Music Royalties in China: Let Those Without Sin Cast the First Stone

China is digital. Its music market is almost entirely digital. Physical sales here comprise only about 20% of the total market. To put that in context, in the United States, physical sales are still around 50% and in Japan they’re around 60%. China has more than twice as many internet users as the US has people. There are about 900 million mobile internet users here, 70% of whom consume music online. That means there are around 630 million digital music consumers. With mobile payment penetration at about 85%, there are around 540 million consumers in China who can easily buy music on their phones. They may only be spending ¥10 ($1.45) a month for a premium service, or to download an album, but Chinese audiences are being conditioned to pay for their digital music and that is a big development that has taken a long time.

Despite the actual and potential growth, China’s music industry is beset by systemic royalty accounting problems. The temptation is to blame China for this. But when you take a closer look at the royalty ecosystem, the blame doesn’t lie squarely at China’s feet. Entrenched global practices in the music industry seem to have a lot to do with it.

As I said during a recent webinar, there are three main factors contributing to China’s royalty accounting problems.

Inadequate Metadata.

To account properly to foreign labels, Chinese DSPs (digital service providers) need adequate data, but according to Chinese DSPs, the major labels do not generally provide the complete song lists or other data sets required. In many cases, there are technological reasons for this — many foreign labels use systems not commonly used by the Chinese DSPs, such as the common works registration or CWR system. But the MCSC (Music Copyright Society of China) is also sometimes criticized for not providing full song lists and other data to the DSPs. The result is that proper accounting is impossible or impracticable. There are insufficient data for matching. As one DSP executive puts it, it’s a case of “garbage in, garbage out”.

Exclusive Deals, Bid Advances.

China’s market for foreign music has been dominated by exclusive deals granted to Chinese DSPs in return for big advances for the major labels. Under these exclusive deals, minimum guarantees have been paid instead of royalty income based on actual transactions. Payments structured in this way tend to overvalue music catalogues and are effectively buy-outs in which transactional accounting is impossible or discouraged. The major labels have left themselves open to the criticism, often made in China, that big advances with no prospect of reporting are the desired outcome as they result in non-allocable surpluses or “breakage” that may be retained.  Exclusive deals also support webs of sub-licensing and copyright transfer agreements which contribute to the inadequacy of metadata, attract multiple payments for the same properties, and give rise to accusations of anti-competitive conduct. About the only good thing people have to say about exclusive deals is that they have driven a rapid reduction in piracy because exclusive licensees have had the incentive to eradicate infringers.

Messy Copyright Collections.

As I said in a recent post on audiovisual copyright, one of the ongoing difficulties with Chinese copyright law is that, although it enumerates the rights comprising copyright, it does not clearly state which of these rights apply to which copyright works or other subject matter. An indeterminate class of rights — such as the rights of “consent” or “remuneration” — is often the only link. In the Chinese music business, distinctions between mechanicals, public performance and streaming are therefore unclear. Other markets have developed customs and practices to handle these kinds of distinctions. In the UK, for instance, 75% of a download is regarded as mechanical and 25% as public performance, while streaming is divided between those rights 50/50. In China these kinds of customs and practices do not yet exist. To make matters worse, the “streaming” right — the right of network communication or online dissemination — is poorly understood and rarely, if ever, anticipated in a grant of rights under a music publishing agreement between foreign parties.

The legal issues are compounded by unclear or overlapping local industry practices. For instance, though foreign labels deal directly with the Chinese DSPs, the main Chinese collection society, the MCSC, also deals with the DSPs for the same music. Publishers and the MCSC then make competing claims to the DSPs. The very existence of these competing claims means the distinction between the writer’s share and the publisher’s share is unclear or in practice non-existent. As Outdustry’s Ed Peto recently put it, the “writer’s share is a cultural import largely met with shrugs”.

Despite these royalty accounting problems, there have been some encouraging developments in copyright law, and China’s digital environment is clearly driving substantial investment activity in the music business. A recent $3.4 billion deal in which a Tencent-led consortium bought 10% of Universal Music Group certainly evidences this. The Chinese music business may now even have eclipsed the film business in the international investment arena. Still, investment has it limits. Foreign investment in production of audio-visual products and network publications in China remains prohibited.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.