Can TikTok Beat Spotify and Apple Music?
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ByteDance, the company behind the huge international success TikTok, or Douyin as it's called in China, is really on the offense. Fueled by the position as the third most downloaded app in the world 2018 and a valuation of $75 billion, ByteDance have recently both announced plans to enter messaging to directly compete with Tencent and Facebook, as well as launching a smartphone.

And now, reported first by Bloomberg, ByteDance seem to have far advanced plans on getting into music streaming to compete with Spotify, Tencent Music and Apple Music. Already positioned among hundreds of millions of teens around the world, this actually doesn't seem that crazy.

Yeah, I think you want to interact, right? You want to interact with the music. You want to make your own music video. You want to share it. You want to comment on it somehow. This is what TikTok has succeeded in doing. Spotify is doing none of that, really. At least I don't think the average 12-year-old would see a playlist on Spotify as something where you express yourself all that much. So I think that's a huge threat to Spotify.

Typically, music labels ask for a lot of money up front and then shares in the company. So they want money up front in case it goes bust and they want shares in the company in case it's a success. So they want sort of all types of protection.

In this episode, we're going through the ins and outs of the music streaming business and discussing if ByteDance actually have a shot on reaching global music dominance. Welcome to Digitally China, a podcast about the fascinating Chinese tech industry created together with Radii. I'm Eva. I'm Jacob. And I'm Tom.

So, according to various studies, China's gaming industry is now, in fact, the largest in the world. You may know their messaging app called WeChat. Chinese outbound M&A. Chinese corporates are buying international companies at record pays. The hottest phone you've probably never heard of. China's Xiaomi. Yes, it's...

It's claim to Apple's credit. Major deal over in China. You have Chinese tech giant Tencent leading an $8.6 billion acquisition to buy a major stake in Supercell. $14.3 billion in sales bought by a Chinese e-commerce site in one wild day. ♪

There is actually something charming with the company being this aggressive. Not only are they taking on the dominance of Tencent and Facebook through messaging, but also think of doing something as complex as launching a smartphone. And now this latest news about them entering music streaming that's dominated by Tencent Music, Spotify and Apple Music. But before we get into the nitty gritty of all this, I have some special guests with me here today.

Sven Karlsson and Jonas Leijonhuvud, renowned tech reporters that recently just published a book about Spotify, roughly translated Spotify Untold. Hi, everybody. Hi. So to set the context, let's just go through the foundation of the epic battle to come. Ten

Tencent Music just IPO'd recently at a valuation of $21.3 billion with 700 million active users. Spotify currently market cap $22.5 billion and a user base of more than 200 million. And then we have, of course, Apple Music leveraging the huge user base of all iPhone users in the world. And of course, ByteDance with TikTok.

It was a while ago they published official user numbers, actually. But last summer, they said they had 500 million users globally, of which 200 million outside China. Earlier this year, they announced they had reached 500 million in China alone. And there are rumors that their app ecosystem in India have over 300 million users, although distributed on many different apps.

I guess the key question here to begin with is why is actually TikTok important in this ecosystem? Well, I mean, TikTok is king of the teens, right? I mean, this is the app that every 12-year-old is using right now. And TikTok...

In five years, they'll be 17. They'll be using either Spotify or ByteDance, a new streaming service. So I think this is a challenge for Spotify. It's a very adult streaming service. They're moving into podcasting. They're catering to adults, not to teens. So I think ByteDance could be a

really difficult challenger. This is a threat coming from another direction to Apple Music, who have mature users, perhaps migrated iTunes users who've been around for a long time, who are perhaps a lot older than even Spotify listeners. And I mean, the freemium model of Spotify is to get users in and have them use the service for free with an ad-supported service, their ad tier, their free tier, as it's called.

and then convert them into paying users. And typically, they would come in maybe late teens or so, maybe during their college years or when they're studying in their 20s to eventually start to pay. And Spotify have been using family plans and student discounts and these types of things to convert people at an even younger age.

But I mean, the pipeline of Spotify's freemium model starts pretty early. And I mean, if those users get picked up by TikTok or by ByteDance, the streaming service, before they get a chance to start using Spotify, that could really be a problem. Also, our concept of how to listen to music is changing, right? And TikTok is changing that among young people.

We think of music as something you listen to by searching for an artist or searching for a song or listening to a playlist or a type of music. But for a lot of young people, music is something that you make a video to, that you express yourself to. And then that leads you in to maybe listening to a certain artist. So...

I think TikTok has really changed the rulebook on what music is. And this is a big opportunity for ByteDance to capitalize on. Yeah, so if we go through the competitors one by one, I mean, it feels logical at least that from Apple Music perspective, they might be struggling with teens, obviously, because their base product, the iPhone, is very expensive. And I wouldn't expect a lot of, you know, 13, 14-year-olds having iPhones out there. But Spotify, that also...

always felt like a new hip service that, you know, all young people use? Are you saying that they have kind of twisted the strategy and going after the older target group? I think that they do want to engage listeners as much as they can. Hence, they're investing in podcasts as well to both differentiate from other services, but also to deepen the engagement of their existing users and to basically compel their users to begin to pay. But I mean, the

core of Spotify's model has always been the free tier. That's the way in which they recruit new users to convert them into paying. And I mean, those users tend to skew pretty young. And so if you have a compelling service that's coming from the other end and getting them in even earlier, that's a real threat. And it's a new type of threat for Spotify.

If you look at what Spotify is doing, they're focusing on audio, right? They want to be the king of audio. Their competitors, Apple and Amazon, are investing a lot in television services. Their competitor, YouTube Music, which is not that big maybe in Europe and in the U.S., but has a good chance of becoming big in India and other countries. They, of course, are focused on music videos and video content.

Spotify is moving away from that. We write in our book, they had a period where they were trying to get into television, trying to do a lot of video stuff. It seems like they've left that phase behind. And I think that's the risk there is that you lose the young people because they want video, they want quick, short, small, interactive video content. And I think TikTok has proven that. And so Spotify right now with music and podcasts,

I think if you're 12 or 14, it looks like something for old people. I don't know. I'm not that age, but I'm guessing it does. They're also in a different business in one sense. I mean, Spotify has started out as the go-to sort of platform for finding music. They added layers to sort of start to program music and develop algorithmic playlists and their own type of content and start recommending music.

to users. A social network is a really different business. Spotify has integrated with Facebook in the past, but it's never really itself gotten close to that type of business. And so, I mean, if you compare TikTok and Spotify, you really have two pretty different products at the core. Yeah. So if we actually talk about TikTok,

as a service, I was very surprised that we all know Swedish market is a very small one, but at least for the music industry and especially Spotify, it's been kind of the first test market indicating how users in the West will react to this service. So that's why any number coming from Sweden usually has some type of significance. And the report I saw was that actually among teens, the primary tool to discover new music and new songs was through TikTok.

and not Spotify. And that kind of surprised me because I never even saw TikTok as a music discovery tool. Spotify has long had this problem a few years back when they, inside the company, according to our sources, were looking in the U.S.,

they saw consumer research that showed that if consumers wanted to find a specific song, they would go to YouTube. And if they wanted to be served a song, they would go to Pandora. So that was really like the crux of Spotify's problem in terms of getting to the consumer in the US. Now, they've rectified that to some extent. I think that they are more widely known as somewhere where you can go to be served music and get a lean back experience these days.

But certainly, I mean, they want to be the go-to place for people to find new songs. And there's been competition for that role from YouTube, but also clearly from TikTok now, especially among young users. Because if we look at TikTok service and try to kind of understand the user behavior there, then it feels like among this new young generation, they want to...

to explore new songs not only by listening to audio but also you know seeing something fun and engaging content around it and having it extremely extremely short is

Is that how it should translate the user behavior? Yeah, I think you want to interact, right? You want to interact with the music. You want to make your own music video. You want to share it. You want to comment on it somehow in an interactive way. Spotify is doing none of that really. I mean, you can share playlists and stuff, but it's all very sort of, you have to lean forward and put a lot of work into it. And you're not putting a lot of your personality into something like that. I

At least I don't think the average 12-year-old would see a playlist on Spotify as something where you express yourself all that much. So this is what TikTok has succeeded in doing. And if they can use that audience and lead them into a streaming service that feels similar to Spotify but is different...

then I think that's a huge threat to Spotify. Now, if these 12-year-olds turn 13, 14 and discover that ByteDance doesn't have all the songs they want and isn't like a great service, then that's the risk, right? It has to be as good as Spotify pretty much to succeed, I think. And we still haven't seen how TikTok have done in terms of negotiating with the music labels. That's very difficult. And that's what

Spotify have actually become experts at over the years. So we'll see how that goes. That's a big sort of unresolved question. All that stuff is becoming less important, but it's still going to be important for the next five or ten years, I think. The big music labels have a lot of power still. There's one aside here, which is that Spotify have, they've sort of

tested bite-sized content before. They rolled out Moments, they called it, in 2015, which was sort of both video actually and music-related content and podcasts that were meant to be sort of catered to the user, served in little chunks so that it could be quickly consumed when people were on their way to work, when people

where during their daily commute it was sort of like a curated content experience by Spotify that really flopped. I mean, it never really even got rolled out fully. So that's one of the big sort of actually strategic mistakes they've made too. So that's

clearly Spotify has looked at sort of bite-sized, you know, smaller, you know, like content that's quicker to consume and more sort of served to the user as opposed to... But that's not what TikTok does, I'd say. I think that what they do is interactive. And that's more like maybe SoundCloud has been involved in stuff like that where you do mashups and

But that's more a fair comparison. Spotify has never engaged their users in that way. And so I think that they can be blindsided by a new service coming out of TikTok, potentially anyway. Yeah, so when looking at a lot of the reporting about this potential project from TikTok...

The reporting usually mention two key things here, which you just both mentioned. One is this kind of social graph TikTok have been able to do.

and also the challenge around signing the right contracts with the record labels. So let's just go through them one by one. Obviously, TikTok is a very social and interactive service, but I think there are a few learnings from the music industry before, because as you guys write in your book, Spotify started very early on with a very deep integration with Facebook, which is a very important part of the music industry.

What type of learnings do they have there? And what can we, of that, can we apply on TikTok? So Facebook was meant to be Spotify's growth engine. And to a large extent, it was during 2011, 10, 11, 12, I would say. But it was also a very criticized partnership because users across the world didn't want their music sort of

shown off to all their friends exactly what they were listening to at a particular time. So it's a pretty sensitive thing for Spotify to do. They had to sort of roll parts of this partnership with Facebook back. And eventually, they caved and stopped requiring that new Spotify users had to have Facebook. So it was sort of, they used it to grow for a short period, but they weren't able to fully capitalize on the social graph in the way that perhaps Daniel Ek had intended.

Spotify basically used Facebook to launch the service in the US. That was Daniel X motivation. And they integrated. So you had all these playlists on Facebook, your Spotify playlists were out there. People were embarrassed. People didn't want to want everybody else to see what they were listening to. It was basically a flop, but it got Spotify a lot of attention in the US when they needed it. So in that way, it was a success. But

They never lived up to the potential of that joint venture that they had. And Spotify have since been looking at getting users more sort of engaged and interacting with each other. That's a large part of why they were looking at acquiring SoundCloud in 2016, a deal which was very close to coming through but fell during a late stage of the due diligence process.

Spotify looked at the way that SoundCloud's users were engaging with each other, you know, the conversation around music is really happening there. There's no really other place where you can discuss music today. That's a different type of use case than TikTok. I mean, it's probably an older crowd and more of a sort of

a crowd that's more interested in music. But there is, there's certainly, I think Spotify are aware of the fact that their users don't necessarily, there's not a lot of user generated content on Spotify, apart from perhaps the artists that Spotify are approaching now at a pretty small scale to upload their music directly. They know that this is something that Spotify lacks. Yeah, but what I'm trying to figure out here is if there's no social opportunity at all,

when it comes to music streaming and that type of consumption, or if it's just Spotify and Apple Music that have kind of failed at it. Because even here in China, I wouldn't claim that Tencent Music is a very social service. You know, it's got deep integration WeChat, but, you know, they're not utilizing the social graph of WeChat either.

Yeah, so, I mean, a social platform is everybody gets to be creative, everybody gets to be noticed, and everybody gets to output something that somebody else thinks is interesting. Now, if you have a lot of people singing into microphones, you quickly discover it's not going to be a great show, right? Most people can't make music that other people want to listen to. And so SoundCloud had a good platform where musicians and creative people could make stuff for each other, and they could make special stuff for their fans, right?

But what TikTok did is they took all the fans, everybody who's using the service is able to do stuff that can become interesting and fun for other people to look at. You make your little video to a song that's already produced, to a little loop that's already produced for you, and you do something interesting and fun. It can be funny. It can show off some talent. You might be good at sports or dancing.

And you can show that off to music and you can have a little hit in your community, right? Or in the whole world. And you can get like millions of people and that type of creativity connected to music. I think there's a lot of innovation going on there and TikTok sort of leading the way. But I think there's going to be more happening. And right now, it doesn't seem like Spotify has a plan. So I think that this is a threat to them and Apple Music and a lot of the other sort of major players in this field.

And I think, like Jonas is saying, they certainly did fail at creating a social layer of Spotify. Daniel Ek actually started out with a vision of music as a social object. So in the way that photos were a social object for Flickr, that were sort of the core of the social experience. Facebook obviously was a lot broader, but Daniel Ek did have an early vision of music as being a key component in a social network. And that's...

You know, I think that's a large part of the reasoning behind the partnership with Facebook. It hasn't panned out. I mean, what is Spotify today? It's basically a modern stereo system that you can carry around and have some type of music programmed for you. But it's not where you go to talk about music and it's not where you go to interact with your friends.

But the question then is if TikTok can find a product connect, you know, from the current app of TikTok, pushing the user to a more Spotify or Apple Music-like type of service where people probably pay for music.

Yeah, they have the perfect opportunity and I'll be excited to see what they're going to try to do. I think at this point we can all just guess, right? None of us really know what they're planning. Exactly. And I mean, I think it seems to be a pretty tall order to create one of these things. I believe that, you know, if anyone can do it, it would be ByteDance with their scale. If you look at Instagram, you know, there's those type of interactive features around music today.

I can lip sync to a song on Instagram if I want, but I won't necessarily find the song, the version of the song that I want. You know, I'll find three sort of remixes, none of which I really like, not exactly the original song that I wanted. I can find that on Spotify. I can't find it on Instagram, even though, you know, Facebook made a huge upfront payment to the labels to get those licenses. So I think it's no matter your scale, you're going to have a pretty tough round of negotiations with the labels.

that critical factor of being able to have a good music streaming service. Obviously, you know, we can learn a lot from both Spotify and Apple Music. So how hard was it actually? Well, yeah, now you're getting into the history of Spotify, which is, of course, a lot of what this book that we've written is all about. I mean, Spotify, they start the company in 2006. And in early 2007, they have a great product, Spotify.

probably better than any other product on the market at that point. But it still takes them another 18 months before they can go live. There are a lot of really difficult negotiations with the record companies.

Of course, Spotify, the vision from the beginning is that they want an entirely free service. And this is in the age of piracy. The record companies don't take too kindly to that proposition of giving music away. So they have to negotiate and they have to sweeten the deal and they have to develop a premium service. And eventually they're able to launch. And Spotify grows by being a free service company.

And for years and years and years, you know, you have 80, 90% of the users being sort of free users up until now when you have almost half of the users paying. But still, more than half of Spotify's 220 million users are using the app for free. So that's what's made it controversial and that's what's made it so difficult for Spotify to negotiate with the majors. Yeah.

This has always been sensitive. And when they crossed over from desktop to mobile only, or when the whole world did, Spotify had to renegotiate again. Because the Spotify app and the mobile app was part of the premium service, and they wanted that to be part of the free service, and that was a big hurdle. They talk about that themselves as a near-death experience.

So that's about 2013's fund. Is that when that happens? Yeah, 2012 to 13 is when Spotify were negotiating to sort of not to get on the right side of the smartphone revolution. I mean, basically, they're in constant negotiation is what Spotify always say. They never, I mean, formally, I think a licensing deal with one of the major labels will stretch for two years.

Spotify look at it as though they're in constant negotiations with the labels. And many times these licenses have been extended, you know, a month at a time because the deal has expired without them coming to an agreement. I mean, it's really at the core of why Spotify have succeeded. It's the fact that they've been able to sort of appease the labels by paying them large sums of money up front and

in terms of royalty payments, and they've over time been able to increase their margins. But nowadays, they don't at least publicly claim that the way to increase their margins in the future will be through negotiations. They're looking at sort of other revenue streams to do that.

But just from a simple perspective, it feels like, all right, cool. Spotify did everything. They put in the hard work. Now, by chance, the Chinese company can just copy the deals and do whatever Spotify is doing. To an extent, yes. I mean, the labels want competition, right? They don't want one actor becoming too dominant and pushing them around. And so...

There is a case to be made that the labels may look pretty positively at a large service such as ByteDance wanting to sort of monetize their music. That's something that they'll probably encourage. There is apparently ongoing talks with TikTok because the labels want better licensing deals and a better...

a better cut of what's happening on the platform. So that'll be, you know, it'll be a constant factor in ByteDance's venture if they are creating a streaming service. Spotify grew by giving music away for free, and a lot of the record companies felt like you're growing...

by giving our content away for free and you're growing on our dime, kind of. And then Spotify said, well, okay, but we'll give you a bunch of money up front if you're okay with that. And then they said, okay. And then, you know, they went back to the negotiation table a year or two later and sort of the same song and dance

would repeat itself. So, I mean, with ByteDance and TikTok, it's probably going to be the same story, right? I mean, you want to get young people to use your service, you want it to be free, and that's where the negotiations are going to be problematic. So,

Yeah, maybe they're more mature and they're used to this, but maybe not. I mean, when Spotify launched in India, Warner Music wasn't part of that because they're still fighting with Spotify. And this time around, and this was this year, Spotify decided to launch without Warner Music aboard. And that's the third largest music company in the world, or in the West anyway. So, I mean, things aren't smooth sailing anymore.

these days either. Yeah, because this rumor that started about TikTok launching music streaming service, it actually quotes a source saying the first country to try this out is India. Do you see any connection there? India is, of course, a huge and strategic market where smartphone penetration is increasing. The availability of data is getting better and better. It's a real war between many services, local services and foreign ones.

for that market. And I mean, I think that's, if ByteDance is looking for a place to get a strong foothold early, that would be a good bet. Yeah, the sort of Bollywood culture, I think, is conducive to interactive music content. Spotify and Tencent Music are co-owners of each other. When asked, Spotify will say that our China strategy is our ownership in Tencent. So

I think basically the agreement is that Spotify is not going to expand in China. And so where's the big marketplace then? Well, the second largest country in the world, India, right? And India has a lot of local streaming companies that are pretty big, but there's a showdown there now between Spotify and YouTube Music. Apple Music is there.

China has been a big part of future trends being created. Maybe India is like the new playing field, the new battleground where all the streaming companies are going to try to invent something new and dominate the market. Yeah, I mean, if you look at some of the official interviews that the founders of Musical.ly have given, and Musical.ly was then later acquired by TikTok, and it literally became the majority of TikTok's global user base outside China.

They actually talk about one of their main success factors being that very early on in their journey, they managed to get record labels to sign on on their concept to give them contracts and licenses. And, you know, making record labels understand that this type of service such as TikTok is a huge marketing tool for new music to get out to teens around the world.

Maybe that puts them in a better position to be able to kind of sign these music streaming contracts much faster. You can make a comparison to YouTube because they get music for cheap because artists don't want to block their music from appearing on YouTube.

And YouTube has been a big source of music for over a decade. And you'd think that Google would have launched something like YouTube Music earlier, but they didn't. But they had the opportunity there because when something gets big and a huge part of culture, it's hard for people to boycott it and stand outside and say, I'm not going to be part of that. And I think that TikTok is already there. They're such a huge part of preteen culture in the world now.

that it's something that big record companies can't ignore. That's actually one of the ways in which Spotify was sold early on as a marketing arm or as a marketing channel for the major labels. Obviously, it turned out to be sort of the revenue stream that saved the music industry. So it'd be interesting to see how ByteDance managed to position their streaming service. And yes, I do think that that type of argument could result in a service that's closer perhaps to

to SoundCloud and YouTube than it is to Spotify in the end. Yeah, at the end of the day ByteDance basically have somewhere between half a billion and a billion people using their services to discover music and that's not monetized at all by the labels. So how important do you think it is that they actually create a platform for monetization and maybe creating a music streaming service is even a requirement from the labels?

I would assume so at this point. I don't know exactly what their arrangements are with the labels right now. But I mean, it's controversial to do something on that scale, you know, without the labels getting their sort of share. But I also think that they see huge potential. And so that gives ByteDance sort of leverage in the talks, I would...

I think the record labels are going to want to see a lot of competition in the marketplace. They don't want to see just a few companies getting too big and too dominant. So if Spotify and Apple are getting too bossy, they'd be happy to encourage a new big player to step in. But they're going to try to use the various streaming services to

to pitch them against each other in order to retain their relevance and power for themselves. You know, typically music labels ask for a lot of money up front and then shares in the company. So they want money up front in case it goes bust and they want shares in the company in case it's a success. So they want sort of all types of protection.

Yeah, so actually when I read the first articles about music streaming and TikTok, I was kind of negative to it. Like, oh, now ByteDance is trying another thing. Like, it's not like they haven't announced a bunch of takeover the world plans lately. But now after talking to you guys, I get more and more positive about it because...

Honestly, I can't find any weak points here. It just feels like this should be a pretty simple thing because another thing we haven't mentioned is obviously the huge China scale that they can leverage.

Yeah, I mean, Sweden was like China 10 years ago, right? There's lots of piracy going on and Tencent Music has sort of saved China from piracy and Spotify saved Sweden from piracy. So there are similarities there. But then moving forward, you know, negotiations will change. Also, I think one thing that you have to ask, ByteDance is getting into the streaming game pretty late.

And so that's one thing that's going to be challenging. I mean, the only way they can do this is by approaching the 12, 13-year-olds, right? And hoping that they can attach some sort of streaming service to TikTok and then see that grow with coming generations. And that seems like a very attractive idea.

proposition, but it's still going to be a while before they, even if they can take over the world in that way, it's going to take a while, right? I think that a lot of old users will be happy to just keep on listening to Spotify and Apple Music and the other streaming services that they've been using all along. And also, I mean, what can a 12 or 13 year old in China or India pay for

for a streaming service monthly, right? And so will that affect their catalog perhaps? I mean, will ByteDance be able to get the sort of exclusive releases, the new releases from the very big, you know, the biggest artists in the world that have been sort of shopping their material to specific streaming services in these past few years?

Will they be able to offer the sort of premium podcasts that Spotify are getting into, the sort of video content that might end up being bundled with Apple Music pretty soon? We don't know, but that's certainly a possibility. So there's definitely a lot of hurdles for ByteDance to overcome as well. Lots of challenges, but you look at Chinese companies and the impression you get is that they're playing a long game. Yeah.

And they got deep pockets. And so it still makes a lot of sense to me that they make this move. Yeah, definitely. They're valued at $75 billion. So pretty deep pockets. And they're in the social game. They're in the short video game. They are in the music discovery game. So it's going to be really exciting to see what's going to happen going forward. I mean, maybe they will succeed in making teens around the world love them more than brands like Spotify and Apple.

So with that, thank you so much for listening to this episode of Digitally China. As usual, we'll be back in two weeks. In the meantime, please rate us in any podcast app you're using and reach out to us on Facebook or Twitter. Thank you for listening. Thanks, guys. Thank you very much.