his thoughts on the rumour that exclusivity agreements with Tencent expire for the big three major labels this year and next year – the agreement that sees Tencent then sub-license their music to other local services. Ding said he anticipated it would have a major impact because “the whole industry has been overpaying the content cost twice, three times or even more… in this unfair setup”. Do you agree with him?
I think exclusivity agreements served a purpose early on insofar as they incentivised the major DSPs to go out and protect their exclusive catalogues via aggressive policing of the market place, effectively minimising piracy in very short order. Of course, there is the added bonus that exclusive deals used to bag you a massive cheque, quite often the first massive cheque a label would have seen from the digital space in China.
Beggars Group — our client of over 10 years now — were the first label (either local or international) to get full reports, at a track level, with ISRCs/UPCs, from every major DSP in China on a monthly basis. That was really pioneering work which we are incredibly proud of. Beggars have been doing this for years now and yet still today proper accounting and reporting like this seems to be a luxury rather than a standard, particularly in the context of DSPs sub-licensing to each other. The truth is that if you have an exclusive deal, you are observing an incredibly vibrant market through the lens of just one company. You are at a competitive disadvantage.
“if you have an exclusive licensing deal [in china], you are observing an incredibly vibrant market through the lens of just one company. You are at a competitive disadvantage.”
A major kicker here is that ad inventory, playlisting, editorial, on-platform activations etc. are often prioritised for exclusive partners. We have chosen to simply push through this on the basis that good music will prevail, and seen great results, but it can be frustrating on occasion considering our equitable access ideals. In an ideal world, the end of exclusive catalogue deals would make for a much healthier market. What we are now seeing happen, though, is a potential evolution of the same problem. In a post-exclusive-licensing world it isn’t far fetched to imagine DSPs giving preferential treatment to rights owners in which they own equity. Taken to its natural conclusion you would end up with a giant, amorphous platform/rights-ownership singularity, which would be as unhealthy as it sounds.
All this being said, now that piracy is tentatively manageable, exclusive deals are a hurdle that needs to be hurdled. As a general rule I would say that right now, before revenues, and in preference to exclusive deals, everyone’s focus should be on a) building infrastructure via non-exclusive licensing, supply chain setup and reporting/accounting, and b) building direct relationships and workflows with the platforms. Revenues are important, but they are only a function of these two components.
What impact does the language barrier have? How much appetite is there in China for English language music?
We typically say, anecdotally, that Anglo-American repertoire has around 20% market share, and a further 10% for K-Pop/J-Pop, averaged across the major DSPs. The 20% figure has been around forever and seems to remain fairly static as it sits between increasing English language use and internationalising of tastes on one side and a rapidly improving domestic pop music market on the other. The modern Chinese music canon, given its late start in the late ’80s and slow growth since then, is still likely under a million songs in its entirety. If you assume 40m songs on any given platform, that means 70% of consumption is coming from 2.5% of the catalogue. These are broad strokes, but you get the idea.
We run marketing in China for the likes of Dua Lipa (client: Warner), Lauv (client: AWAL) and Major Lazer (client: mtheory). When dealing with major artists like this we certainly don’t have any of these market share numbers in mind. Instead, we assume that the entire 600m+ audience is reachable and receptive. It is a question of localising the artist enough via collaborations, activations and continuous local engagement from the artist themselves. In this way, over time, the local audience takes ownership of the artist and you transcend any of these genre/language categories.Music Business Worldwide