Universal to pay-gate music in China as part of new Tencent Music deal

MBW has been prattling on about Tencent Music Entertainment’s paywall strategy in China for some time.

In short, with every week that goes by, TME – owner of QQ Music, Kuwo Music and Kugou Music – is making a increasingly large chunk of blockbuster music on its platform exclusively available for those users who pay for Premium streaming access.

This is a central tactic for TME in its quest to get more Chinese music fans shelling out for premium streaming subscriptions.

TME has a stated headline target, too: ensuring that 20% of all music streams on its services are of paywalled content by the end of 2020.

The company just got a big hand in this mission – in the shape of its new deal with Universal Music Group.

TME revealed its Q2 2020 results yesterday (August 10), confirming that its revenues from music subscribers on its services hit $186m in the quarter, up by 64.7% year-on-year.

TME’s CEO, Cussion Pang, said this impressive subscription revenue growth was his firm’s “most notable” music-related story in Q2, while noting the direct impact that TME’s “effective paywall strategy” had on the increase.

The announcement of TME’s Q2 results came hours after the company confirmed that it had signed a new multi-year licensing deal with Universal Music Group, as well as launching a new JV record label with UMG.

On TME’s Q2 earnings call, the company’s Chief Strategy Officer, Tony Yip, was specifically questioned by analysts about the firm’s paywall strategy and how the new UMG deal fits into it.

Yip confirmed that TME is on track to hit its 20%-of-streams-behind-a-paywall target by the close of this year, while further suggesting that the firm “might slightly exceed that”.

Yip then confirmed that “as part of [TME’s new] agreement with UMG, we intend to add the UMG content behind our pay-for-streaming paywall”.

What this means: We can expect to see an increasing amount of blockbuster/particularly popular pieces of UMG catalog becoming premium-only on TME services in the future.

Sources close to the situation suggest that TME and Universal will decide between them which releases / albums become pay-gated as the months and years roll on.

“as part of [TME’s new] agreement with UMG, we intend to add the UMG content behind our pay-for-streaming paywall.”

Tony Yip, Tencent Music

Yip further confirmed that some catalog from “each of the big three” (Universal, Sony and Warner) – is actually already behind TME’s paywall.

“Ultimately, it’s important for users to appreciate the value of music, and all players in the industry are moving towards the pay-for-streaming direction,” said Yip, calling the trend “a very good thing for the industry overall”.

The total number of people paying for online music on TME’s services hit 47.1m in Q2, up 52% year-on-year.

Yip noted that this was “the fastest-ever reported quarter in terms of year-over-year increase in our paying users”, with 4.4m added versus the previous quarter (Q1 2020).

TME’s top execs also gave some color on the broader nature of the firm’s new deal with Universal on their Q2 earnings call yesterday.

Cussion Pang told investors: “Unlike the last agreement [with UMG], which was effectively more like a fixed cost contract in respect of the revenue generated, the new [deal] has a reasonably fair [minimum guarantee] level that both parties are incentivized to work together to exceed so the revenue sharing can kick in”.

“the new [UMG deal] has a reasonably fair [minimum guarantee] level that both parties are incentivized to work together to exceed.”

Cussion Pang, Tencent Music

Tony Yip further clarified that TME’s new deal with Universal contains a “reasonably fair minimum guarantee level, which is in striking distance”.

Yip added that both UMG and TME are now “incentivized to work together to exceed” this minimum guarantee threshold – something he predicted would happen “based on the current trajectory of our subscription growth”.

Tencent Music Entertainment’s total revenues from its online music services in the second quarter of 2020 increased by 42.2% to RMB2.22 billion (US $314 million).

This increase was driven by strong growth in music subscription revenues, supplemented by growth in sales of digital albums and advertising service revenues.

These factors offset a decrease in sub-licensing revenues, which are set to continue to decrease as music rightsholders like Universal Music Group directly license TME’s rivals – including NetEase Cloud Music – in future.

Tencent Music’s majority-parent, Tencent Holdings, leads a consortium which acquired 10% of Universal Music Group in March for $3.4bn.Music Business Worldwide

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