On August 15, Tencent Music (NYSE: TME, HK: 01698) released its unaudited financial results for the second quarter ending June 30, 2023. The financial report shows that the total revenue of Tencent Music in the second quarter of 2023 is 7.29 billion yuan, a year-on-year increase of 5.5%; the adjusted net profit is 1.53 billion yuan, a year-on-year increase of 48.6%.
After the release of the Q2 financial report, the market responded positively, and its Hong Kong stock price rose continuously for the past two days. From the perspective of revenue structure, Tencent Music has two major components, one is online music services consisting of user subscription fees and digital albums; the other is social entertainment services such as live broadcasting.
We disassemble and analyze them one by one.
1. Revenue from online music services has increased by nearly 50%, and many indicators are outstanding
In the second quarter of this year, Tencent Music’s online music service has a lot of highlights, and the achievements are obvious to all. Financial report data shows that its online music service revenue reached 4.25 billion yuan, a year-on-year increase of 47.6%, accounting for 58.3% of total revenue, surpassing social entertainment service revenue and becoming the backbone of total revenue.
At the same time, with the increase in per capita payment, the number of paying users and the payment rate are also continuing to increase. Not only did it usher in the milestone that the number of paid online music users exceeded 100 million in June this year, but the average monthly income of a single paying user reached 9.7 yuan, achieving growth for five consecutive quarters.
It can be seen that the continued high growth of music payments that return to the origin is still due to the solid basic disk of Tencent Music. At least in the digital music market, its monopoly advantage has not been affected much.
Moreover, in the context of the booming consumer demand for offline travel in the second quarter, it is not easy for Tencent Music's online music streaming disk to remain basically stable. According to the data, as of the end of the second quarter, its MAU increased by 2 million users to 594 million.
In terms of further breakdown, subscription revenue and other revenue under online music services have increased a lot.
Among them, subscription revenue increased by 37.2% year-on-year to 2.89 billion yuan. The number of paying users and the per capita payment amount under this revenue increased by 20.2% and 14.1% respectively, which greatly stimulated revenue.
Other online music services, including digital copyright sales, advertising, and other revenues, saw a 76% year-on-year increase in revenue, mainly driven by advertising, including in-app advertising, incentive advertising, and brand-sponsored advertising for exclusive events held.
In the author’s opinion, Tencent Music’s revenue from online music services in the second quarter can achieve such remarkable results, mainly due to the following two points:
First, advertising revenue will recover naturally after the tourism market is fully liberalized. Tencent Music has also increased its advertising inventory, launched new forms of advertising such as incentive advertising, and continued advertising in e-commerce, games, and tourism, which has brought considerable benefits.
The second is that Tencent Music continues to efficiently promote the content and platform "one body, two wings" strategy to attract paying users by continuously outputting high-quality content and services. For example, as of July 31, with the support of 10.12 billion traffic, the original musician "New Power Project" created by Tencent Music has 1,977 songs that have received one million plays for the first time. It is a matter of course that users are willing to pay for high-quality content.
2. The social entertainment business is under pressure and the payment potential needs to be tapped
Then, compared with the success achieved by online music services, Tencent Music’s social entertainment business has returned to the “mud pit”.
The financial report shows that in the second quarter, its social entertainment revenue accelerated by 24.6%, and it only achieved 3.03 billion yuan in revenue. In order to create a more music-focused live broadcast atmosphere for users, Tencent Music also admitted that starting from the second quarter of 2023, it will take the initiative to take some service improvement and risk control management measures to improve the user experience. However, these measures are expected to put pressure on social entertainment service revenue in the second half of the year and have a certain impact on the group's total revenue this year.
Combined with the total revenue guidance given by the company (Q3 is expected to decline by 10-15%, and Q4 is expected to decline by 1%-5%), assuming that the growth of online music revenue is stable, its social entertainment business will also accelerate its collapse in the second half of the year.
In response to the decline in the revenue of this business, we delved into it, and it is not difficult to find that the social entertainment revenue originally affected by short video competition has gradually seen a weakening trend in Q1 at the beginning of the year. However, at the end of the second quarter, with the tightening of regulatory policies, the rectification of illegal live broadcasts launched by Tencent Music once again poured cold water on the social entertainment business.
In fact, Tencent Music is currently mainly attacking gambling-related live broadcast content. Therefore, in terms of volume and price, it is mainly reflected in the shrinking ARPPU paid by users. According to financial report data, the number of monthly active users of its social entertainment service mobile terminal dropped by 18.1% from 166 million in the same period last year to 136 million; the number of paying users fell by 5.1% year-on-year; 20.5%.
Combined with the current actual situation, we can also predict that the growth pressure of Tencent Music’s social entertainment revenue in the second half of the year will continue to come from the continued sluggish per capita payment amount. At this time, how to recover the lost paying users may be the key to the recovery of Tencent Music’s social entertainment business .
3. Using AIGC to build a moat, what will Tencent Music face?
Under the sluggish growth of social entertainment business, Tencent Music is also trying every means to make changes to attract traffic, and AIGC technology empowerment has become its new choice.
For example, this quarter, Tencent Music tried new interactive functions in live broadcast services, using AIGC technology to generate virtual gifts and barrage functions. After users input text descriptions, virtual gifts can be generated in real time and given to the anchor, allowing users and anchors to interact with each other during the live broadcast. In the process, more creative and special connections are established to enhance user interaction experience and enhance product competitiveness.
In terms of online music, Tencent Music has started to test "Listen with AI", allowing the AI music companion "Xiaoqin" to join the user's journey of listening to music, and share various topics with him, including "Xiaoqin"'s views on music; Real-time interaction with users recommends songs or generates playlists. This new feature can provide users with an interactive and fun music discovery journey, as well as a more personalized and engaging listening experience.
So, will AIGC be the best solution for Tencent Music?
In my opinion, it can be solved, but it will take time.
On the one hand, from the perspective of user-level impact, these actions do not seem to have caused too much splash. Listening to music and watching videos online is actually a process of entertainment. The content generated by AIGC technology is just an embellishment. Presumably many people like the author open Tencent Music just to listen to music. After all, few people still have time to listen to music. Participate in virtual interactions.
From the perspective of the consumption path, it is in line with the logic of the scene to open the music platform-search for the music you are interested in-pay to buy online listening. And open the music platform—swipe the video to listen to the song and spend time interacting—paying for the purchase, this path seems a little awkward.
This problem essentially reflects how Tencent Music, as a tool platform, turns to a content platform. In other words, the form of Tencent Music in the past was "shelf type". Now under the sweep of "content", it is urgent to use AIGC to empower content to open up the trading field, but how to realize the closed loop of positive feedback on the consumption path on the platform is The challenge Tencent Music faces.
On the other hand, AIGC technology can indeed help the platform to greatly improve productivity, break through innovation, and thus generate more high-quality content for drainage. The reason is that AI is just a tool, and talent is the purpose.
For example, Tianqin Lab, the first audio and video laboratory under Tencent Music, has just officially launched the second virtual idol "Xiaotian". More gentle and deep, pure robots will not work like this. Therefore, balancing the technical levers of human IP + AIGC is the core of this technology bureau.
Four. Conclusion
Goldman Sachs mentioned in the latest "Music in the Air" report that global recorded music revenue is expected to grow by 7.5% in 2023, while streaming media growth will remain healthy, with a compound annual growth rate of 11%. According to the global music report released by IFPI, China has surpassed France to become the fifth largest music market in the world. It is not difficult to predict that the attention and participation of the Chinese music market in the global market will further increase in the future.
As the online music and audio entertainment interactive platform with the deepest accumulation in China, when embracing the future with an open and upward market growth imagination space, I will apply a sentence from Liang Zhu, CEO of Tencent Music: "Looking forward to the future, Tencent Music will continue to cooperate with The industry will work together to explore more opportunities and possibilities in China's online music field, and in the process of promoting the development of legitimate music, better grasp the opportunities brought about by the upgrade of users' music consumption habits. While creating long-term value for shareholders, Further promote the prosperity and development of the music industry."
This kind of narrative confidence is obviously firm, but the future is also full of many uncertainties. We also look forward to the further development of Tencent Music's two major businesses, and more new stories can be told in the future.