Reuters: China’s anti-monopoly action points to Tencent, fines expected to be at least 10 billion yuan – sources

China’s (Communist) anti-monopoly agency is preparing to issue a hefty fine to Tencent, though it may be lower than the record $2.75 billion that punished Alibaba earlier this month, according to two sources with knowledge of the matter. This is part of a move by authorities to crack down on monopolistic practices by the domestic Internet giant.

Both sources said Tencent’s fine should be at least 10 billion yuan ($1.54 billion), an amount large enough to make an example of the State Administration of Market Regulation (SAMR).

Tencent has been punished for previous acquisitions and investments that did not follow normal filing procedures for antitrust approval, with fines of up to 500,000 yuan per violation, in addition to competition-violating practices in certain business operations, the sources said.

The State Administration of Market Supervision and Administration and Tencent are not commenting at this time.

“The regulator’s attitude is that, unlike Alibaba, you are not the biggest target, but since the action has already started, it is impossible not to punish Tencent,” a source said.

Tencent and Alibaba 9988.HK are China’s two biggest tech giants, with market caps of $776 billion and $642 billion, respectively.

Earlier this month, China’s State Administration of Market Supervision and Regulation (SAMR) announced that it had imposed an administrative penalty on Alibaba Group for imposing a “two-for-one” monopoly on the e-tailing platform services market in China, imposing a fine of 4 percent of its 2019 sales of RMB455.712 billion in China, totaling 18.228 billion yuan.

Tencent has a wide range of businesses involving video games, content streaming, social media, advertising and cloud services.

Two of the sources and two others with knowledge of Tencent’s business said the State Administration of Market Supervision and Administration’s investigation is focused in part on Tencent Music Entertainment Group’s TME.N. Tencent Music did not immediately respond to a request for comment.

The sources said the State Administration of Market Supervision and Administration has informed Tencent that they will face fines, relinquish exclusive music rights and unbundle the acquired Cool Me and Kugou music apps.

But one of the sources said Tencent’s core businesses — video games and WeChat — will remain intact.

** Restrictions on streaming**

Tencent Music acquired rivals Kugou and Cool Me in 2016 and obtained exclusive streaming rights from record labels such as Universal (UMG), Sony and Warner.

Tencent then sublicensed some of the usage rights to rivals such as NetEase Cloud Music, an arrangement NetEase complained was unfair and too expensive.

Two sources previously told Reuters that SAMR launched an investigation into Tencent Music in 2018, but stopped it in 2019 after the company agreed not to renew some of its exclusive use rights after they expired, which typically expire after three years.

However, Tencent Music has retained exclusive rights to Jay Chou’s music, the most influential pop star in the Chinese music industry, which Tencent uses to maintain a competitive advantage over NetEase Cloud Music and Alibaba’s Shrimp Music.

Two of the sources said SAMR told Tencent Music that it should be prepared to give up some of its exclusive rights.

Three sources said a sale of Kugou and Cool Me to rivals or other investors could also be required as one of the options presented to top government officials.

Two sources warned that a forced sale of those divisions would set a precedent and could be difficult to enforce.

The sources said final confirmation of the penalty against Tencent would require the approval of the Communist Party’s central leadership.

They added that Tencent is lobbying for a more lenient penalty.

“Tencent doesn’t care about paying high fines and is willing to pay more if needed, as long as its core business is not affected,” one of the sources said, referring to video games and the WeChat app.

Last month Reuters reported that Tencent’s plan to merge China’s top two live gaming sites, Hu Ya and Dou Yu, would have to make compromise concessions to resolve authorities’ anti-monopoly concerns.

China’s State Administration of Market Supervision and Administration announced on Monday that it had recently opened a case to investigate the suspected monopolistic behavior of Meituan 3690.HK, a takeaway platform, based on reports of “two-for-one” competition; Meituan responded promptly that the company would actively cooperate with the regulator’s investigation and that its business was now running normally. Tencent holds a stake in Meituan.