It is no secret that the global music industry is struggling to identify a sustainable model that can serve the interests of music publishers, distributors and consumers.
While previous eras coped with the issue of copyright, in the digital era, the global music industry faces a new set of problems especially that of content monetisation. With so many free music content options available on the internet, consumers are less willing to pay for it.
China, while yet to establish itself as a major player in the sector, may offer some hints as to how the struggling industry can transform itself into a long-term sustainable business.
The latest comes in the filing of Tencent Music Entertainment Group as it disclosed its operational and financial details on Tuesday, ahead of a highly-anticipated initial public offering in the US.
There are some stunning facts behind China’s largest digital music distributor. Its total number of paid users has more than doubled in less than two years, and its revenue grew 1.5 times to nearly $1.7 billion last year, underscoring the company’s rapid growth as Chinese customers become more accustomed to music streaming.
But perhaps the most astonishing fact is that the business made a profit of $263 million in the first six months of this year – already more than the $199 million net profit for the whole of last year. That stands in sharp contrast to US-listed streaming giant Spotify which has not made a profit since it was founded in 2006.
INTEGRATED PLATFORM
Tencent Music’s profitability proves that it is running under a better business model than Spotify, which relies largely on subscription payments from customers of its music streaming service.
The group said that it generated 71.3% of its revenues from music-centric social entertainment services last year, while music streaming revenues accounted for only 28.7%.
The group’s social entertainment services include interactive karaoke and live streaming platforms that allow users to share their own performances. These services are mostly offered through Kuwo Music and Kugou Music, which Tencent acquired in 2013 and 2014 respectively.
Tencent Music’s social entertainment services also include virtual gift sales and premium memberships, according to its filing.
The group was able to achieve a higher paying ratio for its social entertainment services than its music streaming service. In the second quarter this year, some 4.2% of its social entertainment users have paid for the service compared to 3.6% for online music.
Such a business model suggests that music has to be offered as part of an integrated entertainment solution in order to attract more users as well as more payments. Music can hardly be distributed as a standalone product since users can access some of the content for free on YouTube, the single most-used website in the world to listen to music legally.
CHINA MARKET
As a matter of fact, Tencent Music faces significantly weaker competition than Spotify. Not only is Google-owned YouTube banned in China, Tencent Music dominates about 75% of the country’s burgeoning music streaming market.
China’s relatively less-developed music industry suggests that music streaming sites have more bargaining power when it comes to negotiating royalty fees with music labels, many of which are small in scale and command a low market share.
Compare this to the likes of Spotify, which has to negotiate with some of the world’s already dominant music labels such as Warner Music Group, Sony Music and Universal Music Group.
Tencent Music’s monthly active user base of 800 million is also larger than Spotify’s 180 million, making it a potential landmark for music streaming
For prospective investors, Tencent Music’s main drawback is its single-market focus since the group currently operates only within China. As with many other sectors, changes in Chinese regulations may significantly affect the development of the music industry.
Tencent Music said it plans to raise as much as $1 billion through the IPO under a dual-class share structure. About 40% of the proceeds will be used for enhancing its music content, while 30% will be used for product development and another 15% for sales and marketing.
Joint sponsors of the IPO are Bank of America Merrill Lynch, Deutsche Bank, Goldman Sachs, JP Morgan and Morgan Stanley.
