MBW Reacts is a series of analytical commentaries from Music Business Worldwide written in response to major recent entertainment events or news stories. Only MBW+ subscribers have unlimited access to these articles.
Streaming giant Spotify is readying to roll out a new “Super-Premium” subscription tier designed to better monetize music superfans – a development eagerly awaited by the music industry.
We don’t know yet for sure what will be part of this new “deluxe” tier (as Spotify CEO Daniel Ekdescribed it in a recent earnings call), though there’s a good chance it will include high-fidelity audio (a feature that has been conspicuously missing from Spotify’s service thus far), and potentially “superfan clubs” as well as new playlisting and song management tools.
All Ek is willing to tell us so far is that it will be for “huge music lovers who are primarily looking for even more flexibility in how they use Spotify and the music capabilities that exist on Spotify.”
Ek also hinted at the price of this new tier: “Something like $5 above the current Premium tier… probably around a $17 or $18 [per month] price point”.
That’s certainly good news for artists and music rightsholders, who have long argued that music is undervalued in the digital world.
The price of Ek’s mooted Spotify Super-Premium tier would be roughly 50%-60% above the current rate for an individual Premium subscription, holding out the promise of significantly higher royalty payouts from the streaming service.
Yet if Spotify is still working to figure out exactly what to add to its “deluxe” tier, and just how it should be priced, it may want to take a look at Tencent Music Entertainment (TME), China’s largest operator of music streaming platforms.
On its Q2 earnings call Tuesday (August 13), TME brass talked about the earnings boost the company has seen – and expects to see in the coming quarters – from its “Super VIP” membership tier.
According to CEO Ross Liang, a Super VIP membership costs around RMB 40 per month, or about five times as much as the RMB 8 going rate for a typical paid subscription to one of TME’s music streaming services. (TME operates QQ Music, Kugou and Kuwo, as well as the karaoke app WeSing.)
To be clear, those are still considerably lower prices than what Spotify charges in its most lucrative developed markets.
RMB 40 translates to around USD $5.60 at current exchange rates, and RMB 8 is just $1.12.
That’s certainly well below the $11.99 that Spotify charges in the US for an individual premium subscription (after two price hikes in the past year, bringing the price up from the $9.99 at which it had sat for years).
Given the considerably lower spending power of the average Chinese consumer compared to the average US consumer, that price difference is no surprise; but the more salient aspect here might be the ratio between Tencent’s typical standard paid subscription and its VIP subscription – a fivefold difference.
So what do TME’s subscribers get for that much higher price?
According to Liang, quite a bit: “A holistic and seamless listening experience across various devices and multiple scenarios… SVIP integrates music with long-form audio and online karaoke services [plus] always superior sound quality.
“It wins the hearts of our active members with comprehensive online and offline privileges, such as priority access to digital albums and… ticket booking for live music events, including our TMEA [Tencent Music Entertainment Awards].”
One advantage that TME has here is that, unlike Spotify, it has seriously moved into the live events space, including hosting its own music awards show, complete with multiple performances by well-known musical acts.
Plus TME Executive Chairman Cussion Pang noted this week that the company has started signing contracts with labels for ‘windowing’ (or “pre-phase”) deals. These give paying TME subscribers 30-day exclusive access periods for new music releases, for instance from Taiwanese indie band Sodagreen and K-pop label CJ ENM, which represents the boy band ZEROBASEONE.
These deals have “effectively improved membership conversion and engagement,” Pang said on the call.
TME’s Super VIP tier also includes access to “long-form audio content,” i.e. podcasts and audiobooks.
That’s a space that Spotify has moved into as well, of course. But given that SPOT’s existing paid subscription tiers already offer access to podcasts and include 15 hours of free audiobook time per month, Spotify may be limited in how much it can leverage long-form audio for its ‘Super-Premium’ tier.
“Frankly speaking, [this] is a really relatively low-cost entertainment that is very affordable to all users.”
Cussion Pang, Tencent Music Entertainment
So how well has Super VIP been working for TME financially? According to Liang, it’s been a key driver of the company’s growth in monthly ARPPU (average revenue per paying user), which jumped 10.3% YoY, to RMB 10.7 (USD $1.47) in Q2 2024.
Though TME brass aren’t ready yet to share raw numbers on Super VIP subscriptions, Liang predicts that in the back half of 2024, ARPPU will outstrip subscriber growth in terms of driving the company’s gross profit margin, largely on the strength of Super VIP subscriptions. And that’s saying something, given that subscriber growth has been no slouch: TME recorded 117 million paying subscribers in Q2, a 17.7% increase from the same period a year earlier.
In all, TME’s revenue from music subscriptions came in at RMB 3.74 billion (USD $515 million) in the quarter ended June 30, a 29.4% YoY jump. Revenues from music services – including ad revenue and downloads, plus subscriptions – came in at RMB 5.42 billion ($746 million) for the quarter, up 27.7% YoY.
Tencent Music said that growth was thanks to a “unique blend of premium benefits, original content, and a variety of engaging use cases” that “drove sustainable subscriber growth”.
Here are two other key things we learned on the company’s latest earnings call…
1) TME top brass say the music streaming business is recession-proof
Asked by analyst Thomas Chong of Jefferies whether China’s economic headwinds could affect TME’s business, Cussion Pang said that while the macroeconomic environment “will bring some challenges to different aspects of the business,” he expects the music streaming side to remain strong, because of the “value for money” it provides to consumers.
“Frankly speaking, [this] is a really relatively low-cost entertainment that is very affordable to all users,” he said.
Pang conceded that China’s economic slowdown might impact TME on the ad-supported side of the business.
“But we are seeing that we are still doing a good job” on the ad side, he added, especially with regard to tourism and advertising “related to some of our offline concert sponsorships.”
He noted that TME is expanding into new advertising formats, which Pang expects will keep the momentum going on that side of the business.
“So I think that the overall macro environment does not have such a big impact [on] TME,” he concluded.
As we reported yesterday, Pang’s optimism about the future of music – and streaming subscriptions – was summed up in this quote from the exec: “We remain optimistic about the music industry’s long-term potential and are committed to sustainably achieving our mid- to long-term goals, at a healthy pace, and with the right balance.”
2) Producing its own content has helped TME grow its gross margin
TME Chief Financial Officer Min Hu noted that the company’s gross margin reached 42% in Q2 2024, a 7.7 percentage point increase year over year, which she attributed in part to the growing paid user base and improving monthly ARPPU, as well as increased ad revenues.
But also, she noted, “the ramping up of our own content continued to help improve our gross margin.”
While TME has repeatedly stressed the importance of its many and growing contracts with music rightsholders – including a recently renewed multi-year licensing deal with global giant Universal Music Group – it has also focused on creating content in-house.
The economic benefit of that is pretty clear: Cut out middlemen like third-party record labels and distributors, and you can keep a larger chunk of the profit to yourself.
“We will continue to invest in high-quality content, original content production as well as innovative technologies to further improve user engagement and enhance [the] user experience.”
Min Hu, Tencent Music Entertainment
One key element of this has been the Tencent Musician Platform, which, as of the end of 2023, had attracted some 480,000 indie artists who had contributed around 3 million songs to TME’s streaming platforms.
In the past few years, Tencent has aggressively deployed AI-driven tech to help with the music creation process.
“In 2023, we launched a full suite of AI-powered music production tools on Venus, our all-in-one platform for music production and promotion, and we use AIGC [AI-generated content] tools to improve artists’ music content creation and production efficiency,” TME said in its most recent annual report.
Among those tools are the ability to separate different music instruments on a recorded track, the ability to automatically generate sheet music, a lyric-writing assistant, and a composition assistant.
“We will continue to invest in high-quality content, original content production as well as innovative technologies to further improve user engagement and enhance [the] user experience,” Min Hu told analysts on the earnings call.Music Business Worldwide
