Attention, Chinese Internet Music Services Now Pried Open for Foreign Investment by WTO Lawsuit

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[this post was written by T.K. Chang ( of Ivy Law Group, a lawyer currently advising a U.S. company preparing to establish an online music service in China.]

Chinese Internet music services will now be open to foreign investment for the first time, as a direct result of the victory at the WTO in the case brought by the U.S. against China. Under the new Foreign Investment Industrial Guidance Catalogue issued just before New Year’s Day, Internet music services, which previously had been an Internet sector prohibited for foreign investment, will now be open for foreign investment.

The U.S. government (in other words: the major U.S. media companies) has been trying for years to pry open China’s music market for CD’s, DVD’s and online music. The U.S. brought a case against China at the WTO back in 2007, accusing China of discriminating against U.S. media companies in violation of China’s WTO promises. The case would wind torturously through the WTO bureaucracy for years, until finally in January 2010, after China had exhausted all appeals and conceded defeat, the WTO ruled definitively in favor of the U.S. If you run out of things to read on the beach during Lunar New Year vacation and are in a masochistic mood, you may want to try the WTO ruling, which altogether runs over 600 pages.

China was obligated to carry out the WTO decision within 14 months, and so, with the deadline looming, it has issued the new Foreign Investment Catalogue (replacing the previous version from 2007) permitting foreign companies to invest in Internet music services in China.

So now, in theory at least, foreign music companies will no longer have to contort themselves into the VIE corporate structure used by almost all of the major Chinese Internet companies listed abroad, including Tudou, Dangdang, etc. The prospect of the change in law is probably why Pandora has been head-hunting for a China CEO. The new Foreign Investment Catalogue goes into effect January 30, 2012.

So the famous music service like Pandora, Spotify, Rdio etc, are you guys ready?