The default business model of music streaming services is that they license music from rightsholders, and then offer that library of music to listeners.
But Tencent Music Entertainment (TME), China’s largest operator of music streaming services, has added a twist: It’s creating its own music, generated with the help of AI.
“Notably, in the third quarter, we deployed AI singing technology to create the single Fairy Town, which quickly went viral on short video platforms,” TME CEO Ross Liang said on the company’s Q3 earnings call, held on Tuesday (November 12).
One obvious benefit of a streaming platform creating its own music is that it can save on licensing fees. (“The ramping up of our own content continued to help improve our gross margin,” CFO Shirley Hu noted on the call.)
But for TME, the key motivation is driving user growth. Offering original content not available elsewhere is a key differentiator from other music streaming services.
While TME’s paid subscriber base continues to grow at a rapid clip – up 15.5% YoY, to 119 million paying users in Q3 – the company has struggled with its overall monthly active user (MAU) count. The total MAU count for online music was 576 million in Q3, down 3% YoY.
In fact, TME’s MAU count has been falling for years, down by 85 million from a peak of 661 million in the third quarter of 2019. That poses a longer-term problem for the company because, generally, that pool of active users feeds the pipeline to higher-revenue paid subscriptions (not to mention TME’s Super VIP tier, which charges five times as much as a regular subscription).
Hence the need to differentiate TME’s content from the competition (namely, NetEase Cloud Music and China Mobile’s Migu Music).
To that end, Tencent has not only focused on AI-powered music but has also expanded its content offering to include audiobooks – also with the help of AI. Liang said on the call that TME used text-to-speech technology to convert “tens of thousands” of books into audio files.
Looking forward, TME sees more opportunities to grow MAUs through in-car technology and IoT (internet of things) technologies, which the leadership team believes will be “a great growth driver in the near future.”
“The steady expansion of our [paying] music subscribers and diversified music services continue to drive overall growth and profitability.”
Cussion Pang, Tencent Music Entertainment
Ahead of the earnings call, TME reported a 20.4% YoY revenue increase from its online music services – which include QQ Music, Kugou, Kuwo and karaoke platform WeSing – to RMB 5.48 billion (USD $781 million).
The company also reported 35.3% YoY growth in net profit, to RMB 1.71 billion ($244 million), with earnings per share rising to RMB 1.01 ($0.14), up from RMB 0.74 a year earlier.
“The steady expansion of our [paying] music subscribers and diversified music services continue to drive overall growth and profitability,” TME Executive Chairman Cussion Pang said.
Here are three other things we learned on TME’s latest earnings call:
1. TME sees its ‘Super VIP’ subscribers doubling or tripling in the coming years
There’s been plenty of talk lately about Spotify’s upcoming “Super-Premium” tier, a higher-priced subscription service for music superfans that many in the music industry hope will drive higher streaming revenues in the years to come.
TME has actually beaten Spotify to the punch: Its own “Super VIP” tier has been up and running for a year, at a price point five times as high as a regular subscription – around $5 per month, compared to $1 per month for a regular subscription.
Super VIP has proven hugely successful, with subscriptions passing the 10 million mark in Q3. That means some 8.4% of paying subscribers are shelling out the extra cash for a Super VIP subscription.
Not surprisingly, this has been driving TME’s average revenue per paying user (ARPPU) higher. In Q3, it sat at RMB 10.8 ($1.50), up 4.9% YoY. Nonetheless, that number wasn’t enough to satisfy some of the analysts on the call, who wondered why Super VIP hasn’t improved ARPPU more, given its much higher price point.
TME’s leadership explained that they expect to see ARPPU accelerate – when the Super VIP tier reaches into the 20 million to 30 million subscriber range.
Clearly, TME expects major growth in Super VIP ahead. To put some perspective on that growth: 20-30 million Super VIP subscribers would be between 17% and 25% of all paying subscribers, at the current total subscriber base. (Though, of course, we can expect that overall subscriber base to grow as well.)
TME’s leadership team also noted they’re planning to roll out a Super VIP family plan.
2. Super VIP goes beyond music
So how is TME attracting such a sizable share of its subscribers to Super VIP?
For one thing, it’s offering higher-quality audio (much like Spotify will likely do with its own Super-Premium tier), including for in-car streaming.
Secondly, TME has introduced priority access to new digital albums from certain popular artists, ticket pre-sales for concerts, and exclusive fan activities. In other words, it’s targeting music superfans with just the sorts of products and services that they’re likely to pay a premium for.
But TME is going further than that, expanding Super VIP access to content well beyond music.
“We expanded our audiobook content library with original content and popular IPs across various genres, including hit TV dramas and films, comics, suspense, and children’s stories,” Liang said on the earnings call.
For those following the music streaming business, it’s hard not to notice the similarities between TME’s expansion into non-music content and Spotify’s efforts at doing the same, with its expansion into podcasts and, more recently, audiobooks.
TME seems to be moving further, though, into audiovisual content.
All of which begs the question: Are music streaming services – in their quest for revenue growth and higher margins – turning into general media content providers? Will they eventually become competitors to Netflix and YouTube (if they aren’t already)?
With market saturation for music streaming services approaching, we may soon receive the answer to that question.
3. TME’s revenue is back on track for growth
Like its rival NetEase Cloud Music, TME has seen its overall revenues shrink in recent quarters. That’s due not to its online music business but rather its “social entertainment services” division, which was hit heavily last year by the Chinese government’s crackdown on online gambling.
Witness, for example, the 48.8% YoY decline in social entertainment revenue that hit TME’s earnings in Q3 of last year, which dragged the company’s overall revenue number down nearly 11% that quarter.
Well, that’s all in the past now. In the latest earnings report, TME reported overall revenue growth of 6.8% YoY, to RMB 7.02 billion (US$1.0 billion), thanks not only to solid growth in music revenue but also to a narrowing decline in social entertainment, which fell by “just” 23.9% to RMB1.54 billion ($219 million). Maybe more importantly, paying users on the social entertainment side rose by 1.9% YoY, to 7.9 million.
So what’s driving the rebound? First and foremost, TME’s karaoke platform WeSing. TME has been investing heavily into WeSing’s live-streaming capabilities, as well as into WeSing’s advertising business, resulting in what company leadership called a “better-than-expected performance.” Similarly, on the Kugou platform, TME has been innovating the integration of games into live streams.
Simply put, TME is finding new sources of revenue to offset the loss of its online gambling customer base. Looking forward, the company’s leadership expects the social entertainment division to see “very stable growth.”Music Business Worldwide