About us: Aurora Mobile (NASDAQ: JG) established in 2011, is a leading customer engagement and marketing technology service provider in China. Its business includes notification services, marketing growth, development tools, and data products. As its sub-brand, MoonFox Data is a leading expert in data insights and analysis services across all scenarios, aiming to help companies gain market insights and empower precise decision-making.

CHENGDU, China, Jan. 16, 2024 /PRNewswire/ — According to the Global Music Report by IFPI, China has become the fifth largest music market in the world and the second largest in Asia in 2022, experiencing 28.4% year-on-year growth. TME has been recognized as the third largest online music platform globally in terms of revenue, following Spotify and Apple Music, showcasing its increasing international influence.

However, within the industry as a whole, the top music platforms in China have witnessed a slowdown or decline in revenue growth, with some businesses shrinking rapidly. This raises the questions of why the industry is facing growth pressure and whether it will undergo a downturn or optimize and transform its business models.

I. The decline in social entertainment revenue and the rapid changes in business structures

TME’s total revenue reached 6.57 billion yuan in Q3 2023, representing a 10.8% year-on-year decrease. This indicates short-term growth pressure.

The decline in quarterly income was mainly attributed to the decreasing revenue from social entertainment services.

The core businesses of Tencent Music Entertainment Group (TME) consist of online music services and social entertainment services. Among them, the primary revenue generation method of QQ Music, Kuwo, and Kugou are online music services that leverage subscription models to generate revenue from customers, along with revenue-sharing tipping from auxiliary social entertainment functions such as livestreaming, audiobook, and KTV. WeSing, on the other hand, focuses on social entertainment services to achieve revenue growth through KTV platforms, Maixufang livestreaming room and other functions.

Data of TME’s Top5 Apps on November 30, 2023

Data source: MoonFox iApp; Data collection period: November 30, 2023. The single-day data provided by MoonFox iApp is not sufficient for analyzing the data change trend of the platform and should be used for reference only.

According to data from MoonFox iApp, by the end of November 2023, TME’s top music Apps have witnessed relatively high penetration rates and a large number of active users, with a 10-million level of DAUs.

As mentioned, the primary factor leading to the overall decline in corporate revenue was the contraction of the social entertainment service business. In Q3 2023, TME’s social entertainment service revenue registered 2.02 billion yuan, marking a 48.8% year-on-year decrease.

Strict supervision and content rectification have been the main drivers behind the shrinking social entertainment business for TME and even the entire music industry. Previously, KTV and music livestreaming were the main revenue generators for music platforms, ensuring stable income and active users through revenue-sharing tipping. 

Tencent has initiated formal supervision and regulation of its own social music business. In Q3 2023, TME adjusted and reduced some interactive livestreaming functions and implemented stricter compliance procedures to strengthen risk management and control. The internal business adjustment also led to a decline in the MAU of its social entertainment business. The mobile terminal MAU dropped to 129 million in Q3 2023, with a 16.8% year-on-year decline. According to MoonFox iAPP data, WeSing saw a monthly increase of only 7.5 million users in November 2023, down more than twice year-on-year.

We believe that although the decline in social entertainment business has slowed TME’s revenue growth, it has established a path for the future healthy development of its overall business. This entails focusing on the content ecosystem and returning to online music services.

II. Focus on user assets to build safeguards for online music services as paying users increase

In Q3 2023, TME’s online music service revenue surged by 32.7% year-on-year to 4.55 billion yuan, while service subscription revenue reached 3.19 billion yuan, with an increase of 42.0%. The year-on-year growth in the subscription business was driven by a consistent rise in the number of paying users.

TME’s online music paying user sizes from Q2 2020 to Q3 2023

Data source: TME financial report data; Data collection period: Q2 2020 to Q3 2023. The Q3 2023 data is used instead due to the inaccessibility of the Q4 data, for reference purposes only.

In Q3 2023, the number of paying users of TME online music services reached 103 million, accounting for 17.3% of the total, and the average monthly income from a single paying user was 10.3 yuan, up 17% year-on-year. The trend indicates that TME has consistently prioritized online music services, leading to continuous growth of paying users for six consecutive quarters. TME’s current contraction in social business empowers the company to put more efforts in the development of the subscription business in order to cater to the pure listening preferences of its users.

First, as the era of exclusive copyrights ends, leading music Apps place greater emphasis on building a comprehensive music content ecosystem.

For example, by prioritizing the complete industry value chain, TME has reinforced the emotional connection between musicians and their audience. The events include interactive music gameplay introduced around the commemorative song for the 10th anniversary of TFBOYS and an offline concert jointly held with singer Zhou Shen for the 9th anniversary of his debut. The emotional value has always been the core driver of the fan economy, and the music content possesses inherent flexibility. Through engaging activities and content, users can deepen their sense of belonging and emotional attachment, thereby enhancing their stickiness and willingness to invest in the platform.

Second, independent musicians are gaining prominence, and there is a significant market brought by moderate to enthusiastic music lovers.

According to a market tracking and forecasting report from MoonFox, we believe that the number of independent musicians has reached nearly one million, and more singers are positioning themselves as singer-songwriters, seeking to establish independent labels and attract a broader audience with personalized creation. In response to this trend, TME launched the Emerging Force Program in 2022 and further enhanced its support and resources in 2023 to empower independent musicians in terms of income, traffic, fan growth, and commercial cooperation, thereby extending their influence and promoting original music content. On the other hand, this approach can also enhance engagement with music enthusiasts and achieve a substantial conversion of commercial value by providing customized services.

Finally, in terms of user consumption scenarios, non-subscription business models have emerged.

The landscape of music appreciation sector encompasses a wider array of user types, each with different inclinations towards payment modes and service methods. In view of this, TME has made numerous attempts, such as promoting free access to music by watching videos to delve into the demands of non-paying users through incentive videos, and drive revenue growth.

TME music platforms’ average daily use time per user (minutes) from January to December 2023

Data source: MoonFox iApp; Data collection period: January to December 2023. The statistical results exclusively include App data without the traffic data of web pages, mini-programs, and quick Apps

The upgrade of online music service business has significantly improved the use experience of audience. As per MoonFox iApp data, TME music platforms lead the industry in average daily use time per user. This strong user stickiness has fortified the brand of TME and further solidified its position in the industry. Looking ahead, online music service business will be the focus of TME and even the entire online music industry, with user stickiness being a key indicator of platform service quality.

III. AI drives business growth on all fronts by empowering both creators and listeners 

In the midst of business transformation, AI brings new industry growth opportunities by assisting creators and optimizing audience experience.

In the aspect of creation, TME has launched the service platforms of Tencent Music Venus and Vocal Producer, featuring auxiliary lyrics, intelligent composing, and other functions. These platforms also provide creators with music separation and original sound integration functions to greatly improve their efficiency and creativity. Meanwhile, relying on large language models, the platforms offer audience a more personalized music experience and recommend more suitable music content based on their preferences across various dimensions.

In addition, TME has launched the Weiban App which integrates musical and social functions by capitalizing on its advantages. Users can engage with a virtual human in the App with a background sound from the music library automatically matched by the system to create scenarios based on their demands. The company plans to introduce creator platforms and virtual communities into products in the future, aiming to build the platforms into a musician-oriented music and entertainment community by combing the above-mentioned AIGC system.

We believe that, similar to games, films, and TV, the music industry will be one of the first to embrace large-scale AI applications to transform production, interaction, and business models. As AI demands high training costs and lengthy training and tuning cycles, leading platforms are poised to reap the initial benefits of AI by enhancing service quality and reaching a larger user base.

Above all, amidst the growing convergence and emphasis on content in Internet services, users no longer blindly pursue free services. High-quality and sustainable paid content will be a better way to retain users. This is a trend particularly noticeable in the online music field. We foresee that the future development of online music platforms will revolve around nurturing users’ listening habits and enhancing individual user value. With an industry landscape where a dominant player coexists with multiple strong competitors, TME’s influence in the industry will continue to deepen.

Aurora-Moonfox consistently monitors industry development and regularly tracks corporate performance. The following is our research report on industry hotspots:

• 《Image-Text Content, Hot Items, and Seeding Drive the Rapid Growth of RED Community》；
• 《Tencent focuses on the WeChat ecosystem and leverages mini-programs to create the second growth curve》；
• 《NetEase Q3 Financial Report Game-driven Multi-segment Growth》；
• 《Ctrip achieved multiple-fold revenue growth in Q3, surviving through the harsh winter amidst industry recovery》

If you need a report, please contact us to obtain it.

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