Riding the same wave – Jay Z and music streaming in China

The following blog comes from Richard Davies, an associate in King & Wood Mallesons’ London Technology team. King & Wood Mallesons claims to be the first and only global law firm to be headquartered in Asia, with extensive experience in music industry transactions.

“Jigga just dropped 60 mill on a website” was part of Lily Allen’s twitter response to the launch of Tidal.

Her views on the announcement of BMG’s deal with China-based internet giant Alibaba were not published.

Both events announced a day apart are indicative of a changing industry landscape and are connected to the same fundamental issue – moving more consumers away from free music.

China has long been seen as a music market of vast potential mired in rampant piracy. Recent years have seen free to use ad-funded licenced services which provide low returns to labels and artists.

In short, China is a problem market.

Just like the UK, then. And the US. And just about every other major music market.

International labels have been making distribution deals in China for many years, backing local distributors in trying to create a paid-for model.

As is typical in nascent digital markets, failure rates for services are high and the transition has been from piracy to ad-funded free services rather than paid channels.

“China is a problem music market. Just like the UK, then. And the US.”

Nonetheless, the potential prize in China is obvious and vast – China is not currently in the top 20 markets for digital music revenues yet there are more broadband connections in China than there are people in the EU.

The recent strategy for international labels has been to tie up with the dominant online players in China, rather than licensing tech start-ups as has been typical in Western markets.

Major labels have recently entered into distribution deals with three heavyweights of the online space in China – search giant Baidu, e-commerce group Alibaba and Tencent, the online gaming and social media platform.

Just as the re-launch of Beats Music by Apple and YouTube Music Key are generating hope that paid-for streaming may reach a tipping point in the US, international labels are targeting established entertainment providers in China to open up music revenues.

The reality of the music industry in China, as in other markets, is that any legal music service which gains traction marks progress.

Jay Z’s Tidal marks a response to the same problem, and opportunity, in the US. There were only 7.7 million paid subscriptions in the US at the end of 2014 and the global streaming subscription figure of 40 million is growing but remains a low base.

Tidal has entered the debate over which model will convert meaningful numbers of consumers to paid-for subscriptions.

Over the past 5 years, labels have entered numerous distribution deals with some services attracting users and many sinking without trace.

The small existing market and typical deal length of 2-3 years is a recipe for continued flux. Licensors face the decision of whether to renew deals, including ad-funded free tiers, that may not be delivering significant returns or opt for a changed model – perhaps including increased windowing and exclusive content.

“Licensors face the decision of whether to renew ad-funded deals or op for a changed model.”

Tidal is making a differentiation play on both content and audio quality and is hoping to attract artists and consumers with its superstar backers.

Though it remains to be seen whether its rumoured model of artist equity and higher percentage pay outs will stretch down the pyramid, the real challenge is not attracting users away from existing services, but convincing consumers they need to pay for music at all.

The buzz created by Tidal may move paid subscriptions towards the mainstream and benefit the industry as a whole.

If Tidal can access a fraction of the potential streaming market, Jay Z can expect rich returns on his investment.

It won’t be long before he looks to China too.Music Business Worldwide

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