As recent news reported, the streaming subscription music website Pandora will enter China and is head-hunting a capable CEO. This is definitely a great news for music fans in China. But the question you may ask is that, whether this music streaming service can legally operate in China? You know the environment here is kinda of complex.
On one hand, as classified in “China Telecom Business Category” issued by Ministry of industry and information (the “MII”), Pandora’s music streaming service is the Information Service business in the category of Value-Added Telecommunications Service. 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 also belongs to the Internet Culture business which is actually CLOSE to foreign investors.
So, the answer for Pandora seems a NO. However, you may still find a way. The followings are three typical cases of other foreign-invested enterprises entering into China market, which Pandora can take for reference.
MySpace.cn is jointly invested by News Corp.(NES:NSQ), local investors in China and entrepreneurial team. According to the introduction on MySpace, the site is run by a local internet company with independent management and operation, and the company is 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.
- 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 their US internet service, i.e. the music in MP3 format purchasable to China users from iTunes or Windows Media Player is actually provided by the server in USA. Furthermore, any payable charges shall be settled by international credit card like VISA or Master Card.
- MSN and Google Music
In this case, foreign enterprises provide online music services through their licensed Chinese partners. The music services on MSN and its website are provided by licensed CRI Online, the official website of China state-owned enterprise China Radio International. And the search giant Google(NSDQ：GooG) also provides online music service using a local site which owns the license.
Based on its business mode, Pandora is most likely to take MySpace’s solution, 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 applies for the license will facilitate Pandora’s business in China.
[this post was written by Mr. You Yunting (email: bridge At chinaiplawyer.com, twitter @BridgeIP), a popular law blogger from Attorney-at-law of Intellectual Property, Partner of DeBund Law Offices in Shanghai.]