China’s music business will grow substantially over the coming years thanks to the rise of online streaming services, according to Max Hole, head of international business at Universal Music Group, the world’s biggest record company by sales.

For decades, widespread piracy has undermined the ability of rights holders to sell CDs or digital downloads in China.

Although China boasts a fifth of the world’s population, it accounted for less than 1 per cent of the $15bn in global revenues made last year by record companies. Labels make more money in the US state of New York alone than they do in China.

“The Chinese existing model for music is not entirely broken but it’s pretty broken,” says Mr Hole, who runs Universal’s operations outside the US. “The reason China is so exciting at the moment is that we’ve got the opportunity to skip all that and go straight to a streaming and subscription model.”

What is changing, he says, is that Chinese consumers are increasingly listening to music via a small number of streaming services controlled by the country’s biggest internet companies including Tencent, Alibaba and China Mobile.

These big internet groups, he says, are increasingly willing to pay to license music for their platforms. This is both because the Chinese government is stepping up its enforcement actions against copyright infringement, and because the big internet groups are looking to expand internationally into countries with tougher copyright regimes.

“They’ve all got aspirations in the west so they’re becoming much more amenable to a solution with intellectual property owners,” he says.

Until recently, most online platforms in China provided pirated music. But over the past three years, the major record companies – Universal, Sony Music and Warner Music – and some independent labels have licensed China’s eight biggest online music services.

The spate of licensing deals was triggered by a landmark agreement in 2011 with Baidu, the internet group that runs China’s biggest search engine. That deal also involved the settlement of anti-piracy litigation.

“Has [the Baidu agreement] been fantastically successful? No,” says Mr Hole. “Was it a start? Yes.”

While Chinese consumers are increasingly listening to music on licensed services, the most popular services are free and supported by advertising, generating very little revenue for record companies.

The next step for China’s music business – and a much more challenging one – is to convince consumers to pay. Most of the biggest free streaming services have introduced paid tiers in the past couple of years following pressure from record companies.

So far, the paid userbase is small. Tencent’s QQ Music, which is one of the longest established services, has attracted 2.8m subscribers paying up to Rmb10 ($1.60) per month.

Perhaps the best evidence that it is possible to make money from music in China comes from China Mobile, the state-owned telecom group. China Mobile reportedly generates more than Rmb22bn ($3.5bn) a year from music services. This is mostly from selling ringback tones, which cannot be pirated.

However, China Mobile, which has more than 700m customers, has hitherto shared only a small proportion of its revenues with rightsholders. Record companies hope to negotiate more favourable deals as China Mobile expands its streaming services, which include the music site Kugou and Migu Music, a subscription and limited-download music service that has 20m paying users.

In third place behind China Mobile and Tencent, Alibaba also controls a big share of the digital music industry. Since the start of last year, Alibaba has snapped up stakes in streaming companies Xiami, TTPOD and Youku Tudou.

Outdustry, a Beijing-based music industry consultancy, predicted in a recent report that the continuing consolidation of digital music services in China would benefit record companies.

“In the next few years, we will see these few major players – with the support of the government – being able to shut down or license any rogue sites or apps, leaving a handful of services who will in turn most likely have been consolidated into one of the fiefdoms,” wrote Outdustry’s Ed Peto.

“At this point, with the market largely under control, there will be a concerted push towards more realistic freemium structures in which paying money does actually add value.”

For Mr Hole, the opportunity in China has never looked bigger. He says Universal is increasing investment in its operation in Beijing, where it has signed artists such as Sa Dingding, a folk singer from Inner Mongolia, and Li Xiangxiang, the winner of television singing competition Chinese Idol.

“I feel the wind of change in China,” he says. “Up until fairly recently I had to go to China to sell. Now they’re coming to me.

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