Tencent should expect a penalty of at least 10 billion yuan
($1.54 billion), significant enough for the State Administration of Market
Regulation (SAMR) to make an example of it, both people said.
Tencent faces penalties for not properly reporting past
acquisitions and investments for antitrust reviews, an offence with a fine
capped at 500,000 yuan per case, and for anticompetitive practices in some of
its businesses, with music streaming in particular focus, said the sources.
Neither SAMR nor Tencent immediately responded to Reuters'
requests for comment.
"The attitude from the regulator is that unlike Alibaba
you are not the biggest target here, but it would be impossible not to penalise
Tencent now that the campaign is in action," said one of the people.
China has in recent months sought to curb the economic and
social power of its once loosely regulated internet giants, in a clampdown
backed by President Xi Jinping.
Tencent and Alibaba Group Holding Ltd are China's two
biggest tech conglomerates, with market values of $776 billion and $642
billion, respectively.
Earlier this month, SAMR imposed its record fine on Alibaba
after an investigation found the e-commerce firm had abused its dominant market
position for several years.
Tencent's vast businesses include video games, content streaming,
social media, advertising and cloud services.
SAMR's investigation partly focuses on Tencent Music
Entertainment Group, which was spun off and listed in the United States in late
2018, two of the people and an additional two sources close to the business
said. Tencent Music Entertainment did not immediately respond to request for
comment.
The regulator has informed Tencent that it should expect a
fine, give up exclusive music rights, and may even be forced to sell the
acquired Kuwo and Kugou music apps, said the people.
However, Tencent's core businesses, video games and WeChat,
are likely to remain intact, said one of the people.
Streaming stranglehold
Tencent Music, China's answer to Spotify, acquired
competitor apps Kugou and Kuwo in 2016, and pursued exclusive streaming rights
with record labels including Universal Music Group, Sony Music Group and Warner
Music Group Corp.
It then sublicensed some of the rights to competitors
including NetEase Cloud Music, which complained that the arrangement was unfair
and prices too high.
SAMR launched a probe into Tencent Music in 2018 but dropped
it in 2019 after the company agreed to stop renewing some of the exclusive
rights, which normally expire after three years, two sources told Reuters
previously.
However, it kept exclusive rights to Jay Chou, the most
influential pop star in the Chinese-speaking world, using it as a competitive
edge against smaller rivals NetEase Cloud Music and Alibaba-backed Xiami Music.
SAMR has told Tencent Music that it should expect to give up
some of the remaining exclusive rights, two of the people said.
It may also be required to sell Kugou and Kuwo to
competitors or other investors, one of the options being proposed to senior
government officials in Beijing, three sources said.
A forced sale of those units would set a precedent and might
be hard to execute, two of them cautioned.
Final confirmation of Tencent's punishment will need a nod
from China's central leadership, the people said.
Tencent is lobbying for a more lenient penalty, they added.
"Tencent doesn't mind paying a hefty fine and is
willing to pay more if it needs to, as long as its core businesses remain
intact," said one of the people, referring to its video games and WeChat
app units.
Last month, Reuters reported that Tencent will need to meet
certain conditions in its plan to merge Huya and Douyu, two leading video game
streaming platforms, including giving up exclusivity to broadcast Tencent games
to competing streaming sites.
SAMR said this week it is investigating Tencent-backed
Meituan over claims the food delivery giant forced vendors to use their
platform exclusively, the same offence Alibaba was penalised for.
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