When we think of music streaming services, some of the biggest names that come to mind are Spotify, Apple Music, and YouTube Music. While these three services are all direct competitors, they generally share the same business model and prices: they each offer unlimited music streaming from their respective catalog for $9.99/mo, have a family plan for $14.99/mo, and give students a discounted $4.99/mo option. Yes, it’s the exact same prices for all three of these platforms. I just checked.
So what sets these streaming platforms apart? Spotify has the best integration with other services (Discord, Amazon Alexa, Google Assistant to name a few) as well as the best song recommendation algorithm. Apple Music is a more natural choice for native Apple users with its synchronization functionality with the rest of iOS and MacOS. Besides YouTube Music’s terrible user interface and lack of functionality, its main appeal is the largest streaming selection by far (essentially any video on YouTube).
Overall, a look at these key differences doesn’t really tell much of a tale of creative business interests. Sure, they’re different, but in the grand scheme of things, small nuanced details aren’t too big of a deal to the average consumer. All the options are more or less the same. Brand loyalty aside, there’s nothing that really stands out that says, “check out my service, we’re truly revolutionizing the field!”
The Western streaming business model is focused on driving up subscriber counts for business sustainability. For the sake of consistency, I’ll use Spotify: it’s a standalone company without the backing of a major company like Google or Apple. According to its latest 20-F filing (annual report for international companies operating in the U.S.), Spotify’s revenue was a hefty €7.88 billion ($9.32 billion) in FY2020. While that seems like a huge number, Spotify identified its biggest risk in terms of revenue is the loss of subscribers:
If our efforts to attract prospective users and to retain existing users are not successful, our growth prospects and revenue will be adversely affected.
Risks Related to Our Business Model, Strategy, and Performance (pg. 8), Spotify Technology S.A. Form 20-F for FY2020
The next paragraph continues by describing the necessity of monetizing users through subscriptions as well as increasing ad revenue for free users by incentivizing them to listen for longer periods of times and introduce ads in more areas such as podcasts. While these strategies seem like common sense, they’re not creative like the music they host.
What drives listeners to stay engaged? In what ways can users who already pay for subscription plans continue to spend money with the service? These are questions that should be asked. Luckily, the answer is already here, and it comes from Tencent Music Entertainment Group (TME). Tencent is one of China’s largest tech companies (technically, it’s based in the Cayman Islands for tax write-off purposes), and its approach to music streaming is fundamentally different than what we’re used to. While they do offer subscription plans, they range from 8 to 15 RMB/mo (that’s $1.22-$2.29/mo). How do they make money with subscriptions at such low costs?
First, let’s analyze their revenue based on the typical subscription/advertisement model, aka “online music services.” At the end of FY2019, TME earned 7.15 billion RMB ($1.09 billion). While the number pales in comparison to the $9.32 billion made by Spotify, the answer lies in its more creative business approach, known on TME’s 20-F form as “social entertainment services.” A total of 18.28 billion RMB ($2.79 billion) in revenue was reported for FY2019. It’s important to note here that the Chinese economy is different from Western economies—these numbers may not look as impressive to us, but operating costs are significantly lower.
“Social entertainment services” make more than double the revenue compared to its more traditional counterpart. So what exactly are these services? Here’s their explanation:
Users are attracted to our online karaoke and live streaming platforms primarily by engaging music performances from our online karaoke singers and live streaming performers. We generate revenues from online karaoke and live streaming services primarily from sales of virtual gifts, including consumable, time-based and durable virtual items. Consumable virtual items are mainly used as gifts sent to online karaoke singers and live streaming performers as they perform by the audiences as a way for them to show support and appreciation for the performance.
Social Entertainment Services and Others (pg. 53), Tencent Music Entertainment Group Form 20-F for FY2019
Tencent Music caters to their audience by building a community around artists and listeners. It’s similar to Twitch because of the “interconnectedness” aspect. Fans and creators interact with each other while Tencent Music mediates those interactions using monetary incentives. The company is also aggressively signing agreements with karaoke singers and artists to perform exclusively on their platform. Its success is found in the numbers: social entertainment services make well over double the revenue in the company compared to its subscription and advertisement services. While TME’s combined revenue was only 25.43 billion RMB ($3.89 billion) in FY2019, the ratio between revenue sources is the important takeaway: 2.56:1.
Logically, Tencent Music indirectly mentions its social entertainment service as its largest business risk. Whereas Spotify’s main risk is about the numbers, Tencent’s is about its ability to be flexible with its community:
If we fail to anticipate user preferences to provide online music entertainment content catering to user demands, our ability to attract and retain users may be materially and adversely affected.
Risks Related to Our Business and Industry (pg. 5), Tencent Music Entertainment Group Form 20-F for FY2019
Creativity and adaptability is the core of Tencent Music. Its business model is centered around community: in a world where people are so easily able to connect with one another and are eager to express themselves and their content, it’s a truly innovative approach that understands the needs of consumers—both artists and listeners alike. While the risk is that retaining entertainers is a challenge and that the revenue can be inconsistent (whereas traditional subscriptions are more long-term), the benefit of this approach for the industry overall, both on the business and consumer side, is a positive.
Western music companies like Spotify have great room to expand in this area. The market is relatively untapped and they already have userbases that pay good money for subscriptions. The next step should be building the framework to keep them engaged. With so many millions of people interested in music, there’s unlimited potential to grow. Adapting an approach like Tencent’s not only allows companies to further engage with and understand their consumers, but it’s a way to fire up people’s passion of music. In the end, we all win: more money going to artists and entertainers, a feeling of community, and happy businesspeople.
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