Tencent Music vs. Spotify - friend or foe?
29:48 Share

Hey, daily china is produced together with our friends at radio, this awesome independent media platform. If you're interested in culture and innovation in china, you should definitely check out radio china or com. They'll give you inside look into everything from china's underground music scene to bike sharing. That's R A D I I china dot com.

Tencent music entertainment looks set to be the third largest chinese initial public offering in the U. S. This year.

Is actually is already .

very profitable, each around like a 12 percent stay in each other。 And when they did that equity swap, IT was a pretty landmark partner ship that really was nothing like IT. I think they're just starting to crack the code.

A few weeks ago, another tencent service was publicly listed. This time he was tencent music making IT. Interesting consider spotify listed earlier this year.

And actually as a preparation for this, I P, O tends that music tried to buy spotify, but as everything in china, tens of music is very different from spotify, the same way we can call reach at the facebook of china. What are the differences between text and music and spotify? How does the music industry differ between china and the west?

And now the weird battle like dance giants .

being built that both in china and the west, will we see a future battle between chinese and western music companies? To simplify, from the spotify perspective, extensive music, a future friend or and I .

think if they made a deal with ten cent, that would cause a lot of problems. That's a dramatic mismatch to the way to pontifices Operates.

Welcome to digit china A D cast. The fascination is second. And to get with radio.

So a point to various studies, china's gaining .

industry .

is now effect, the largest .

in the world. You may message .

chinese outside the M A. Chinese programs provide internal properties of the case.

how we never know china's show me.

yes, it's state, it's claim the apples major deal .

over in china, your chinese tech giants ten sent leading at eight point six billion dollar acquisition to buy a major stake, a super sale.

forty two point three billion dollars in sales, locked by a chinese e commerce site in one wild day.

Let's first go through what tencent music is by listening to a kino speech that the C E. O of tencent music and entertainment, the end of two thousand seventeen .

core business of T M U. Right now is the music streaming. And this also the reason why of the users come to our ecosystem.

They need music contents. But in order to make an ecosystem works good, we have to have traffic. So where does all this traffic come form? They are majority from the tencent social network. Although all of this platform is very huge in size, they have a really, really clear market positioning that help us to serve all of the market segments .

right so well. Spotify or apple music, basically only our music streaming apps. Tencent music is very different. The way the C. O refers to this is as an ecosystem where music streaming is kind of the hero product that brings the people in. But all the other apps in the echo system are actually making the money.

So the main products from tense music are basically for apps with a total of, according to them, around eight hundred million active users per month. And the way the category is, is calling IT either online music services, which essentially is QQ music and the streaming service, and then the social entertainment services. So of the eight hundred million active users, obviously the music extreme service, majority of them when comes to social entertainment services, in the third quarter, two thousand and eighteen, they only had two hundred twenty five million users. But IT actually stands for the majority of the revenue because the screaming service only generates about less .

than thirty percent. And the reviews, people who are familiar way of doing things like this perform approach, where you have one thing that brings the volume like the traffic and then a bunch of other things sit around IT that can generate revenue. Like you mentioned, we chat the messaging up bright.

Where mean now they have ads. Um there's payments. There's also all these other services like right healing and e commerce like a platform or lots of people right on IT that gives tencent the ability to charge businesses to have access to that traffic.

I don't know if you use these apps, eia, but so one of them, very popular, is called we sing as we know cariole or T V is a big thing in china and in asia.

So we think is essentially an APP with love adam services that you can pay for, where you can either practice on your own kao ke songs, but also seeing IT with others, like more or less making IT virtual cariole rooms where you kind of enjoy music together with friends or people you don't know. Besides, we think the main kind of social music gap they have is more less live stinging apps that enables influencers or k to live stream for for their fans. And you know, for example, you know, me as a fan could ask my favorite influencer to seeing a favorite songs for me. And I would pay for that by giving virtual fts, or for example, a Normal user that wants to become an influencer would be on the platform live stream while they seem certain songs or do certain performances and then hopefully going viral. And people would send you like version row, not very similar to how other live streaming services work in china.

which is very stary obvious, said its selected tech company that's building a music platform versus like a music company building its own platform um because it's all about plugging different services into this quote, ecosystem as opposed to understanding music itself for the music industry, right?

Like it's like IT, let's bring about people just platform, maybe views are here to listen to music and then let's plugging life streaming, playing like A K T V O K O K. And then let's also go offline, which is a very Normal progression, right? And then with offline will work with other players in the ecosystem like artists and help them do their off fine events.

Which revenue too, right? Like it's a very tech company way of approaching this. The music itself could be any product.

you know yeah exactly like I think your thing is in a nice way if you are a music professional, maybe you would say that they were they like soul and they'll pragmatic and you know they don't only look at as one of other things and they don't have the respect for the art behind music.

thanks. You're saying what you know I wanted to say but yeah I know it's very clear from the model, right, that this is the way that they .

be this industry yeah and I think like both reading a lot of the communication from the and listening to like senior x being on different conferences, they repeat toward ecosystem over and over and over again. And we've actually made a lot of progression there, both for the user, obviously, in terms of being able to monetize on the multiple times, thanks to the music, but also on the business to business. And let's listen to the CEO talk about .

this also invents the idea of the licensing model. What that means is we are not just tried to distributing your content and promote content, at the same time help you to monitor and see and how to protect your I P right? In addition, we also team of our valuable partners, music labels and also music platform to form anti privacy alliance in china. I ve think the china market right now is a little more more legitimate and and also more healthy when compared to the past few years.

So basically what the CEO of tencent music is saying there is there's less piracy compared to the past, right, in the chinese music industry. And yes, like the chinese government has crack down on copyright infringement and has bolstered licensing for music and movies recently. But I think it's important.

Remember kind of how wild the chinese industry was in the past, which is why I talked a few experts about, you know, what was the music industry like, let's say, five, ten years ago. So I spoke to, well, tiger, who works at artistry, which provides music services for artists from the world. So starting from five to ten years ago, you could say that downcity music in china was total free for all, like you would search for stuffe online and he would throw up an M P.

Three five that you could download. Actually, being a music consumer, the time was really awesome. I didn't have to pay for anything. You just search stuff and then you put that on your ipod.

So in the process of, you know, china going from a place where there is no protection of music rides, a place where, and gradually, the government is trying to enforce protections against copyright infringement, tech companies have realized that music are really good way to track traffic and users, and as a result, they need to lock down as much content, you know, by buying a rides and exclusive deals to make sure that their competitors don't use music as a way to attract more users as well. And then now you have this weird battle of, right, it's like music rides and locking down content versus building really good recommendation engines. yes.

And that sounds like the main difference between the western and the chinese market, especially when comes to streaming platforms in china, recent labels are giving away exclusive rights. Well, in the west, they will never do that to either spotify, apple music business or anyone else. But on the other hand, western music has slightly less important role to play in the ecosystem over here as well, considering there are so many local artists with local record labels that are attracting tens or hundreds of millions of fans only in lets china or japan or south korea.

I S my girls away from my first with, and people have been in the industry for a while as though it's not the most healthy way to develop the music industry because the most foundational product is the music itself, right? So if you control the access to all, let's say, all the music in the industry, then that lets you plug as many services as you want and monetize IT as basically the rational behind companies like tencent music.

But what about the artists? right? Like from the artist perspective, you want to work with a bunch of different players in the industry because then they compete with each other and you have a bit more leverage.

And maybe you can use like, let's say, youtube for one thing and then you spotify for something else. So from like the person is producing the music or even the record label, the more competitive environment is probably more preferable. But if from a tech company perspective, you just want to lock down everything and then you can make as many services and monetized IT freely, and that's kind of what's happened in china.

I mean, for me, I guess as a user, i've always been struck by like that the recommendation systems on tensor music. That's not the focus of the product. And you can really see that where in spotify, like sometimes I don't even you could take this as a power con. I don't even follow the artist that they recommend, but I always enjoy the music that they're recommending anyway, which means i'm not there to search for certain artists and I know will be available. I enjoy the music that comes out of.

I think that's a really good point. I mean, due to exclusive access, IT has may be made the chinese kind of streaming platforms more lazy. They don't need to build out all these other things in order to have a competitive product because they have exclusive access to certain rights. While in the west, you know, the main competitive advantage you would have is a great search or a great recommendation engine. Or what I .

emption to certain artist is less for sure, may it's developed in china.

So I think this equal system in from tens of music has actually proven itself because if we look at their kp eyes, they are actually profitable with a net profit margin. Does over twenty percent compare to, for example, spotify are still losing a lot of money. And to summarized, if this secret formula seem to be building a ecosystem for the user, I making from them through a lot of different other adon service system, just a music streaming, but also leveraging the unique position by having, you know so much traffic so we can force the red label to sign these exclusive deals that essentially you know make their costs lower. yeah.

I think in china, if this approach works very well, especially for a company that has a lot of advantages in terms of attracting traffic lake, someone must pop their apps in china with every billion users, right? But I guess i'm curious like if they want to expand outside of china, I wonder how well the project work and how they're adapt to the differences in the western.

Great question. And actually, that's something I try to figure out by talking to a journalist spacing sweet m currently writing a book about spotify. So he's kind of the perfect person to help us speculate about the future of the industry outside china.

My name is jonas lay on Howard. I'm a business writer at the dark industry and in sweet, which is the main business sulk ation. I grew up in the states partially.

I went to high school and college in two thousand, arizona. And i'm writing this book a with my co author, spent carson. He started at columbia pool of journalism.

So we both have a sort of the international perspective on things, and they were trying to have an international perspective. Spotify, as we're writing this book, spotify started, we was started by denial ex and the Martin Lawrence son and and the Daniel, the most famous at this point. He had started a few smaller companies and sold them before starting spotify.

And he was think twenty two years old when they started talking about this, him and his Martin Lawrence son, now his background at at the time that spotify is started up more interesting in many ways, because he started trade double ler, which was an inferior marketing company that was listed in the november of two thousand, five on the extension, and three and and attained the unicorn status for a while. He sold his shares in this company and came away with about at that point maybe fifty million dollars or something. And so he was a very wealthy man at the time.

When Daniel and marc tin started qualifying, he was able to invest um a lot of is uh personal fortune and to spotify and and that way was crucial because IT costs a lot of of money to build the product, cost a lot of money to uh negotiate with the record companies. Uh that took a couple years before they were up and running uh, with the licenses, the product was was finished way before that. And then he was able to get the venture capital to spotify at at a level that was sustainable because, of course, some spotify has needed to raise capital for a long time. It's still not turning a proof ten years after the launch and a Martin Lawrence son's personal financial situation was with a key to spotify, uh, having a chance of becoming a big company the way IT is today, the largest streaming company in the world .

yeah I guess what really struck me from what john said is the spotify hasn't yet turned to profit. I mean, everything he said actually is contrast is without tencent music works, right? Which is tencent music has developed this way where music is essentially way to bring in traffic. And then the company, he has all these other services that make money kind of independent or whether not the music is considered good or not is just like A A means to .

an end sort of yeah. I think the core of IT is exactly how different this contract negotiations are from the tencent perspective and join us actually give us a quick intro about how these contracts with record labels work on the western markets.

Sort fies deals with uh, the major record companies is based on a RAV share where they give about seventy percent to the the record companies and the publishing companies and and then they have to give advances and they have to give revenue guarantees and and there's also a per stream payment that can be um initiated if there are too many free streams to make modify uh to give them incentive to convert from free to pay.

But if if you have you know ninety percent free users in a country, spotify will be punished for that in the contract. And then they have to pay per stream zong. Otherwise they just done the at the money they get from subscriptions with the money they get from advertisement. And they just give seventy percent of that basically to the record.

So basically the way that the most the west work is that the record labels do not want users to listen to the music for free.

But spotify has been able to get contracts any way to provide a free to use service in the order to attract new users, actually, in the order to even be able to launch in the beginning, that should give a 快 of shares。 I think at the point of I P O, the record labels owned about eleven percent of spotify, which is substantial part considering valuation north of twenty billion U. S. dollars. My translation of this is that, you know, due to owning the user, due to tencent music owning such a big part of the chinese internet, thanks to tencent, they were able to leverage that in combination with china being such a complex market, and actually get what I would call the deal of a lifetime.

And I guess something else is that even though users in china may not have this habit of paying for music, they will pay for kana in other ways, like gifting virtual flowers to live streamers, right? I mean, there's also this habit of tipping, let's say, bloggers for liking their work, or tipping content creators that may be, by kind of a messing all these licensing deals and then asking people to subscribe is like a VIP member, something to gain access. Maybe that is the smart way to do here, even though wouldn't work as well in in the west.

And one thinking about the future, this is actually very interesting because this tencent music versus spotify comparison sounds very like other chinese versus western technology comparisons, for example. And financial, they leverage alipay, which is free to user with mobile payment, with very low transaction fees, but then they monitise by selling the user loans or insurance products.

So maybe by understanding what tencent music have built, we can get little bit about how the future also in the west will be. So I actually ask to us about what he thought next steps are. Yes.

both politiques. Next step in its evolution is, is something they call the two tiered market. They've been good at selling musi C2Consumers, and now they are going to sell a platform for artists and producers to basically self public to upload their music, to distribute IT, to check out whether fans are.

And that's good when you're touring, you want to know, okay, we're big in these three cities, so will go there. And these songs apparently popular in the city, so play those songs on our set. So all that kind of data that bands need spot if I wants to supply that.

So they want to be like a google sweet for the music industry and they bought some companies to uh, help them in that pursuit, like sound trap, for example, which helps us to produced music in real time over the internet, just like working in google dogs together. So I think that animals vision and the very mccarthy vision also he's had a finance over its modify, uh, is to pursue this strategy and it's something at the market likes when they talk about. And you can see that when y've announce things.

the share Price increases, again, I think like spotify way forward, makes a lot of sense if you just view business says we're going to understand music so well that we know how to recommend the best music for users and then also give advice or tips to musicians on what their users like, right? Tencent again, is like doing their their platform play for tencent would be amazing if they had bought spotify because and they have both signs of this, right, the recommendation and the data on user taste.

especially globally. Yeah and that actually bugs me very much because like I think a year in half for two years ago, I made a projection that tencent music should buy spotify or would buy spotify. And you know before spotify people, they were these more less confirmed rumors that they were in conversations about just acquiring spotify set of, you know, letting spotify I P O ending up with, you know them just grabbing a bit less than ten percent chairs of of each other. But considering, you know, the future old man verify, considering what tenant has built and considering that tencent has proved what types of regular deals you can when you own the consumer base, for me, I just didn't make sense that this deal didn't happen because IT just feels like everything should have become much Better instantly for the both of these companies if they were too merge. I mean.

I think they're forgetting the human element here, which is, you know, as a cofounder who's build a really successful product, do you really want to sell out and kind of merging to another company? I think even if logically or business wise makes sense, that doesn't mean people actually do IT. And then also, I I ve no clue, but maybe he didn't like the way that tenant was doing things yeah .

actually I ask jonas about exactly this yeah I .

think it's tencent buys modify seems like a good idea because you get the actually called on the on the world market for streamed music. But IT seems like and I don't know that much about how tencent Operates in china, but IT seems like if they're acquiring recordings and the negotiating with the record industry in those terms of actually buying the music and then reselling IT, that's that's a dramatic mismatch to the way bi fy Operates.

And I think if they made a deal with tencent, that would cause a lot of problems for the Operations in in europe and the U. S, I don't think that the way tencent Operates in china is acceptable practice. So they wouldn't want to negotiate with a sponge fied lash ten cent those negotiations would they would be so complicated that I would be maybe a nightmare.

And if Donna lake is deciding between listing the company and emerging with tencent in complicated situation that would throw spotify negotiations with the record industry back years, then maybe he felt the Better to list and to have a deal with ten cent that the allows them to move forward together, sort of kicked the calm down the road, and deal with some of these negotiations later. Of course, in the end, IT makes sense that this will be a worldwide industry and that all countries will have access to a few streaming alternatives. That's where things should end up in the long run.

yes. Obviously sense that the market shapes the product. And in the market like china, which is a bit more isolated, that tense of music, anything is so smart that way that they've done things would, I guess, be more serve or aggressive when dealing with record labels compared to the way that spotify has developed.

And I I guess personally, I am glad that they didn't merge even though I know that was your conspiracy theory of last year. Um because I just think that monopoly are not a good deal for users. Um great for maybe the people on the industry.

I guess you have a point then. I just wanted to be right for once. So so I know that's why I want see the deal happening. But on the other hand, like if we fell forward, whether IT is five years or twenty years, this seems to be bound to happen now that the future of the industry is more more getting into the hands of the technology companies. That they have built up these best platforms with loads of data, being able to guide artists to what type of musi C2Create, or at least how to market their music to which target group and also from the user perspective, being able to access everything in the entire world, whether IT is music or music videos or live stream of a concert or, you know, just influencer doing cover of your favorite song, being able to access that through just one APP.

Yes, I think is this term, I don't think it's limited china, but it's been used like here, pain entertainment, which is kind of bundle ling movies, music or kinds of entertainment basically to one service. And I don't think that tenant has has really implemented this to its fullest, you know, because they are gaming company too, right? I very dependent on how the gaming business goes as well.

And you could also leave that under this pan entertainment concept. Um I think mazo prime has done this really well, right? Like kind of undying services together under one subscription in the future, maybe companies can view music so separately from other types entertainment.

And also like you mention with social apps like I mean, if you look at tiktok, which merges user created videos with music, how addictive that is for users. I mean, you can see like that's that's a totally different model, right? Like that's not streaming, but it's also this combination of music and video. And I guess and curious how those social apps will get involved in industry .

too yeah and looking at you know this tencent music I P O, looking at how the music industry E E is going to become in the future. I personally very look forward to study this market over the next year or so because I think we can all agree that a majority of the future kind of entertainment consumer, whether IT is music or video or what not exists in asia.

So he feels very logical that that's where everyone is habit h whether IT is tencent that already are expanding heavily in south or the western internet companies spotify, apple music or maybe even amazon that also need to go there in order to, you know kind of grow their companies for this topic brings us back to the original question. You know, how will all these things play out to instance of music, a friend or foe? Considering how critical winning in asia will need to be for a bunch of these western companies as as .

a consumer or user, i'm excited for when we get to the point where whatever a music out by open and recommends great music from all over the world, like i'm curious what kind of music, lets say from india or indonesia or china or from other markets I would really enjoy based on my music taste that isn't, like, say, restricted to the market where or the country or culture where grew up in right? And I would be great to see these music platforms expand globally and be able to recommend music from all over the world based on what you like, which you know this language agnostic, right? So i'm excited to reach that point.

Yeah absolutely. By looking deeper at tension music, understanding how they make the ideals, understanding how they monti's, I think it's a very good point how the digital music entertainment services globally will change going forward. And maybe this case kind of the answer to the overall question about how youtube music or spotify or apple music are supposed to make money.

So thanks again for your listening to india, china. As always, we welcome and need feedback or suggestions that you have, and we hope that you and your loved ones had a wonderful new yeah and happy twenty nineteen.