In the heat of last week’s escalated trade dispute between China and the United States, China’s Tencent Music (NYSE: TME) first-quarter reported earnings mildly impressed analysts. The report is only its second since going public in December.
Revenue for the largest music streaming company in China with an estimated 800 million users was up 39% year over year but still slightly short of Wall Street’s predicted 5.8 billion. Twenty-eight percent of Tencent Music’s revenue came from its online music business, the remaining 72% came from its social entertainment unit.
Shares of the company then tilted in after-hours trading in a sell-off in the broader market apparently triggered by trade unease.
But the story behind Tencent Music’s rise is more intriguing. The company is blazing a new trail in the world’s most populous country, one that promises to soon have everyone in it online. And it’s going about it on its own terms in a fast evolving entertainment culture all its own.
“As wider data network coverages improve and the cost of mobile data usage decreases in China, our users are increasingly consuming music content through streaming services,” said CEO Cussion Pang (pictured) in the earnings call.
“To capitalize on such changes, we began adopting the pay-for-stream model and educating users in turn,” he said. “As our users increasingly consume music content through streaming services, we are riding on this trend to gradually transition into a pay-for-streaming model over the coming years.”
Tencent Music, controlled by Chinese tech giant Tencent Holdings Ltd, said paid users of its online music service jumped 27.4% to 28.4 million in the three months ended March 31.
A Powerhouse Integrated Strategy Prevails
Tencent Music, formed by a merging of China’s biggest streaming platforms, generates revenue from subscription fees, ads, and digital downloads. Its core growth engine, however, is its social entertainment unit, which drives most of its revenue from social streaming app, WeSing.
Tencent Music’s music-centric social strategy also benefits under parent company, Tencent Holdings, which is horizontally and vertically integrated, and powerfully so.
“Our music-centric live streaming platform enables us to discover and nurture emerging artists, too. Another emerging artist, as an example, she was discovered through our live streaming platform and went on to develop her professional singing career,” said Chief Strategy Officer Tony Yip.
“She continued to engage with her fans and publish even more new songs through our platform. This, in-turn, expanded our music library,” Yip added. “Such examples truly demonstrate our unique position as an integrated all-in-one music entertainment platform which allows our users to discover, listen, sing, watch, perform and socialize around music.”
Table: Tencent Music Opportunity in China
|Vast market||An estimated 1.4 billion people; world’s second largest economy|
|High smartphone penetration||Fifty percent of the population uses a smartphone|
|Strong mobile coverage||Ninety-two percent of mobile subscribers have 3G or 4G service|
|Broadband investment||Full broadband coverage is expected in the next few years|
|Dominant market share||800 million users of Tencent’s music apps (QQ Music, Kugou and Kuwo) comprise 78% of China’s music-streaming market|
|Exclusive licensing||Deals with Universal, Sony, Warner and, most recently, indie record-label Merlin|
|Innovative business model||Tencent Music’s integrated music-centric social media strategy|
Social Content, User Experience “Just the Beginning”
While pay-for-streaming accounts for a very small percentage of Tencent Music’s total offering, the company is gradually adding to its list, and acquiring a large music library of original, organic music content along the way.
“We started implementation of the pay-for-stream transition model with a small selection of content in Q1,” said Yip. “While the amount of content being put behind the paywall accounts for only a very small percentage of our total revenues, this is just the beginning and we’ll continue to gradually add more content over time.”
Tencent Music’s current focus is on making sure the user experience remains good despite a paywall transition, and, according to Yip, it will take some time to promote a broader user adoption of paid accounts.
Tencent Music said it had started charging for more of its content in the first quarter as the popularity of its pay-for-streaming services helped drive up profit to above expectations.
As of March 31, 2019, TME says that its music library included over 35 million tracks from domestic and international music labels.
Top Chinese Music Streaming Services: What to Know
- Kuqou – music streaming and downloading (Tencent Music, 2004)
- QQmusic – music streaming and awards (Tencent Music, 2015)
- Kuwo – music streaming and downloading (Tencent Music, 2004)
- NetEase Music – music streaming and downloading (NetEase Inc., 2013)
- Xiami – music streaming audio and video (Alibaba, 2007)