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In 2011, a landmark agreement was made between three international record companies and China's Internet giant Baidu. The agreement involved the settlement of anti-piracy litigation and a commitment by Baidu to close its service that infringed.

"The Baidu deal was a trigger that led to other Internet companies changing their approach and becoming licensed," says Sunny Chang, president of Universal Music Group International's China region. "We believe that in three to five years, the market will be open and China could be one of the top markets in the world."

There are also challenges ahead. According to Song Ke, one of China's most prominent music industry veterans, a study published by the China Music Industry Committee in 2012 found that the total estimated value of the digital music sector in China was about 30 billion yuan ($484 million), but it also estimated that a very small share of that revenue, less than 3 percent, was being shared with copyright holders.

Song also made a comparison with China's booming film industry, in which box office returns are being plowed back in for re-investment into local film productions.

"A paid model will encourage investment in local artists and help develop a thriving Chinese music business. But nowadays, it isn't just piracy that is our problem. We have to get a fairer distribution system that motivates our industry, just like in the film industry," Song says.

Song, the former head of Warner China and now the general manager of Evergrande Music, launched the Evergrande Star Music Festival that played 60 dates in 60 cities around China last year. The festival breaks with the traditional format of outdoor music festivals in China, which usually just tour big cities, such as Beijing, Shanghai and Guangzhou.

To attract audiences, tickets for the music festivals cost about as much as a movie ticket - less than 100 yuan. Earlier this month, Song announced the 2014 festival dates, which will continue last year's format.

"In China, a majority of people now use legal music, which is a very good environment, but the big question is how can we transfer consumers from free to paid," says Lei Ming, CEO of Kuwo Music, one of the leading services in China, which runs a paid offering alongside its free streaming service.