Stairway to Streaming Heaven: Tencent Music Entertainment (TME)
ChinA’s Central Planners are Nudging Consumers to Actually Pay for Music.
Chinese Chairman Xi Jinping has a solid-gold touch for ruthless iron rule.
In 2018, Xi crowned himself what amounts to sovereign-for-life for over China’s 1.4 billion souls. If the 57-year-old survives even into his mid-70s, Xi’s reign will be longer than all but a handful of the monarchs that have ruled the middle kingdom since 2,800 B.C. Xi not only dictates day-to-day policy in China; he commands the world’s largest professional Army and probably the largest Navy. Economically, Xi is a quick text message from the boardrooms of China’s largest private companies: Cell equipment giant Huawei recently appeared to be directly under Xi’s operational oversight.
But when the General Secretary of the Chinese Communist Party turned his talents to the “star making machinery behind the popular song,” Xi’s golden touch turned to lead.
Tencent Music Entertainment, the online music monopoly his Communist Party helped create, has been a resounding music-industry dud.
A Chinese Star Is Still Born.
Much of Tencent Music’s history is clouded in deep, almost Confucius-scale debate. Even so, it is safe to say that Tencent Music has been a Chinese central economic planner’s musical darling since it first monopolized the mainland music market back in 2016. That’s when Tencent Music purchased the China Music Corporation and then merged China’s major music apps QQ Music, Kugou Music, Kuwo Music and WeSing, into a single Web service. Almost immediately foreign competitors, like Apple Music, were driven out of sino-markets. Other potential rivals, like Spotify and Universal Music, were then walled off from the mainland, via various ownership shares and territory splits. In 2018, Tencent Music created a Cayman subsidiary that offered its combined assets as an IPO floated on the New York Stock Exchange: $1.8 billion was raised.
Global acts like Taylor Swift and Justin Bieber showed legs on Tencent Music’s newly centralized Chinese music marketplace. Sales boomed. That paved the way for domestic mega-stars to be born: “Idol boy band” R1SE, front man Lay Zhang and Taiwanese singer/rapper Jay Chou sold well. Tracking services like Chartmasters say Chou could move roughly 30 million units. He also starred in the American reboot of the Green Hornet. Such are the true fruits of fame.
But in spite of the Chinese central planning muscle, the investor interest in Tencent Music disappointed. Company stock has traded, at best, at about $19 per share. That’s a valuation afterthought, when compared to a true streaming music powerhouse like Spotify, which has seen values jump by 40% since June 2020, into the $240 range. Tencent’s valuation woes are easy to listen for, because, unlike most other Chinese enterprises, Tencent Music must follow American accounting and financial standards. Even a brief listen to its surprisingly transparent financial data, shows just how grim a business tune Tencent Music sings.
Total active monthly users remained flat between 2019 and 2020. Worse, only 12.5 million of those hundreds of millions paid for access. What did each paying customer actually pay per month? Just $.73.
A mature streaming operation like Spotify, where roughly 50% of its users pay subscription fees of $12 per month.
Piracy’s Cost: 651 million Tencent users yields just 12.5 million subscribers.
Tencent Music has re-proven to China’s centralized economic planners what any bloodied record executive could have explained: Scale and distribution almost never equal a hit song in the digital age. That means, for all of Chairman Xi’s reach, this most influential of all men stands utterly powerless to coerce Chinese music consumers to pay for music.
To us, Xi, and his vast economic planning machine feels like the American music industry, circa 2002: A once powerful enterprise struggling to find a business model in a crumbling digital music market.
Learning to Sell to Thieves.
What has crippled Tencent Music is what has crippled any music company facing digitization. Chinese consumers flatly refuse to pay for music, movies or anything else streamed to their phones or computer screens. Piracy in China is so ingrained that it is actually a deep debate as to whether it is illegal at all. Until recently, China’s commitment to piracy made good economic sense. The Chinese music industry never had a lucrative CD or vinyl album era to disrupt. Rather, its digital economy leapfrogged straight into music as a cell phone add-on, like a ring tone. For many years, free, all-you-can eat music is what drove smartphone and mobile device sales.
But conversations with North American partners and investors in Tencent Music point to a new music narrative emerging in China. They say Chinese economic planners are prodding consumers down the slow and steady path of paying for music, movies, and games. Why? Because in a country where most consumers already have a cell phone, subscription fees are the only place to find growth.
The drive to push customers to pay for music is also forcing a deeper reevaluation of intellectual property throughout all of China, not just music. Actual details of China’s economic mechanics are always challenging to confirm. But it is clear that China recently issued tougher guidelines for patent law in software. Also, drug industry research got fresh protection. China conducted an antitrust probe against Tencent Music, even though the suit was eventually dismissed. Other streaming media services, like Tencent Video, announced 100 million paying customers. Baidu-backed iQiyi announced a subscriber base of 105.8 million as of September. And music videos like Wanting have streamed 165.6 million times on YouTube – each and every one of which is monetizable.
Tencent Music’s historical disclosures, which must obey Western standards for accuracy, show a slow but consistent growth in paying customers over the past few years. Subscribers grew by roughly 50 percent since 2018. Certainly such large percentage gains are as much about the small numbers involved, rather than real growth. The tipping point for profitability is a way off.
But is that tipping point coming to Chinese streaming music? The answer is, most certainly yes.
The Adele of China: Homegrown headliners like Jay Chou Can Drive Paying Subscriptions for Online Music Services.
Remember, Chinese central planners think in terms of centuries. There is in fact a 3-volume text, called that Governance of China, that exactly maps out Chairman Xi’s strategy. For the record, complete comprehension of Xi’s Proustian works may not be humanly possible. We found its creepily ethereal, yet deadly threatening, tone not far from the mission statements of Web giants Google and Facebook. Xi’s book has been read and quoted by Facebook’s Mark Zuckerberg.
“China will need to increase its residents' incomes and optimize income distribution so that residents can be more relaxed about spending their money,” wrote Xu Sicong, managing editor for China Global Television Network in a video he produced for a plenary session of the Central Committee recently held in Beijing.
Xi’s plan calls for a so-called Dual Circulation Economy. There will be “internal circulation” made up of Chinese consumers driving sales for domestic businesses. And then more traditional “external circulation,” based on China’s existing overseas trade. What China watchers explain is the global coronavirus has accelerated the Communist Party interest in the domestic “internal circulation” component of Xi’s long-term plan.
Chairman Xi is realizing that a mere monopoly over 1.4 billion people is not enough to sell music. He must treat his subjects as customers. That makes the Chinese Communist Party, for all its power, just another Web services company struggling to find profit.
Tencent Music has emerged as one of the few ways for the rest of the world to reliably bet on a totalitarian government learning the new dance of serving newly empowered Chinese customers, rather than controlling them.