China’s AI Innovations
The DEPSeek’s firm-apartment in China incited a wave of anxiety among AI investors when it launched its chatbot AI in January, illustrating that intricate AI can be developed at far lower costs and with fewer AI chips than previously anticipated.
The debut of the Chinese chatbot has raised concerns among some AI developers, including OpenAI, which fear that Deepseek has pilfered elements from their extensive language models. Ironically, OpenAI is currently grappling with multiple legal claims about its alleged use of protected materials for training its own LLMs while now worrying about the unauthorized usage of its intellectual property.
No matter the circumstances, Deepseek has firmly established its presence in the tech landscape, as evidenced by Tencent Music Entertainment (TME) announcing on Tuesday (March 18) that it has integrated Deepseek into its music streaming service.
The largest music streaming service operator in China, Deepseek, is now part of the Music Tools. GENERAL MANAGER Ross Liang elaborated on this during the company’s latest earnings call.
Deepseek is now part of a tool designed to write AI-based songs, allowing “Users to quickly create songs tailored to specific contexts or moods,” according to Lyan.
However, Deepseek’s involvement does not stop there.
TME has also integrated it into its AI assistant, which includes comment sections, recommendations, and other “user touch points,” explained Lyan. All this contributes to offering users a “more personalized musical experience.”
TME’s Strategic Moves
The TME initiative echoes a recent announcement by Amazon about integrating the next generation of its voice assistant Alexa with the Generation Music Music platform Suno. In ongoing trials conducted by music specialists (Sony Music Entertainment, Universal Music Group, and Warner Music Group), Suno has almost admitted to using copyrighted material without permission for training its AI.
Moreover, Amazon Music licenses music from copyright owners, similar to TME, which has previously struck licensing agreements with entities such as Sony Music, Universal Music Group, Warner Music Group, and K-Pop giant Hybe.
TME’s revelation of Deepseek coincided with the company’s announcement of profits for the fourth quarter of 2024, highlighting significant improvements for both the year and the quarter.
One notable figure from the report: TME’s income from paid music subscriptions surpassed 2 billion US dollars in 2024, marking a nearly 26% annual increase.
This revenue growth was fueled by an increase in paid subscribers (up 13.4% year to 121 million in the fourth quarter of 2024) as well as improvements in average revenue per paying user (ARPPU).
Part of the ARPPU growth stemmed from the rising popularity of TME’s “Super VIP” tier, which is priced five times higher than the standard subscription and offers listeners extended audio and online karaoke streaming, along with benefits such as priority access to digital albums and ticket bookings for live events.
TME did not provide updates on the number of Super VIP subscribers in its latest report, but in the previous quarter, it noted that 8% of paid subscribers held a Super VIP level, which could translate to 10 million subscribers at that time.
Insights from TME’s Earnings Call
TME Executive Chairman Kussan Pang hinted at enhanced benefits for Super VIP subscribers. “We plan to expand our VIP offerings, exclusive meetings, limited releases, merchandise, personalized experiences, and more, while also empowering artists and sound recordings to explore new ways of connecting with their target audience,” Pang remarked during the earnings call.
Overall, TME’s revenue rose by 2.3% in 2024 to 28.40 billion yuan (3.95 billion dollars), as the rapid increase in streaming music revenue helped offset the continued decline in the company’s social entertainment segment.
The company announced its third share buyback of 1 billion dollars over the next 24 months along with dividends of 273 million dollars for 2024.
Here are three more insights we gathered from TME’s most recent earnings call.
1) The Era of Price Competition in Streaming Services Has Ended in China
It’s well-known within the music industry that after several years of low subscription prices to compete for users, streaming platforms have started to increase prices to enhance their profitability—a strategy that has indeed worked for Spotify, which recently announced its first full year of operating profitability.
In the Chinese market, revenue per user significantly lags behind that of developed markets where Spotify has achieved a substantial foothold. While Spotify’s ARPU (average revenue per user) for premium subscribers was $5.18 in the fourth quarter, TME’s ARPPU during the same period was Rmb 11.1 or $1.53.
This discrepancy is understandable given China’s relatively lower income levels, but it does not eliminate the potential for price increases. Some analysts have suggested that there is room for raises in this arena.
“We will not sacrifice our interests by resorting to aggressive low pricing … for short-term growth.”
Ross Liang, Tencent Music Entertainment
General Manager Liang seems to be on board with this. During the earnings call, he said that subscriber boards are “quite sensitive to price,” but TME’s strategy is that “we will not sacrifice our interests by unveiling aggressive low prices … for short-term growth.”
Currently, TME’s base subscription costs Rmb 8 ($1.10) per month, while premium subscriptions range between Rmb 15 and 18 Yuan ($2.08–$2.49), and the Super VIP tier costs Rmb 40 ($5.53).
“We hope to continue improving our service through price increases,” Liang commented. “By doing this, we can enhance user retention while improving ARPPU for sustainable growth.”
Liang further expressed expectations that the Super VIP tier will continue to grow its subscriber base “regardless of pricing.”
2) The Expansion of Original Content Has Helped TME Improve Its Gross Profit
For years, TME has focused not only on securing licensing agreements with major music labels but also on developing its own music and other content.
To achieve this, TME has effectively utilized AI technology. By the end of 2022, the company reported creating 1,000 tracks using AI that mimicked human vocals, with one track achieving over 100 million streams.
It also launched the Tencent Musician program back in 2017, enabling over 390,000 independent artists to upload 2.3 million tracks as of 2022.
Such initiatives help clarify why TME’s music platforms—QQ Music, Kugu, Kuvo, and Wesing—now boast a massive library of 216 million “licensed and joint” tracks, while global streaming leader Spotify has “only” 100 million+ tracks.
(Let’s see how TME’s partnership with Deepseek can elevate that number beyond 216 million …)
“The scaling of our own content has further enhanced our gross profit.”
Shirley Hu, Tencent Music Entertainment
But how is TME building this vast catalog? The company’s Chief Financial Officer Shirley Hu offered insights during the earnings call.
“The scaling of our own content has further enhanced our gross profit,” Hu told analysts. “This remains a key metric in our cost management of royalties.”
Considering that music streaming services generally pay around two-thirds of their revenue to rights holders, TME’s ability to sidestep licensing fees on some of its streaming music can prove crucial.
In the fourth quarter of 2024, TME’s gross margin improved to 43.6% compared to 38.3% in the same period a year prior, “primarily driven by strong growth in revenue from music subscriptions, including SVIP membership … and income from advertising services alongside the growth of our own content,” the company stated in its earnings report.
3) Live Events Are a Growing Component of the Music Experience
One of the most striking aspects of TME’s recent earnings call was Executive Chairman Pang’s emphasis on live music and its growing significance in the streaming music landscape.
Pang indicated that streaming consumers are increasingly inclined to seek experiences beyond just listening to music.
Listeners “are increasingly in search of a live atmosphere and enjoyment from live concerts and music festivals,” Pang stated.
“Additionally, we are seeing fans wanting to show support (for their idols) through the purchase of official merchandise while attending live shows … Attending live performances allows fans to gain a richer and deeper understanding of artists, which strengthens their bonds with them.”
“For artists, this also incentivizes song listening on our platform.”
“As more live shows are held, users’ expectations for the quality of these shows have also risen.”
Kussan Pang, Tencent Music Entertainment
Live music has seen steady growth in China over the past few years, with Pang noting, “The willingness of users to invest in such events has surged, with tickets for major artist concerts and music festivals selling out within seconds.”
TME has potentially done more to integrate live music with streaming than other large services, having established TME Live in 2020, invested in virtual concerts, and collaborated with music companies for regional concert tours.
Pang sees intensified competition in live music. “As more shows are produced, user expectations regarding the quality of these events have also increased,” he remarked during the earnings call. “Therefore, the industry has entered a phase where only the strongest will survive and the weaker will fall behind.”
