On August 13th, Tencent Music Entertainment Group (hereinafter referred to as Tencent Music) announced its unaudited financial performance for the second quarter ended June 30, 2024, continuing to show a trend of increasing profits without increasing revenue.
According to the financial report, Tencent Music's total revenue in the second quarter was 7.16 billion yuan, a year-on-year decrease of 1.7%, but the decline in revenue compared to the first quarter (a year-on-year decrease of 3.4%) has narrowed. The net profit for the second quarter was 1.79 billion yuan, a year-on-year increase of 33.1%. Under non International Financial Reporting Standards, the net profit was 1.99 billion yuan, a year-on-year increase of 25.7%.
The decline in revenue is mainly due to a year-on-year decrease of 42.8% in social entertainment services and other revenue, from 3.04 billion yuan in 2023 to 1.74 billion yuan, but with a slight decrease compared to the first quarter. In the first quarter, Tencent Music's social entertainment service revenue experienced a staggering year-on-year decline of 49.7%.
Specifically, although the number of paying users for social entertainment services increased slightly by 5.3% year-on-year to 7.9 million in the second quarter, the average monthly revenue per paying user (ARPPU) decreased significantly by 45.8%, from 135 yuan in the same period last year to 73.2 yuan.
The financial report explains that this decline in revenue is mainly due to the platform's adjustment of certain live interactive features and implementation of stricter compliance procedures starting from the second quarter of 2023, as well as intensified competition from other platforms. Based on the financial reports of recent quarters, this will have a long-term impact on Tencent Music's revenue.
From a longer-term perspective, Tencent Music's revenue structure is currently in the throes of transformation. In 2019, social entertainment services contributed over 70% of Tencent Music's revenue. In the second quarter of last year, the platform's online music services surpassed the revenue contribution of social entertainment services for the first time.
During last year's earnings conference, Tencent Music executives discussed the decline in revenue, stating that "in the long run, it lays the foundation for the healthy development of the platform." However, this year's social entertainment service revenue continues to decline, putting pressure on Tencent Music's overall revenue data.
The growth of online music services has to some extent offset the impact of the decline in social entertainment service revenue on overall revenue. According to the financial report, Tencent Music's online music service revenue in the second quarter increased significantly by 27.7% year-on-year, from 4.25 billion yuan to 5.42 billion yuan.
This growth is closely related to the mining of paid users. The number of online music paying users for Tencent Music increased by 17.7% year-on-year to 117 million in the second quarter. Compared to 113.5 million in the first quarter, it increased by 3.5 million. However, a previous research report released by Goldman Sachs predicted a net increase of approximately 3.7 million paying users this quarter.
The financial report believes that the increase in the number of paying users is mainly due to high-quality content, attractive membership benefits, optimized user operations, and effective promotional activities.
From the overall development trend, Tencent Music is shifting its focus to mining paid users.
But the growth of the online music industry itself has significantly slowed down. According to data from Zhuoshi Consulting, the number of online music users in China will reach 744 million in 2023, with a year-on-year growth rate of only 3.7%.
Under the influence of the overall market, Tencent Music's user growth has also approached its ceiling. According to the financial report, the monthly active users of Tencent Music's online music service reached 571 million in the second quarter, a year-on-year decrease of 3.9%; The monthly active users of social entertainment services on mobile devices decreased by 31.6% year-on-year to 93 million.
In the context of difficulty in achieving large-scale growth of online users, pursuing the growth of paid users and ARPPU has become the focus of Tencent Music's online music service growth. In the first half of 2024, Tencent Music's net increase in online music paying users exceeded 10 million, and the total number of paying users continued to reach historical highs.
In order to promote the growth of paying users, Tencent Music has taken a series of measures.
For example, QQ Music officially announced that starting from July 27th, the number of device logins in member services will be adjusted. Non members can log in on five devices, but for security reasons, they will not be able to view or remove logged in devices. The statistical caliber has been adjusted from "the cumulative number of logged in devices for the same member account within 7 days" to "the cumulative number of logged in devices for the same member account within 24 hours".
While promoting an increase in the number of paying users, Tencent Music is also seeking to improve ARPPU, and the results are significant. In the second quarter, the monthly ARPPU of Tencent Music's online music service paying users was 10.7 yuan, a year-on-year increase of 10.3%.
In 2023, QQ Music underwent two changes to its renewal service. In June, the monthly subscription price for members increased from 13 yuan to 15 yuan, and the seasonal and annual subscription prices also increased by 10-20 yuan. At the end of 2023, for users who previously had discounted prices, the automatic renewal price for the Green Diamond Luxury Edition will increase from 11.4 yuan/month to 15 yuan/month.
However, price increases will ultimately lead to a certain degree of user rebound. This year, Tencent Music has focused on driving ARPPU with higher priced SVIP (Super VIP). According to the financial report, SVIP provides a comprehensive listening experience across various devices and scenarios, including music and long form audio content, as well as additional benefits such as priority access to digital albums and booking offline performance tickets.
The most important factor in ARPPU's growth is the plan to launch SVIP in the future. We hope to not only maintain basic content privileges in the SVIP system, but also provide users with higher value in other privilege modes, "said a senior executive of Tencent Music at the second quarter financial report conference
Against the backdrop of declining revenue, profit growth is closely related to cost control. The gross profit margin of Tencent Music in the second quarter increased from 34.3% in the same period of 2023 to 42.0%. The financial report attributed this to strong growth in music subscription and advertising service revenue, as well as a gradual increase in original content.
It is worth noting that Tencent Music's revenue cost in the second quarter was 4 billion yuan, a year-on-year decrease of 14.8%. This is mainly due to the reduction in revenue sharing expenses caused by the decrease in social entertainment service revenue, but partially offset by the increase in content costs such as royalties, offline performance related costs, and payment channel fees.
The total revenue cost in the second quarter decreased by 8.5% year-on-year to 1.15 billion yuan, and the proportion of operating expenses to total revenue decreased from 17.2% in the same period of 2023 to 16.0%. While sales and marketing expenses remained largely unchanged from the same period last year, general and administrative expenses decreased by 10.2% year-on-year.
Whether it is cost control or mining of paid users, all aspects are optimized based on the original business model to achieve the goal of transforming revenue structure, reducing costs, and increasing efficiency. But from a longer-term perspective of business growth, it is also crucial to seek new growth possibilities.
AI may be a direction for Tencent Music to seek incremental growth in the future. Tencent Music mentioned in its financial report that the platform is using AIGC to improve sound quality and interactive streaming experience. For example, the AI enhanced SQ Lite mode that saves data has been launched, and the virtual DJ function has been introduced in Kugou Music.
However, the landing of AIGC in the entertainment industry is still in the exploratory stage, and most of its applications are currently focused on improving user experience. There is currently no clear answer as to whether it can bring new user growth and commercialization possibilities.
For Tencent Music, the key to revenue growth in the second half of the year will be to expand the user experience worth paying for based on the current music content.