“China was my hobby for the best part of 10 years: something which the company allowed me to run as a hobby on the side as long as I wasn’t spending too much money. It was five years before we made any money whatsoever, and 10 years until we felt we had a business…”
Simon Wheeler, director of digital at independent music company Beggars Group, first went to China in 2006 on a trade mission organised by trade group AIM and government body UKTI. The dominant form of digital-music consumption was piracy, but his curiosity was piqued.
“At that time, there was no pressure from the Chinese government in the market for people to behave properly. Effectively it was the Wild West,” he says, of a time when local music services were essentially unlicensed.
“We were going in and doing meetings with people saying ‘How about a licence?’ and they’d just be smiling at you. ‘Why would we want to do a licence? We’ve got your music already…’” he remembers.
“But it was a good learning experience to go and do that. If nothing else, we got to build relationships with all the different players, even though we weren’t able to do business back in those days.”
Wheeler spent the next few years travelling to China once or twice a year to hold meetings with the digital services, which ensured that when the Chinese government did eventually crack down on unlicensed music, Beggars was well positioned for those commercial conversations.
He’s reminiscing about this now with Music Ally because in 2018, China is suddenly one of the most exciting digital-music markets in the world.
Tencent Music’s three streaming services claim 700 million monthly active users between them. NetEase Cloud Music claims 400 million. And while the overwhelming majority of those people are listening for free, Tencent has said it hopes to have 25 million paying subscribers by 2019.
But back to that word ‘suddenly’. For Beggars Group, China has been anything but a sudden thing, in terms of its business. It’s been a decade-long, steady effort to build relationships, understand the market and plan a strategy that in some respects, differs from that of many western labels in China.
This strategy has paid off: in 2017, Beggars generated more revenues from China than from Japan, despite the latter being the second largest recorded-music market in the world. “And we have a decent business in Japan!” says Wheeler.
What got Wheeler interested in those early days, given the lack of a licensed digital market in China, was more about the bigger picture of music in a country that had been opening up more to western culture since the late 1980s.
“It was a real clash of ancient and ultra-modern cultures coming together at about 100 miles an hour, running headfirst into each other! Since China started opening up, it had been running to catch up with about 40 to 50 years of [western] cultural history in a handful of years, as it got access to the internet,” says Wheeler.
“China’s first rock band didn’t exist until the late 1980s or early 1990s, don’t forget. We’ve grown up with rock’n’roll and pop culture in the west, but that didn’t happen in China until very recently. Once it did, people there were voraciously consuming it, burning through what had taken us decades.”
“I remember when I first went there, we were taken out to this show, in a venue with a few hundred Chinese kids, and from the back you could have been in a venue in Camden or somewhere, watching these pretty-great Chinese local indie-rock bands. I thought well, there is a scene here, people are interested, and it’s going to turn in to something. It’s a market rife with piracy, so god knows how it’s going to work, but let’s give it a go. It was the challenge that appealed to me, I think.”
After that initial visit in 2006, a few years of smiling but unproductive (in commercial terms) meetings followed, including trying to work through how some of the things labels take for granted in the west – metadata, contracts, publishing and master rights – would work in China.
The turning point came when the Chinese government decided, as part of its wider push to support intellectual property rights, put digital-music service owners like Baidu on notice that they’d have to start signing proper licensing deals and paying out royalties to rightsholders.
“It’s quite mind-boggling to go from ‘why do we need to get licences?’ into a proper licensing conversation. Suddenly, if we needed to get our repertoire removed from services if we needed to make the point that we were serious, it stayed down! That hadn’t happened before,” says Wheeler.
“There hadn’t been the teeth to back it up. But the government had said this [licensing] as going to happen, and the services knew they needed to play ball. It’s a very different way of working to the west: this absolute control from the government. ‘This is what’s coming, and you’re all gong to get on board and do it’. It’s a very effective way of moving the market.”
Wheeler has been the key figure in building Beggars Group’s strategy in China, with full support from chairman Martin Mills. He’s also worked with local consultancy Outdustry to hone its approach to the market – the same company that worked with indie licensing agency Merlin on its recent non-exclusive licensing deals in China.
Non-exclusivity is something that Beggars is very keen on in China. The label group has avoided the kind of deals signed by major labels and western indies (Cooking Vinyl for example) that saw their catalogue exclusively licensed to one Chinese service, which in turn could then (in theory) sub-license it to rivals.
“We have a real issue with exclusivity in any shape or form, whatever country it’s in. By working with everyone, we certainly understand more about the market, and our artists are sharing in that. And it’s starting to pay off for us and them,” says Wheeler, of China.
It is true, he adds, that the business culture in China (and in many parts of south east Asia) is weighted towards minimum guarantees and advances, often with exclusivity built in to those deals.
“You negotiate a fee, you get a cheque, and then you come back in a year’s time and get another cheque. What happens in the meantime? No one cares! Why would you want to do more work? You won’t get more money… If you’re just looking to get paid, it’s fine. But if you looking to build a business, it’s not great,” he says.
So, an exclusive deal might yield a bigger minimum-guarantee from a single partner, but early experiments in China taught Beggars that it was frustrating to have someone else in charge of negotiating the value for its catalogue, especially if reporting on the usage of that music was patchy.
“What we learned was that exclusive deals with someone else managing your business that you don’t have any oversight of doesn’t teach you anything. Well, it teaches you that you need to manage your own business,” he says.
Cue a strategy of negotiating individual licensing deals for Beggars’ catalogue with the various Chinese DSPs.
“Clearly the size of the cheques were not as big. But then we were picking up cheques from lots of people instead of just one person. Could we have earned more from doing an exclusive deal on a year-by-year basis? Possibly,” he says.
“But we worked hard on those first deals to ensure that all our catalogue was being reported on and that the metadata was there. And then the year two and year three deals were so much more valuable, because we’d done all the work to generate the value in the previous deals, which would now certainly exceed any exclusive minimum-guarantee.”
Beggars was the first international indie label to have direct deals with all the Chinese DSPs, and it’s now making money from physical and digital sales, video-on-demand, sync and even karaoke – it’s the only foreign label collecting from Chinese karaoke society CAVCA.
“We’re now getting monthly, track-level reporting from all DSPs, gradually bringing China ‘online’ in terms of analytics,” says Wheeler. “When we first started, supply chain and reporting was basically non-existent, and essentially still is for most rightsholders!”
The backdrop to this in 2018 is the competition between Tencent Music, NetEase and Alibaba driving the Chinese market, and high hopes that the country can finally fulfil its potential for music rightsholders, both local and global.
Wheeler says that it’s important to appreciate the differences between the main streaming players in China. Tencent Music has huge numbers, and many of those listeners are in the second, third or fourth-tier cities in China.
Great for its scale, but also a lot of people who aren’t necessarily interested in western music – as Tencent Music’s boss Andy Ng confirmed at Midem 2017, when he said that more than 80% of its users are only listening to Chinese tracks.
“Even though Tencent is a big part of the market, our biggest partner in terms of revenues returned to us is NetEase,” says Wheeler.
“Their consumers are much more sophisticated in terms of their musical knowledge and interests, and the service is a bit more sophisticated in terms of their programming, and being able to surface music.”
As for Ali[baba] they’re somewhere slightly different. It’s hard to see Ali as a parent company as totally invested in driving up the paid music industry. But that said, the Xiami service which it owns has some real potential. It didn’t have the major-label catalogues tied up in exclusive deals, which meant it has suffered in terms of its market share, but maybe now that catalogue is back on the service, it can become more powerful.”
At the moment, Beggars’ top three artists in China – Adele, Radiohead and The xx – account for around 50% of its revenues from the country. Wheeler admits that’s quite heavily weighted to the head, but also takes encouragement from the fact that the other 50% comes from other artists.
“Getting down to that depth isn’t something we truly expected to see. It’s a nice surprise when a track or artist does resonate, through a particular piece of promo or profiling, or even radio play.”
Beggars Group has worked with managers and promoters to try to get its artists – from The xx down to emerging acts – to visit China and create those kinds of sparks.
It’s also worked with Outdustry to ensure that its labels and artists have had a presence on China’s homegrown social platforms like weChat, as well as through the digital services, digital PR, influencer marketing and lots of national and regional radio.
“It’s like anywhere: we’ve tried to have local people running those accounts who are native to the platforms, instead of westerners coming in and saying ‘I can do this’ because they know Facebook or Twitter,” says Wheeler. “It’s so easy to get things wrong in the translations, or with the tone.”
What will the next trends be in China’s music market? Wheeler thinks that building “real business” will involve growing the number of paying subscribers there.
“Differentiating between what a paying user gets and what a free user gets will be the thrust of the next year. Certainly the conversations we’re having point in that direction,” he says.
“Everyone’s got to move together though. If one service starts withholding content from their free tier and others don’t, the users will just migrate and we won’t have solved anything. We’ve got to get all the services together and agree that we’re going to put stuff behind the paywall.”
Wheeler is optimistic about Chinese listeners’ willingness to pay for a music-streaming subscription. In fact, they’ve already proved themselves willing to buy individual albums, when they’re not available to stream: Adele’s ’25’ being a case in point.
“It wasn’t available to stream anywhere in the world at that point, but we did make it available to purchase, and a lot of people bought it in China,” he says.
“We had a good few hundred-thousand digital sales of that album there, and people were paying around the same or slightly more than the cost of a monthly [streaming] subscription. So even in China, there’s a willingness to pay from a certain segment of the market, which is getting quite sizeable.”
He also points to the lucrative mobile games market in China, driven by in-app purchases of virtual items and currency, as another sign of this willingness to pay for digital content.
“I often hear ‘people will not pay in China’ and the same for India. Yes they will. We’re not sure how much, or how fast, but they will. We just have to put all the incentives in place, and make the service attractive,” he says.
“It’s cheap: a monthly music subscription costs a dollar or $1.50 depending on the exchange rate. And for a Chinese consumer who has a smartphone, mobile data and a contract and is living in one of the bigger cities, that just isn’t much money these days. I think there’s a lot of potential there.”