Tencent’s grip on music weakens after NetEase-Universal deal

NetEase Inc. struck a deal to license songs from Universal Music Group for the first time, a move that will further Beijing’s effort to dismantle Tencent Holdings Ltd.’s commanding lead in Chinese music streaming.

The world’s biggest music company said it’s agreed to license tunes to both Tencent Music Entertainment Group and closest rival NetEase, ending an exclusive arrangement with China’s dominant music-streaming platform. Tencent Music’s shares dropped 2% in New York, but its parent gained 3.5% in Hong Kong after falling two straight days.

The move gives NetEase new ammunition in a fight against Tencent. China’s antitrust authorities had investigated Tencent’s dealings with the world’s three biggest record labels but the probe was suspended this year, people familiar with the matter said in February.

The pact with NetEase lets subscribers get Vivendi SA-controlled Universal Music’s full roster and the two will work on ways to let customers interact with artists. Tencent Music’s separate deal with Universal Music extends a current licensing agreement by multiple years, and the duo will establish a joint music label in China, according to a separate statement. Financial terms weren’t disclosed.

Universal Music, Sony Music Entertainment and Warner Music Group Corp. have all sold exclusive rights to a major chunk of their music catalogs to Tencent Music, which is backed by Sony and Warner. Tencent Music then sublicenses that content to smaller platforms including those operated by NetEase, Alibaba Group Holding Ltd, and Xiaomi Corp. Competing platforms like NetEase have to “pay two to three times the reasonable cost” for content under such arrangements, NetEase Chief Executive Officer William Ding said on a February earnings conference call.

Tencent Music’s revenue grew 17.5% in the second quarter to 6.93 billion yuan ($981 million), beating analysts’ estimates.“We are excited to work together in the years ahead, to help our artists continue to achieve new levels of success in China,” Sunny Chang, chief executive officer of Universal Music’s operations in China, said in the statement.