A critical observation on samr’s decision to merge tencent-cmc, a game changer in the online music playing apps industry

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Just two days after issuing its third decision to ban the merger between DouYu and HuYa, two large live video streaming companies in China (the “HuYa-DouYu merger”), the State Administration of Regulation of the market (“SAMR”) released its sanction decision on the acquisition of one of the leading music streaming companies China Music Company (“CMC”) by Internet giant Tencent (the “Tencent-CMC Fusion” ). This decision is undoubtedly a milestone in 13 years of application of the PRC’s antimonopoly law, as it is the very first time that SAMR has imposed remedies on a closed merger to “restore competition in the relevant market. “. However, it is not without flaw.

We, as frontline practitioners of the PRC antimonopoly law, must briefly comment on the decision from a critical perspective.

What has happened recently to SAMR’s merger review practice?

Since the entry into force of the PRC Antimonopoly Law in 2008, SAMR (the Ministry of Commerce before April 2020) until now[1] examined approximately 3,797 cases, of which 3,635 are permitted, 50 are imposed with restrictions and remedies, 3 are prohibited. In addition, 110 merger agreements are imposed with penalties for parties involved who fail to report a merger deposit or weapon jump; in particular, in parallel with the promulgation of the anti-monopoly guidelines on the platform economy sector, the activities of the SAMR investigating internet giants, Alibaba, Tencent, Meituan, DIDI, etc. . declare that a merger deposit or a weapon jump has been made, most of which was aimed at the internet industry. SAMR’s latest decisions on the DouYu-HuYa merger and Tencent-CMC merger bring the tide to another high point after the decision with the mega fine imposed on Alibaba for its “choose one in two” business model.[2].

About the Tencent-CMC merger

As indicated by SAMR’s decision, the Tencent / CMC deal took place in 2016 and closed at the end of 2017, where Tencent Holding acquired 61.64% of the total shares of CMC by injecting Tencent’s own music streaming business. (mainly QQ Music) into CMC and became the majority shareholder of CMC. Prior to this merger, both Tencent and CMC are competitors in the market as defined by SAMR, namely the online music playback platform market in China, and the products of both parties include several large playback applications. online music, such as KuGou Music, QQ Music and KuWo Music. According to data from IMedia Research[3], the monthly active users of said three applications rank in the top 3 in the industry from October to December 2020, and as reported by SAMR in the decision, at the time of the merger in July 2016, the combined market share of Tencent and CMC , by various statistical calibers such as monthly active users, monthly uptime and canceled sales revenue, reaches 80% and 70% of the relevant market. On the other hand, the combined “basic music copyright resource”[4] of Tencent and CMC, both the total amount and the amount with exclusive license, occupies more than 80% of the market.

According to public sources, after the merger, Tencent restructured CMC and its own online music business by establishing Tencent Music Entertainment Group (“TME”) and initiated and completed TME’s IPO on NYSE. During this period, TME acquired in 2017 10% of the shares of Universal Music Group (“UMG”), one of the three largest record companies in the world, with an exclusive license cooperation, and before that TME had already obtained the exclusive license from Warner Music Group and Sony Music Entertainment.

Under such market power and TME’s upstream copyright resources, other relevant market competitors such as NetEase Cloud Music and Alibaba Music sense the danger. From September 2017 to February 2018, news broke that the National Copyright Administration intervened in disputes between operators of major online music playback applications and led them to reach agreements.[5]. However, after that, the disputes and lawsuits between NetEase Cloud Music and TME continued. According to MLex, in August 2019, SAMR questioned the three biggest music labels because of their exclusive license with TME and opened an antitrust investigation against TME, while until February 2020, information indicated that the investigation of SAMR was suspended.[6].

Half-awake article 48 of the PRC antimonopoly law

It is rather surprising that instead of punishing TME for its suspicion of abuse of market dominance, SAMR’s decision targeted the Tencent-CMC merger and for the very first time used its authorized power under the Article 48 of the PRC Antimonopoly Law to order the company to take the necessary measures to restore the pre-merger state.

Article 48 of the PRC Monopoly Law, as the legal basis of the SAMR punishing the company which has not declared a merger filing or which has carried out a weapon jump, provides that,

When a company infringes the provisions of this law by carrying out a concentration, the authority responsible for the application of the antimonopoly law under the Council of State may order the company to stop the concentration, dispose of the shares or assets within a time limit, transfer the business within a time limit and take other measures to restore the [undertaking/competition] [7]to the state before concentration, and may impose a fine not exceeding CNY 500,000.[8]

However, in the 109 of the 110 transactions punished by the SAMR, only a momentary sentence is ever imposed with authorizations of authorization, namely that the first half of the sentence of Article 48 has been dormant for years.

Questions about the SAMR decision

This decision, except to wake up the whole article, also gives a clue to the hesitant question of what oppose the relevant measures to be taken should restore to pre-merger status, companies or competition on the market. Before this decision, it is commonly interpreted, based on the wording of the article, that the measures listed, stopping the concentration, disposal of shares or assets and transfer of activity, aim to bring the companies concerned back to the status without fusion. However, according to the decision, SAMR, on the basis of Section 48, decided that the measures to be taken by Tencent should restore the “competitive status of the relevant market”. It is not concluded if this decision can indicate the position of the SAMR on this question, whereas from our point of view it seems that it sticks sufficiently to the original meaning of the law.

Although the ruling mentions that TME (combined Tencent and CMC) has a preponderant music copyright remedy, but it appears that the upstream market, namely the music copyright licensing market, should also be defined and analyzed to determine if there is any abusive behavior of TME by using its dominance in the upstream market. Relatively, we are also not sure whether the issue that TME’s acquisition of UMG constitutes a reportable merger has ever been considered and considered by SAMR.[9]

It is also questionable that the Tencent-CMC merger has completed for almost 4 years, the competitive analysis of the decision instead of estimating the actual market effects of competition with facts and evidence, mainly focuses on hypothetical or potential effects with economic evidence such as Increased IHH[10].

Further, in addition to ordering TME to terminate and not attain the exclusive license with the upstream parties, SAMR requires that TME terminate and not meet the so-called most-favored-nation (“MFN”) clauses The Antimonopoly Guidelines on the Platform Economy Sector provide that such broad terms may be recognized as a vertical restraint agreement or constitute an abuse of a dominant market position; however, if such broad terms exist clauses, they will be the subject of a separate investigation.

The ruling expresses its position that it is wrong for TME to pay a high price to upstream copyright holders / music licensors, as this will increase the costs of other competitors. It is difficult to say that this is completely the behavior prohibited by the PRC antimonopoly law.

At the latest, the relevant measures required by the SAMR decision are formulated on the basis of Article 48 of the PRC Antimonopoly Law, but none of them are expressly stated in this article. This can rarely be found during the past practice of law enforcement in China.

Epilogue

SAMR’s decision on the Tencent-CMC merger is worth noting and is certainly a milestone in the implementation of the PRC’s antimonopoly law in the past 13 years since the law came into force, as this is the very first time that SAMR has exercised its power to demand parties. to take the necessary measures to “re-establish competition in the relevant market” before the concentration. More importantly, the ruling expressly denies the legitimacy of the long-standing exclusive copyright licensing model adopted by Tencent and is sure to be a game-changer for the online music playback application industry.


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