China: Vertical monopolistic agreements in digital music’s ‘exclusive copyright + sub-licensing' model

Digital music copyrights have become a key battleground for major music platforms. These platforms often sign exclusive agreements with domestic and international music companies, with the exclusive agency model holding sway. Under this model, a platform holds exclusive agency rights and distributes non-exclusive usage rights of music works to other platforms via sub-licensing.

This article examines whether the ‘exclusive copyright + sub-licensing’ model constitutes a monopolistic agreement. And, specifically, whether vertical agreements signed between digital music platforms and record companies that do not set fixed prices or minimum prices for sub-licensed copyrights could still amount to vertical non-price monopolistic agreements.

In January 2019, the Chinese State Administration for Market Regulation’s Anti-Monopoly Bureau launched an investigation into Tencent Music Entertainment’s exclusive licensing agreements with three major international record companies – Universal, Warner, and Sony – to determine whether they constituted monopolistic practices that “exclude or restrict competition in relevant markets” or represented an abuse of market dominance. In February 2020, the investigation was temporarily suspended. However, in January 2021, the bureau initiated an investigation into Tencent Music Entertainment’s acquisition of China Music Corporation as an alleged anti-competitive merger.

The findings confirmed that Tencent Music Entertainment violated the Anti-Monopoly Law by engaging in a concentration of operators that constituted monopolistic behaviour. Consequently, the State Administration for Market Regulation imposed fines and compliance measures, and mandated Tencent Music Entertainment to take steps to restore competition in the market.

Article 68 of the Chinese Anti-Monopoly Law stipulates that operators’ actions to exercise intellectual property rights in accordance with relevant laws and regulations are not subject to the Anti-Monopoly Law. However, the abuse of intellectual property rights to exclude or restrict competition falls under its purview.

Article 18 outlines three types of vertical monopolistic agreements in upstream and downstream transactions:

• Fixing resale prices;

• Restricting minimum resale prices; and

• Other monopolistic agreements as determined by the State Council’s anti-monopoly enforcement agencies.

Additionally, Article 20 provides exemptions for certain situations under Article 18. The Anti-Monopoly Guidelines for the Intellectual Property Sector issued in 2019 introduced a ‘safe harbour’ rule. This specifies that vertical agreements where the market share of each party in any relevant market affected by the agreement does not exceed 30% are exempt from restrictions under Article 18(3).

Determining vertical monopolistic agreements in the exclusive copyright + sub-licensing model

According to Article 18 of the Anti-Monopoly Law, vertical agreements between a digital music platform and a record company that fix copyright sub-licensing prices or set minimum prices constitute monopolistic agreements. However, the exclusive copyright + sub-licensing model often does not involve price restrictions, making the determination of vertical non-price monopolistic agreements the key issue. This analysis focuses on two aspects.

If the market power of both parties in a vertical agreement is weak, competition from other brands in the same industry can mitigate the effects of price increases or supply reductions, diminishing the likelihood of anti-competitive outcomes. However, if both parties hold significant market power, vertical monopolistic practices may reduce horizontal competition. The safe harbour for parties with market shares below 30% exempts them from scrutiny.

This is evaluated based on the quantity and duration of exclusive and sub-licensed copyrights. On the one hand, a higher volume of sub-licensing dilutes the competitive restrictions of exclusive rights, reducing the likelihood of monopolistic behaviour; on the other hand, long-term and unrestricted exclusive copyrights can lead to price wars among platforms seeking to secure more resources.

Larger platforms with stronger financial capabilities gain a competitive edge, consolidating market dominance and risking monopolistic outcomes. Consumers tend to favour platforms with more copyright resources, further weakening smaller competitors, which may eventually exit the market. Over time, this raises market entry barriers and increases monopolistic risks.

Section 114 of the Copyright Law of the United States limits the term of exclusive licences for sound recordings. In principle, the licence term for music copyrights granted to interactive music services cannot exceed one year unless the copyright holder owns fewer than 1,000 works. In such cases, the licence term can be extended by a year. Moreover, upon the expiry of the exclusive licence, the licensee is prohibited from acquiring a new exclusive licence within 13 months unless the licence holder licenses its works to at least five interactive music services, with each service obtaining at least 10% of the total catalogue or a minimum of 50 works.

This system offers valuable insights for China.

Limiting the quantity of exclusive copyrights obtained by digital music platforms can prevent price wars and unhealthy competition for more resources. It also discourages financially robust platforms from monopolising the market by acquiring excessive exclusive copyright resources and sub-licensing rights.

Setting a time limit for exclusive licences can prevent platforms from monopolising music works over an extended period. This measure can facilitate the circulation of copyright resources and provide channels for other platforms to obtain exclusive copyrights of musical works.

By referencing the US approach, China could impose limits on the term and introduce licensing intervals for exclusive copyrights. Additionally, conditions could be applied to sub-licensing arrangements, ensuring that the number of sub-licensees exceeds a minimum threshold. This would facilitate fair competition and mitigate monopolistic behaviours.

China has five collective copyright management organisations, with the China Music Copyright Association (CMCA) relatively well established. However, challenges such as uneven profit distribution, high management fees, excessive licensing terms, lack of professionalism, and inefficiencies in rights protection persist due to the absence of competition. In practice, the roles and market positions of the CMCA often overlap with those of digital music platforms holding exclusive rights. Copyright holders frequently prefer collaborating directly with digital platforms over collective management organisations.

To address the risks posed by market-dominant digital music platforms, developing collective copyright management organisations can be a viable solution. Drawing from the US competitive copyright collective management model, China could:

• Enforce stricter oversight of agreements between copyright collectives and rights holders;

• Encourage competition among management organisations to optimise services, reduce fees, and resolve conflicts with copyright holders; and

• Gain the trust of copyright holders over time, thereby reducing the influence of dominant platforms in the market.

If an exclusive copyright agreement between a digital music platform and a record company fixes the sub-licensing price of the work or limits the minimum price, the agreement constitutes a vertical monopoly agreement. If it does not, it is still necessary to be alert to the possibility that it may induce the abuse of a dominant market position by means of this vertical agreement. That is, the agreement has a higher likelihood of constituting a vertical non-price monopoly agreement if:

• A music platform and a record company that enter into an exclusive copyright agreement have relatively strong market power;

• The agreement authorises a large number of long-term exclusive copyrights of musical works; and

• The platform restricts sub-licensing to other platforms.

The exclusive copyright model plays a fundamental role in restricting piracy and protecting copyrights and should not be suppressed. Exclusive copyrights can be regulated by limiting the term and quantity, and promoting the development of copyright collective management organisations.