Pandora and Spotify are the most popular streaming music services in America, but neither company has a meaningful presence in China's market of over 650 million streaming music users. Instead, the Chinese market is dominated by three tech giants -- Tencent (NASDAQOTH:TCEHY), NetEase (NASDAQ:NTES), and Baidu (NASDAQ: BIDU).

China's streaming music industry could generate $645 million in revenues this year according to Statista's Digital Media Report 2017 as its user penetration rate rises from 46.3% to 50.6% between 2018 and 2022. Therefore, tech investors should pay close attention to the growth of China's top streaming music platforms.

A woman listens to music on her laptop.

Image source: Getty Images.

The 800-pound gorilla: Tencent Music Entertainment

Tencent owns a 62% stake in Tencent Music Entertainment (TME), which was formed after it spun off its music unit and merged it with China Music Corporation in 2016.

The merged company -- which pulled the top streaming platforms QQ Music, Kugou, and Kuwo into a single ecosystem -- controls about 76% of the Chinese music streaming market with over 600 million monthly active users (MAUs), according to research firm DCCI. TME's streaming services are also tethered to Tencent's WeChat, the most popular messaging app in China with 980 million worldwide MAUs.

TME has secured the streaming rights for songs from Sony Entertainment, Time Warner's Warner Music, and Comcast's Universal Music, as well as streaming rights from South Korean label YG Entertainment and Taiwanese labels JVR Music and LOEN Entertainment.

Last September, TME signed a cross-licensing agreement with Alibaba's much smaller Ali Music (Xiami) platform. That deal gave Ali Music access to TME's streaming portfolio, while TME gained access to Ali Music's library of songs from Taiwan's Rock Records, HIM International Music, B'in Music, and Hong Kong's Media Asia. That deal significantly strengthened TME's presence across Taiwan and Hong Kong's pop music markets.

TME is expected to go public later this year as Tencent Music in an eagerly anticipated IPO. Last December, Tencent Music and Spotify -- which is also expected to go public this year -- agreed to buy minority stakes (of up to 10%) in each other.

TME's biggest rival: NetEase Cloud Music

The TME megamerger made it tough for smaller competitors to gain much ground. Yet NetEase, which is best known for publishing PC and mobile games, still controls about 16% of the streaming music market with NetEase Cloud Music, according to DCCI.

A woman listens to music on her smartphone.

Image source: Getty Images.

NetEase launched the platform in 2013, and it had about 60 million MAUs as of last March according to research firm QuestMobile. However, NetEase claimed that the service had 300 million total users last April, but didn't disclose how many of those users were active on a monthly basis.

NetEase sub-licenses most of its music content from TME instead of securing direct partnerships with record labels. To further complicate matters, NetEase and QQ Music (but not the other TME platforms) have been suing each other in an ongoing copyright battle over exclusive rights to certain songs.

NetEase Cloud Music is clearly David to TME's Goliath, but investors still funded it with 750 million RMB ($119 million) in Series A financing last April, which gave it a valuation of 8 billion RMB ($1.3 billion). NetEase has also been adding social networking features to its app, which could help it compete against Tencent's WeChat, and the platform remains the market leader in electronic dance music, according to iiMedia Research.

The distant underdog: Baidu Music

Baidu is practically tied with Tencent in the streaming video market, but it remains a distant underdog in the music streaming one. Baidu Music only controls about 4% of the market, according to DCCI, which is surprising considering that Baidu's search engine handles over 70% of all online queries in China.

Back in 2008 Baidu was sued by several major record companies for allegedly linking to pirated music with its music search engine. The record companies lost that case, but Baidu subsequently agreed to pay them compensation for each downloaded or streamed song. Baidu attempted to recoup those costs with ads.

In late 2015 Baidu merged Baidu Music with the record company Taihe Music Group, which owned over 700,000 copyrights along with licenses with overseas record labels, to expand its music library. Baidu hasn't said much about Baidu Music over the past few quarters, but it could theoretically integrate the platform with its more popular video platform, iQiyi, as a streaming music option.

The key takeaways

These three platforms all generate small portions of their parent companies' revenues, but they could grow in importance over the next few years. For now, all three platforms are focused on converting free ad-supported listeners to paid subscribers, which could generate more sustainable and higher-margin revenues over the long term.

Leo Sun owns shares of Baidu and Tencent Holdings. The Motley Fool owns shares of and recommends Baidu, NetEase, Pandora Media, and Tencent Holdings. The Motley Fool recommends Comcast and Time Warner. The Motley Fool has a disclosure policy.