Tencent Music Entertainment, China’s largest digital music business, managed to increase its profits in the July to September quarter despite “challenging macro conditions” and the continued retreat of its social music business.
The company, which is a major shareholder in Spotify and Universal Music Entertainment, and is itself controlled by the games to streaming giant Tencent, reported net profits of RMB1.09 billion ($154 million) for the third quarter of its year. That was a 39% increase year-over-year and a 22% increase on a quarter-on-quarter sequential basis.
The profits growth came despite revenues slipping to RMB7.37 billion ($1.04 billion), representing a 6% year-over-year decrease and a 7% increase on a sequential basis.
The quarterly results showed a continuation of the recent divergence between the two halves of Tencent Music’s businesses.
The streaming music side is successfully converting casual users into paying subscribers. That is evident not only by at 20% year-on-year gain in paying subscriptions, which reached 85.3 million at the end of September, but also by the 8% drop in monthly average users to 585 million (as casual, free users went elsewhere). That was achieved with only a 1% reduction in average revenue per user. Overall revenue for music streaming reached RMB2.25 billion ($316 million), a year-on-year increase of 18%.
The more lucrative social entertainment side was a different story. User numbers and MAUs both dropped sharply, by 25% and 26% respectively on a year-on-year comparison. But the segment, which straddles karaoke, podcasting and tools for musicians, managed to push through an 8% increase in ARPU. This matters as each subscriber on the social music side is now 20 times more valuable than a streaming customer.
The company blamed the turmoil on the social music side on “macro headwinds,” and promised to “improve our competitiveness through ongoing product innovations and new initiatives in social entertainment, such as audio live streaming, international expansion and virtual interactive product offerings.”
Things were not supposed to be this way. In mid-2021, after being punished by industry regulators for monopolistic contracts with the global music majors and for predatory pricing tactics against its Chinese competitors, Tencent Music said that it would downplay music streaming and grow its ancillary businesses instead. The opposite appears to have happened. But that was before a deepening of the COVID crisis in China slowed the economy and caused an additional year of lockdowns and restrictions at a time when other countries have been getting back to something approaching normal.
Operational highlights so far this year include teaming up with Faye Wong, Roy Wang, Lay Zhang and Korea’s YG Entertainment to provide early release of their new titles. Jay Chou‘s digital album “Greatest Works of Art” had recorded sales of close to 7 million copies by the end of the third quarter. It also increase its original music efforts and achieved acclaim for its release of Akini Jing’s album “Endless Farewell.” It also hosted 32 online and offline concerts in the quarter.
Towards the end of the quarter Tencent Music Entertainment gave its shares a secondary listing on the Hong Kong stock market, a move that gives it a fallback position should it encounter difficulties with U.S. securities regulators and also opens the stock to retail investors in mainland China.
At HK$17.48, the shares remain below their HK$18 listing price. But they have recovered significantly since a Hong Kong tech stock rout saw them fall as low as HK$13.44 barely five weeks after their debut.
Parent company, Tencent is scheduled to unveil its own quarterly financials on Wednesday. These may clarify the accuracy of current market rumors suggesting that, like the U.S. tech giants, Tencent is planning cost-cutting measures that may include the laying off of several thousand staff.
