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What the future holds for Chinese music industry

In a market largely controlled by Tencent Music, NetEase Music has focused on offering a differentiated product. With the financial backup of Baidu, NetEase Music could find its feet soon.

Dec 15, 2018 by A. Alfaro
What the future holds for Chinese music industry

Tencent Music went public on 12 December. The stock rose nearly 13% on debut at USD 14.70 a share.

Tencent had started planning the IPO launch of its music service back in July 2016. To that end, the social media giant established Tencent Music, which comprises of apps such as Kugou and QQ Music. In August 2018, Kugou and QQ Music were among the three most popular online music apps in terms of monthly active users in China, according to Questmobile.

Tencent Music submitted the prospectus to New York Stock Exchange on 2 October. Shortly after, the stock markets around the world started tumbling forcing Tencent to postpone its IPO. Tencent actually wanted to put off the IPO until January 2019, Reuters reported.

However, the US stock market recovered after the US and China agreed to truce on the sidelines of G20 summit in Argentina after 90 long days of intense trade war. Immediately, Tencent decided to list Tencent Music on New York Stock Exchange.

Tencent Music has managed to raise USD 1.1 billion at a valuation of USD 21.3 billion. “Tencent Music is profitable and has no cashflow problems. The company could have postponed the IPO,” tech portal 36Kr quoted Shi Zhangheng, an analyst at Guosen Securities, as saying.

Tencent Music reported a net profit of USD 436 million for the first nine months of 2018 with a growth of 162.87% year-on-year. However, the delay in the IPO launch had a negative effect on Tencent Music’s valuation. In December last year, Tencent acquired 7.5 % stake in Spotify a part of a share swap deal. Back then, Tencent Music was valued at USD 12 billion. Less than a year later, Tencent had an estimated valuation of USD 30 billion in October.

Tencent Music’s latest financial report put its monthly active users at 655 million with an 8% year-on-year growth. Its social entertainment division has 225 million users. The average time spent daily on the platform per user is 70 minutes. According to Questmobile, Tencent Music has a penetration rate of 70%.

The income from subscription and downloads account for only 30% of Tencent Music’s total income. The subscription rose by 3.8% between Q2 and Q3. Tencent Music’s ARPU (Average Revenue Per User) is relatively low. The company can’t turn a profit from subscriptions and downloads alone, observed 36kr.

Be that as it may, Tencent Music is the best performing online music service as of now. In China, copyright awareness has improved in last few years. According to Music Consumer Insight Report, 96% of Chinese consumers shun pirated music as opposed to the global average of 64%. The rising demand for legit music has widened the scope of the industry.

Tencent Music’s main rival is NetEase Music, which is still struggling to lock in a profitable business model. In October 2018, NetEase Music launched live-streaming app Look. The company wants Look to be a breeding ground for budding artists. “We have seen how users quickly get tired of traditional live-streaming applications. However, there are cases of successful live-streaming applications such as Kugou Live that have combined music with traditional live-streaming models,” said Zhang Yi, CEO of iiMedia Research.

NetEase Music, Tencent Music and Xiami Music have produced talent shows to find new music stars.

Royalty is one of the major pain points for such apps. Spotify spends 70% of its income (EUR 1.3 billion) in royalties. Now, Spotify allows artists to directly upload their music on the platform. The musicians get visibility and in return, Spotify keeps 50% of their income from music sales along with the royalty. According to Martin Lorentzon, CEO of Spotify, already 67,000 artists uploaded their work on Spotify. On the other hand, 70,000 musicians uploaded their songs to NetEase Music, according to financial media Yicai.

On 12 November, NetEase Music said it raised USD 708 million in funding over two rounds with Baidu being one of the strategic investor. Soon, users will be able to access NetEase Music from Baidu’s app.

In a market largely controlled by Tencent Music, NetEase Music has focused on offering a differentiated product. With the financial backup of Baidu, NetEase Music could find its feet soon.

The third biggest player, Xiami Music’s, active users decreased by 20% in July, according to a report by Analysys. All told, the key to success for music apps is a unique business model.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at 

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