(Yicai Global) Aug. 29 -- A legal dispute between the music streaming subsidiaries of Chinese internet giant NetEase Inc. [NASDAQ:NYES] and Tencent Holdings Ltd. [HKG:0700] will go to court. However, the law suit is expected to increase copyright fees and hurt both companies in the long-run, a market insider told Yicai Global.

The case is set to significantly benefit the big three record labels, Sony BMG [NASDAQ:SNE], Universal Music Group [NYSE:WMG], and Warner Music Group [NYSE:WMG].

Tensions between NetEase Cloud Music and Tencent Music have escalated from initial negotiations to an outright legal confrontation.

Leading Chinese music groups do not publicly disclose their financial statements, though all online streaming sites are currently operating a loss, said Liu Xin, vice president at Taihe Music Group, which merged with Baidu Inc.'s [NASDAQ:BIDU] own streaming platform in December 2015.

This is due to revenues from paying users being insufficient to cover expensive copyright fees. Their income mainly comes from advertising at present.

"It's difficult for online music sites to make money, music copyright fees double every two years. In the last three to four years, international and mainstream Hong Kong and Taiwanese record labels have increased copyright fees by several times," Liu said. "The cost of a license renewal by a Chinese online music streaming firm used to be several millions of dollars, but it's gone up to over USD100 million now."

All major music streaming sites have been stockpiling exclusive copyright licenses, and prices for Universal Music copyrights have increased dozens of times, said Zhao Xiaoma, managing director at China Insights Consultancy.

"Music copyright licensing costs will continue to rise," Zhao added.
If online music sites insist on acquiring exclusive copyright rights, it will only further push up their already hefty operating costs, he advised. "Original content is what they really need to win. Sometimes buying large amounts of copyright rights does not yield more financial benefits than a popular song discovered by chance," he noted.

The companies have focused efforts on discovering their own musical talent in China, and while this sounds viable in theory, it has not been very effective in boosting ' financial performance so far.

This is because music streaming companies allocate very limited resources and copyright profits to musicians, and original music creation now faces serious challenges, Liu Xin said. "Major music sites spend a lot of money on copyright rights from the Big Three, so they naturally prioritize records from the Big Three in promotions, leaving little resources available for original music."

It is difficult to measure the specific traffic generated by individual pieces of content in the music streaming sector, unlike the video streaming industry.

"Most music players don't show hit counts, and the sites don't publish this data either, meaning that profits are not distributed to content creators based on the true value of their works," Liu added.

"The Big Three record labels are at a disadvantage when competing with local music firms in content creation for younger Chinese consumers, because they don't have localized teams and are unfamiliar with the Chinese market and the online music industry. At present, most original music is still produced by local firms, so once music streaming sites start publishing traffic data, it'll pressurize the Big Three to change their strategies," he added.

"Taihe Music is trying to make data more transparent in the music industry," Liu said.

"Chinese music companies should set up an ecosystem, expand their customer base and increase user stickiness, so that they can profit from value-added services and advertising beyond music streaming," Zhao Xiaoma suggested.