Highlights: To introduce the legal restrictions on foreign companies to invest in service of operating online music in China and the practical ways that multinationals provide local online music services in China.
As recent news says, the streaming subscription music website Pandora (NYSE:P) will enter into P.R. China, and is head-hunting a capable CEO. However, Pandora’s online music service by China laws shall be categorized as telecom value-added service as well as internet culture service. Though the foreign investment in telecom value-added service is legally permitted, the internet culture service remains banned.
As classified in “China Telecom Business Category” issued by Ministry of industry and information (the “MII”), Pandora’s streaming music service is the information service business in the category of value-added telecommunications service. And the foreign-invested telecommunication enterprises may run such business with equity holding of no more than 50% of total, which is specified in the “Provisions on Administration of Foreign-invested Telecommunications Enterprises” promulgated by China State Council.
On the other hand, by the “Catalogue for the Guidance of Foreign Investment Industries” issued by Chinese Ministry of Commerce, the online music service belongs to internet culture business which is unopened to foreign investors. Therefore, Pandora cannot directly operate its streaming media service in China.
Of course, the window may remain opened though the door is shut in many areas in China. Pandora could find its own shortcut with the reference to others’ experience. The followings are the 3 main methods of other foreign-invested enterprises entering into China market.
A．Mode of MySpace
MySpace.cn is jointly invested by News Corp.(NES:NSQ), local investors in China and entrepreneurial team. But according to the introduction on MySpace.cn, the site is an emerging local internet company of independent management and operation, jointly established by the entrepreneurial team, IDG and China Broadband Capital.
We estimate that News Corp. may avoid China’s prohibitive policies by VIE structure, namely to set up a domestic company invested by local natural individuals, who sign Entrust Shareholding Agreement with actual investors, for the approval of business license, and the actual investor controls the company and transfers profits by technology and intellectual property license under the investment vehicle of WFOE.
B. Mode of Apple iTunes and Windows Media Player
Microsoft(NSDQ：MSFT) and Apple (NSDQ: AAPL) also provide music services to users in China, but such services are actually based on US internet service. The music in MP3 format purchasable to China users from iTunes or Windows Media Player is provided by the server in USA. Furthermore, any payable charges shall be settled by international credit card like VISA or Master Card.
C. Mode of MSN and Google Music
In this mode, foreign enterprises provide online music services through their licensed Chinese partners. The online music services on Microsoft’s instant messaging software MSN and its website are provided by licensed CRI Online, the official website of China state-owned enterprise China Radio International. The search giant Google(NSDQ：GooG) also provides online music service through a local site owning license.
Basing on its business mode, Pandora is most likely to take MySpace mode, for the best way to attract China users is direct investment and operation in China, without any entrustment to third party. Therefore, it’s ideal for Pandora to first get the license through entrust shareholding and control the established company by technology and intellectual property license under the investment vehicle of WFOE. Surely, the cooperation with an experienced local company who shall apply for the license will facilitate Pandora’s business in China.
Copyright reserved by Mr. You Yunting
Editor-in-Chief of Bridge IP Commentary
Partner & Attorney-at-law of Shanghai DeBund Law Offices
Email: Bridge@chinaiplawyer.com, Tel: 8621-5213-4900,
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