In the 1990s, the folk song My Old Classmate was so popular in China that it was often compared with the Beatles classic Yesterday.
With lyrics detailing a young man’s recollections of a girl he shared a desk with at high school, the song soon became a huge hit across Chinese campuses. Still a classic for young students and lovers today, it was adapted into a coming-of-age movie of the same name in 2014.
All of which made Gao Xiaosong, who composed the melody and the lyrics, a legend among Chinese musicians. But while the surviving Beatles are said to be still raking in millions from their work, Gao hasn’t made much more than Rmb10,000 ($1,402) from My Old Classmate. That was because he didn’t own the rights to the song, although it might not have made much difference, given the prevalence of music piracy in China over past decades. As recently as 2012, the market share of pirated music online was still vast – approaching 100%.
Gao has enjoyed a second career, however, as one of the icons of China’s so-called “knowledge economy” (see WiC396). When he was appointed head of Alibaba’s music unit in 2015 he set out to transform the workings of the domestic music industry. Last month My Old Classmate also earned a reprise, this time as a theme song at Alibaba’s 20th anniversary party (and farewell do for founder and boss Jack Ma).
The last deals that Ma signed before stepping down as Alibaba’s chairman were the $2 billion acquisition of NetEase’s overseas e-commerce platform Kaola (see WiC466) and a further $700 million investment in NetEase’s music service. The second deal is smaller in monetary terms but the plan is to shake up China’s fast-growing online music industry. All the same, the latter was overshadowed by a record-breaking moment at market leader Tencent Music Entertainment (TME) in mid-September.
What is TME’s latest offering?
For most investors, Tencent’s music unit has disappointed since going public in New York in December last year. Worth about $21 billion this week, its market capitalisation has dipped below its IPO valuation.
But there was a much needed boost this month when a new song by Taiwanese heart-throb Jay Chou sent Tencent’s streaming platform QQ Music into meltdown. Since his debut in 2000, Chou has sold more than 30 million albums, making him one of the most recognised of Chinese pop stars.
The 40 year-old has been less productive since getting married in 2014, with his most recent album coming in 2016. His last single disappointed a lot of his fans too when it was released in May last year (see WiC410). But 489 days after that lacklustre reception, Chou’s newest track Won’t Cry took Chinese social media by storm.
The song was published on each of TME’s three music platforms at 11pm on September 16. At a price of just Rmb3, it sold more than two million downloads in the first 25 minutes. Within two hours the song had raked in Rmb10 million in sales – a new record for the Chinese music industry.
TME’s flagship QQ Music platform crashed shortly after the single’s release as it could not handle the sudden surge in online traffic.
And while Chou’s revenue sharing terms with Tencent have not been made public, the pop star has managed to rekindle investors’ interest in TME’s potential.
Why has TME been struggling?
When Tencent tries a new sector its favoured tactic is to take over the best of the start-ups in the genre (examples include the eSports and video streaming sectors, see WiC460). That same strategy saw it build up controlling stakes in the top four mobile music apps in China – QQ Music, Kugou, Kuwo and WeSing. TME was set up as a holding company and listing vehicle for these digital platforms, which on a combined basis have more than 800 million active users.
During its IPO roadshow last year, TME claimed to hold the most comprehensive library of music content in China with more than 20 million tracks from over 200 domestic and international music labels. According to Beijing News, TME’s market share (in exclusive copyrights) could be as high as 85%.
However, the company has been struggling to convince its customers to pay more for access to its expensively assembled library.
TME reported its second-quarter revenues this year grew 31% year-on-year to Rmb4.5 billion. But handicapped by higher licencing fees, profit attributable to shareholders increased at a far smaller 2.5% rate to Rmb927 million.
So copyrights are worth something?
Had Gao Xiaosong penned My Old Classmate after 2015 – the year he joined Alibaba – the royalties would have made him millions.
That was also the year that media regulators dished out “the sternest ban on copyright infringement in history”, Beijing News recalls. Since then the music apps have embarked on a bitter “IP war”, paying fees to record labels for exclusive licences to their musical content.
The regulatory push to uphold copyright integrity has stirred up problems of a different sort. Music lovers are complaining, for example, that they now have to install a host of different music apps and switch between them in order to listen to the full range of their favourite songs. For operators such as TME and Ali Music, it has also led to higher expenditure on content, as well as contingencies for lawsuits on the inevitable disputes over intellectual property.
The rivalries got so vicious that regulators found it necessary to dish out another directive in 2017 that demanded industry players avoid “malicious competition”.
TME seems to have emerged victorious from the IP wars. And it looked to have cemented its leading position by agreeing to buy a 10% stake in Universal Music Group (UMG) for $3.3 billion last month.
However, news soon filtered through that the State Administration of Market Regulation was looking closely at TME’s dealings with music labels such as UMG, Sony and Warner Music. Its planned equity investment in UMG could lead to an antitrust investigation in China, Huxiu reported.
Rivals such as Ali Music complain that TME has been paying unrealistically high prices for exclusive rights to the likes of UMG’s catalogues, and then transferred the financial burden via the sublicencing fees that competitors are required to pay TME. (A couple of years ago Tencent and Alibaba inked a deal which allowed customers of both firms to access songs held exclusively by each other via this sublicencing mechanism). Tencent has so far denied any wrongdoing. “We have never tried to monopolise the market. The problem is they [TME’s rivals] simply cannot afford the price,” a TME executive explained to Huxiu.
How has Ali Music been doing?
Gao Xiaosong is still a gifted songwriter (for instance, he composed the duet Jack Ma sang with pop diva Faye Wong in 2017s; see WiC387). But whether lyrical genius sits easily with business acumen is a perennial debate in the music business.
Expectations were high in 2015 when Gao was appointed chairman of Ali Music, a division newly set up by Alibaba to take on its archrival’s TME.
At the time, Alibaba needed a new face to rebut the charge that it was trailing Tencent badly in the entertainment business. Gao was poached from property conglomerate China Evergrande’s own fledging music unit and entrusted with revolutionising China’s Rmb200 billion music industry.
One of his goals was to give a bigger share of revenues to the talent, especially by cutting back on the takes of intermediaries like the production studios, the marketing firms and the licence dealers. Through the distributive power of the internet, Ali Music set out to provide an open platform for performers that sidelined many of the middlemen. But as a relative latecomer to the sector Ali Music has struggled for traction, pulling in less than 20 million active monthly users as of last year.
Gao stepped down as chairman of Ali Music in 2016 and assumed more of an advisory role (he oversaw another project – the Ali Autobiography, Alibaba’s corporate history – which was published earlier this year). At the music division there was subsequently a sense of drift and Alibaba reshuffled its “Big Culture-Entertainment” business unit – of which Ali Music was a part – earlier this year (see WiC447).
Why has Ali Music teamed up with NetEase?
Alibaba’s latest investment in NetEase Cloud Music was an alliance between a player “with a lot of cash but no users” (i.e. Ali Music) and one “with no money but a lot of users”, according to news portal 36Kr.
During its second-quarter results announcement this year, NetEase disclosed that active users at its music platform had reached 800 million. The unit – which was set up at almost the same time as Ali Music – has achieved that by clever marketing, and by focusing on a customer segment that has been overlooked by Tencent: niche singers.
According to 36Kr, NetEase executives spent months talent-spotting at singing competitions. Most of its subsequent signings weren’t famous and typically had small groups of followers. But these fans are intensely loyal and once the reputations of some of the newly-signed singers started to develop more widely, the user pool at NetEase Cloud Music grew equally quickly.
In fact, NetEase received an investment from another internet gi-ant Baidu last year. So the latest investment by Alibaba implies that the BAT trio is squaring up again for a fight – this time in digital music, with market leader Tencent up against an alliance forged between Alibaba, Baidu and NetEase.
That means that – like many other internet segments in China – pop music has become a power struggle between these goliaths.
Hence the timing of Jay Chou’s phenomenally successful new single Won’t Cry may not be coincidental. Huxiu credits the success of the song to Tencent’s powerful cross-marketing machine. Once the song was released, it was discussed and promoted across other Tencent social media platforms such as WeChat (there were free streams of the song’s music video, too, as well as more analytical pieces on how the lyrics paid tribute to some of the classic scenes from his movie career).
News that demand had crashed the servers at its music unit was both good and bad for Tencent. Its engineers will be dismayed by the glitch, but marketing bosses will use it as evidence that Tencent can deliver record-breaking sales to its chosen artists.
Investors in TME may take note too, seeing it as proof that the firm is finding more of a formula to get fans to pay for songs. That matters because TME’s revenue growth has been slowing for several quarters, noted Huxiu, which pointed out too a more unusual aspect about TME’s business model: downloadable music hasn’t been the main source of income for China’s biggest music platform.
In fact, sales from ‘social entertainment services’ accounted for 70% of its 2017 revenues and that proportion had grown to 73% in the second quarter of this year. A key element of this is karaoke services – where TME takes a cut of virtual rewards that customers donate to talented performers.
This revenue stream gives it a cushion as it takes on Ali’s new music alliance. However, the challenge will be to replicate the success of the Jay Chou marketing strategy for a wider range of artists. That would help it monetise one of the parts of its business – its enormous music catalogue – that investors see as its prime asset.
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