Anti-Trust Approval Fines - Signalling the Future of China's Internet Giants

In early November 2020, China's State Administration for Market Regulation published a draft of new anti-trust guidelines aimed at regulating large internet companies with dominant platforms or ecosystems. The Guidelines were intended to reduce market distortions and promote greater competition in the markets through the use of a dynamic and flexible framework that has been developed specifically particularly to target China's emerging internet companies. We discuss these Guidelines in detail here.


On December 14th, 2020, the State Administration for Market Regulation fined each of Alibaba, Tencent, and Shunfeng, RMB500,000 for not obtaining the requisite anti-trust approval before engaging in prior mergers and acquisitions activity. Although the fine amount is insignificant, the issuances of these fines is a signal to market participants that large internet platforms, and especially those with a VIE company structure, will be subject to much closer regulatory scrutiny in the coming future. We discuss the details of the fines and their regulatory implications in this article.

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Fine Details

alibaba logo

Alibaba was fined for not reporting Alibaba Investment's acquisition of Yintai Group, a diversified industrial development and investment group with more than 60 large department stores in over 30 cities, in March 2020.


Note: on December 24th, 2020, the SAMR also launched an investigation into Alibaba's competitor exclusion policies (see our previous article for examples). The investigation lasted only a day but serves as a strong warning that the Chinese regulators will be taking a much stricter stance in terms of anti-trust enforcement in the future.


Tencent was fined for not reporting China Literature's (an online literature platform majority owned by Tencent) acquisition of New Classics Media, a Chinese entertainment and media company, in August 2018.


Shunfeng was fined for not reporting its locker subsidiary company's acquisition of China Post's locker service business in July 2020.


Each company was fined RMB500,000 for their failure to report the M&A activity. However, since the regulators did not deem these acquisitions to result in market monopolies, no further penalties were implemented.


What Do the Fines Signal About the Future of Chinese Internet Giants?

Although the fine amount was very little, the issuances of these fines signal important regulatory changes, as follows:


Variable Interest Entity (VIE) Companies Can No Longer Avoid Regulatory Reporting

In the past, variable interest entity (VIE) companies were not clearly addressed by Chinese law. Consequently, many VIEs, including many Chinese internet giants, exploited the legal grey area to engage in excessive M&A activity without first obtaining the relevant regulator approval or reporting to the Anti-Trust Bureau (see here for a more detailed discussion). Examples include Ctrip acquiring Qunar, a Chinese online travel agency, and DiDi merging with Uber China. The recent anti-trust approval fines provide a strong signal that VIE-structured companies can no longer dodge regulatory reporting and will be subject to the same scrutiny for anti-trust violations as non-VIE companies.


Large Internet Platforms Will Be Subject to Greater Regulatory Scrutiny

Whilst the US and European Union have had many anti-trust lawsuits against the tech giants over the past decade or so, in contrast, China had a more tolerant attitude which allowed for the rapid growth of Chinese internet platforms and significant improvements in the efficiency of many domestic markets. However, as the size, scope, and resulting market dominance of these platforms grew, large Chinese internet companies were able to exploit the loose regulatory environment in their favour to distort competition and generate socially suboptimal outcomes for buyers and sellers (see here for examples). The recent anti-trust approval fines suggest that Chinese internet giants will be subject to greater regulatory scrutiny in the coming future.


How Have the Fines Been Perceived by the Public?

The anti-trust approval fines have received a consensus of support and praise based on official press releases and individual media feedback (i.e. online public media accounts published by individuals). The overall enthusiasm for the fines reflect how the average consumer and/or business owner does feel inconvenienced by the monopoly effects of dominant internet platforms, and most likely will encourage regulators to strengthen their scrutiny of such platforms in the future.


Conclusion

The historic loose anti-trust regulatory environment has fostered the rapid growth of many large internet companies in China, including high profile market leaders such as Alibaba, Tencent, and JD, just to name a few. Whilst these internet giants have clearly contributed to the growth and development of China's economy over the past decade, the market inefficiencies they eliminated through innovation and economies of scale are being replaced by alternative forms of market inefficiencies as these companies adopt a more monopolistic status. As a whole, more stringent anti-trust regulations in China would most likely prevent Chinese internet giants from growing as rapidly as they did in the past, but should foster more socially optimal outcomes through greater competition and innovation in the long run. The anti-trust fines issued are a first step in achieving these long run goals.

Update: August 2021

On July 24th, 2021, Tencent's online music playing platform, Tencent Music, was issued a RMB500,000 fine and asked to remove exclusive copyright licenses held by the platform within 30 days of the order.


Note: an online music playing platform is similar to Spotify, Apple Music, or Youtube Music.


Note: in China, music can either be available without restrictions or exclusively licensed (i.e. copyrighted) to an online music playing platform. Music that is exclusively licensed (i.e. copyrighted) from a music company to a platform can only be accessed by the public through the licensed platform.


Previously, Tencent Music and China Music Group, another online music playing platform that operates within China, held 30% and 40% of the domestic online music playing platform market respectively. Tencent Music subsequently acquired China Music Group in 2016, with the merged entity effectively controlling 80% of the exclusively licensed music in China.


Under the new anti-trust order, Tencent Music is required to remove all exclusive license (i.e. copyright) contracts from its platform, with two exceptions:


1) Tencent Music may engage in exclusive licenses with independent music producers

who have not contracted with any agency or music company. Under these conditions,

Tencent Music may engage in an exclusive license contract with each independent

music producer for a duration of no more than 3 years.


(The rationale here is that engaging in an exclusive license could provide music

makers with higher income during the initial stages of their careers)


2) Tencent music may engage in an exclusive license contract with any musical artist

in order to exclusively license a new song for a duration of no more than 30 days after

the initial release of the song.


Moreover, the new order states that Tencent Music cannot demand upstream copyright holders (i.e. music companies that hold the copyright licenses of various songs) to provide preferential licensing fees to Tencent Music while charging higher fees to Tencent Music's competitors unless there is a valid reason to do so.


(In the past, Tencent Music had substantial bargaining power in obtaining lower licensing fees due to its high market share as the dominant online music playing platform)


The overall intention behind Tencent's fine and anti-trust order from the government is to promote competition among music platforms based on user experience rather than having a single company that dominates from holding the vast majority of copyright music licenses.

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