(Report producer/author: CSC Securities, Sun Xiaolei, Cui Shifeng, Liu Jingzhao)
First, users are young, highly viscous, and there is a broad space for diversified monetization
Industry trends: The stickiness of young users has increased significantly, and the demand structure has changed. According to Analysys data, from the perspective of user age structure, the stickiness of online music users under the age of 24 has grown rapidly, gradually exceeding the industry average: in January 2022, the average daily usage time of all mobile music users was 21 minutes, a year-on-year decrease of 21%; Users under the age of 24 used 24 minutes per day per person, an increase of 11.7% year-on-year. The number of single-day launches per network user was 4.2, a year-on-year decrease of 21%; Users under the age of 24 used it an average of 4.1 times a day, a year-on-year increase of 12.8%. The stickiness of the use of online music products of young users has increased significantly, and the increase in frequency of use is higher than the increase in usage time, mainly because (1) according to the cloud music user report and iResearch, special categories such as ambient music and long audio have increased TGI in the post-90s and post-00s groups, and young users are good at exploring richer usage scenarios; (2) With the popularization of functions such as audio direct broadcast and K songs, the function of the software has also developed from a single player to entertainment and social around music, reshaping the usage habits of young users.
Cloud music users are highly young, creating an audio community & entertainment consumption platform for young people. Baidu Index shows that the search user set of music software is 20-29 years old, compared with QQ Music, Cloud Music, Kugou and Shrimp Music, among people under the age of 29, cloud music users account for the highest proportion of user searches, accounting for 14% and 56% respectively; The user distribution of QQ Music and Shrimp Music is close to the overall user portrait; Kugou Music has the highest percentage of user searches in the 30-39 age group. Young people's willingness to consume entertainment is stronger: iResearch data shows that the post-90s generation accounts for the highest proportion of cultural and entertainment consumption expenditure, reaching 24.5%; According to Times Data's report, 87% of the surveyed post-00s have paid for entertainment apps, and music and video spending ranks second, second only to games. According to the user data report released by Cloud Music in 2022, young users have more diverse needs for music players, and the categories with the highest playback volume after 90 and 00 are pop, rap, and electronic music; After 00, I prefer ambient sound (playback scenes include self-study, before bedtime, etc.); For young users, Cloud Music regularly launches IP cooperation, music social activities, listening to Easter eggs, etc., to create a music culture community for young people.
Rooted in the PUGC ecological soil, actively innovate and iterate
Cloud Music is the largest incubator of independent musicians, and the amount of musicians cannot be underestimated. As of the third quarter of 2022, Cloud Music has 570,000 independent music residents, leading all platforms; Some 2.3 million music tracks in the library came from independent musicians, an increase of 21% compared to the fourth quarter of 2021. Rich music resources and music-based user-generated content bring differentiated experience to users; Musicians promote, interact and socialize on the platform, and enliven the UGC community atmosphere. The number of songs of independent musicians in the library is relatively low, accounting for only 2% in June 2022, but the playback accounted for nearly half, according to the prospectus, independent musicians accounted for 47% of all music streaming on the platform in June 2021, and the activity of independent musicians promoted the prosperity of the community.
A gathering place for niche hobbies, serving the middle and long tail and subcultural communities. Cloud Music has higher head playback in multiple niche music categories, statistics on QQ Music and cloud music music classification, catalog page turning and packet capture for iOS version of cloud music and QQ Music song list retrieval, statistics of the highest playback of song lists under each category, it is found that QQ Music has higher head playback in Douyin, Chinese, Europe and American, Pop, Classic, Chinese style, light music, electronic music, Japanese, R&B, Urban, and Anime categories; Cloud music has a higher number of plays in rap, folk, Korean, blues, rock, jazz, classical, back rock, metal, and variety shows. Among the screened head playlists, the QQ Music playlist had the highest playback volume of 1.65 billion, and Cloud Music was 870 million; In the 100 million and below playback categories, the average playback of cloud music is 41 million, and QQ music is 36 million.
Taking the rap category with a large advantage of cloud music as an example, compared with the rap hot list, the copyright content of the two platforms overlaps low: the exclusive rate of the top 20 cloud music list (compared to QQ Music) is 50%; The exclusivity rate of QQ Music Top20 (compared to Cloud Music) is 40%. Cloud Music rap head track reviews are more, with an average of 12193 reviews for Top20 and 7497 for QQ Music. For rap lovers and creators, cloud music can get a richer community interactive experience.
Innovative efforts to enhance the user experience, with a significant increase in the number of patent applications in 2022. According to the official 2022 product innovation inventory, Cloud Music continues to make efforts in music playback experience, community interactive experience and music industry services, etc., and the number of patents applied for in 2022 increased by 77% compared with 2021, and invention and design patent applications have achieved substantial growth. In 2022, Cloud Music Music Innovation will launch basic music functions such as cloud random function, focus mode, recall coordinates, music encyclopedia, style daily push, Dolby Atmos, and TV version of atmosphere space; Music close friends, social song lists, star review hall, co-production recommendations and other functions improve the social interaction experience. For example, the upgraded "listening to songs and reading songs" function supports the recognition of lyrics for listening, humming, and speaking, and improves the accuracy of song recognition; The cloud shuffle feature allows users to customize the shuffle mode. Users can comprehensively set random preferences in any playlist according to their familiarity with songs and different needs of song style similarity to meet differentiated random playback requirements; Launched the disconnected search function, which supports users to search for local resources and play them in disconnected/weak network environments; Including recently played, hearts, shared, downloaded songs and user-built/collected song lists, to meet the search and playback needs of users in disconnected/weak network environments such as elevators and underground garages, and improve the search experience.
Second, the industry trend: in the era of non-exclusivity, copyright pricing tends to be reasonable
Music software returns from copyright competition to the product itself
Online music has highly penetrated the entire network of users, and the head MAU follows the fluctuations of the netizen market. According to CNNIC data, the number of online music users reached 730 million in June 2022, down from the peak during the pandemic; Internet usage reached 69%, up from 71% in December 2021; The penetration rate of online music software among all Internet users in mainland China has remained at a high level of about 70%.
The reshaping of the copyright environment promotes competition back to the product itself, and the scale of second-tier users is expected to catch up. At present, TME online music MAU leads in scale, up to 80% of the entire online music users, and the number of users has dropped back after peaking; The number of active users of Cloud Music 2022H1 users was basically the same as the same period last year; TME is known for its copyright content coverage (QQ Music, Kugou, Kuwo and other apps share copyright libraries). In July 2021, the State Administration for Market Regulation ordered Tencent and its affiliates to terminate exclusive copyrights, stop paying copyright fees such as high advance fees, etc., to restore market competition, reshape the order of competition in the domestic online music market, reduce market entry barriers, give competitors more fair access to upstream copyright resources, and cloud music and other previously disadvantaged software are expected to attract new users and consolidate old users through increased cooperation and copyright purchase.
The return of heavy copyright stimulates new downloads, and the growth rate of cloud music leads the way. According to Qimai data, from January 30, 2022 to January 20, 2023, several waves of cloud music download peaks were driven by the release of songs by head singers and the return of important copyrights. For example, the return of Times Peak Jun copyright on June 20, 2022, the return of YG on July 20, and the return of believe in music on January 1, 2023, Weibo topics have high popularity. Cloud Music was slightly lower than QQ Music downloads before June 2022, and the same as QQ Music downloads after June. Under the premise that the input of new users is roughly the same, the software naturally loses users in a certain proportion, and the number of users added to the cloud music net is more.
Copyright pricing tends to be reasonable
Anti-monopoly promotes the rational allocation of resources and promotes the healthy growth of the entire industry. For copyright owners, the average selling price of copyright has decreased after the abolition of the exclusive model, but in the long run, more purchasers will promote the growth of industry scale; For monopolies, after the end of exclusivity, it is necessary to pay more attention to building product capabilities and bringing better experience to users to consolidate advantages; For other platforms, after the end of the monopoly, the copyright price may remain high in the short term, but the originally unfavorable competition situation has been reversed, and the platform will have more bargaining space in the future as the volume rises; For the most upstream musicians, the distribution of works will have more traffic channels and will promote creative prosperity.
From exclusive to exclusive debut, copyright still has fair competition space. According to the anti-monopoly penalty document issued by the State Administration for Market Regulation in July 2021, while banning the exclusive copyright model, platforms are allowed to engage in time-limited exclusive cooperation with copyright owners, and the period of cooperation with independent musicians shall not exceed three years, and the exclusive cooperation period with the first release of new songs shall not exceed 30 days. A new window period model came into being: within 30 days of the release of a new song, the platform can reach a cooperation with the copyright owner for exclusivity. Referring to the overseas copyright operation model and related regulations, this model encourages the exchange of high-quality content and traffic resources, and the window period mode has a high probability of long-term existence, rather than as a transition to a special period. After the launch of the new policy, TME reached an exclusive debut cooperation with Times Fengjun and SM Company, forming a situation of one debut and multiple follow-ups.
Cloud Music: Copyright cooperation is catching up, and the return season is timely
After anti-monopoly, the "Cloud Village Copyright Return Season" series of activities has been carried out for 15 periods, and the copyright shortcomings have been accelerated to make up. Since 2017, Cloud Music has successively reached copyright cooperation with Mi Man Media (which owns the music copyrights of many well-known musicians in the Chinese style circle), Kobalt Music, and Tianyu Media (its top artists Hua Chenyu, Chen Xiang, etc.); In 2021, Cloud Music confirmed the copyright cooperation with the world's top three record companies Universal, Sony, and Warner; In October 2021, 3 months after the exclusive copyright model was banned, Cloud Music launched a series of activities on various platforms called "Cloud Village Copyright Return Season", which has been carried out for 15 seasons so far, and has promoted the return of copyright of many labels such as Believe Music.
Except for Jay Chou (Jewell), Chinese pop songs have basically returned one after another, and the three major record companies of European and American songs are all covered, and there are still many missing Korean copyrights. According to Yuncun Research Institute's "Chinese Music Trend Report (2022)", Kugou Music's "2022 Music White Paper" and "2022 Music Life White Paper", "Tencent Music Chart Annual List (2022)", Tencent Music Data Research Institute's "2021 Chinese Digital Music Annual White Paper" and IFPI's "Global Music Report (2022)", etc., after screening out the top artists in combination with album sales, we found that in terms of Chinese music library, Cloud Music owns the copyright of the previous return of Rolling Stone, the copyright of the three major record companies, the copyright of the return in the return season, and the copyright of some head artists (such as Xue Zhiqian and Zhou Shen) own record companies, so that its music library has basically covered the head Chinese music artists, gradually narrowing the gap with TME. In terms of European and American music libraries, since most of the copyrights of European and American head singers are concentrated under the three major record companies, they can be heard on cloud music. In terms of Japanese and Korean song libraries, Cloud Music already owns the copyrights of Ghibli, Avex, SM, YG and other labels, and basically covers the Japanese and Korean head artists often listened to by domestic users, but the copyright of Korean songs is still partially missing.
Third, the subscription conversion ability is strong, and the social entertainment revenue is growing rapidly
Subscription service: Cloud music paid conversion is better, ARPU has a lot of room for improvement
The payment rate of users in the online music industry will gradually increase, driven by (1) copyright protection has become a consensus, and more users are willing to pay to listen to songs: iMedia data shows that 66.1% of the 1452 users surveyed in 2020 are willing to pay to use music platforms, and 65.8% of users are willing to pay to enjoy high-quality music; According to iResearch, the online music payment rate in mainland China has increased year by year, and accelerated during the epidemic. As of the second quarter of 2022, the subscription payment rates of TME and Cloud Music were 14.5% and 20.7%, respectively. Compared with the European and American markets, Spotify (Spotify accounted for more than 30% of global online music users in 2021, the main markets are North America and Europe) user payment rate has been higher than 40% for a long time. With the establishment of the domestic economic development and copyright protection system, and the gradual integration of domestic and foreign music song libraries, the payment level of domestic and foreign users is expected to be on par with overseas. (2) The platform gradually increases the proportion of paid songs and transitions to overseas mature markets: According to the official announcement of TME, the proportion of paid songs on the platform in the fourth quarter of 2020 was about 20%, and the platform said that it will gradually increase the proportion of paid songs; Hot new songs are free first, and then they become the norm when they join the VIP. On January 30, 2023, there were 175 VIP songs in the QQ Music Hot Song List Top300, and 4 VIP songs in the Top100 of the New Song List; There are 20 VIP songs in the Cloud Music Hot Song List Top200, and there are no VIP songs in the new song list; There are 247 VIP songs in the Cool Dog Hot Songs Top500, and 19 limited-free songs in the New Songs Top100. Spotify songs have no VIP classification, and the free account playback function is limited, and it can only be played randomly; Apple Music and Amazon Music do not have a free model, compared with the proportion of domestic music paid content.
Industry-wide revenue and payment rate increased simultaneously, and cloud music user conversion was slightly better. 2021H1-2022H1 Tencent Music's online music business revenue decreased by 4% year-on-year from 5.7 billion yuan to 5.5 billion yuan, while cloud music music's online music business revenue increased from 1.6 billion yuan to 1.8 billion yuan, a year-on-year increase rate of 11%, which shows that there is still a lot of room for revenue growth and maintains medium-high growth. From 2018 to 2022H1, the online music payment rate of Cloud Music Music increased from 4.0% to 20.7%, surpassing that of Tencent Music. Although the payment rate of Tencent Music and Cloud Music has basically increased simultaneously, the payment rate of Cloud Music has grown rapidly, and the gap with Tencent Music has widened.
88VIP drainage effect is good, and ARPU has room for improvement in the later stage. Cloud Music members joined the Taobao 88VIP rights system in August 2020, and Alibaba Department brought membership increments to Cloud Music as a traffic portal. According to data released by Alibaba's 88 Membership Day in 2020, the number of members reached 10 million in August; The 2022Q2 financial report disclosed that the number of 88VIP members has exceeded 25 million. 88VIP members can get vinyl membership rights without paying in the cloud music app, which has caused a certain degree of dilution of the cloud music subscription ARPU, according to the cloud music financial report, the monthly ARPU in 2019 was 9.3 yuan, and the average monthly ARPU for the whole year after joining 88VIP in August 2020 dropped to 8.4 yuan; The average monthly ARPU in 2022H1 dropped to 6.5 yuan. With the return of copyright, the improvement of the quality of paid content, and the conversion of users into high-sticky users, Cloud Music ARPU has greater room for improvement in the future. After excluding the 88VIP factor, the cloud music payment rate and growth rate are still better than TME. If the dilution of subscription revenue by 88Vip is calculated according to the average monthly ARPU of 9.3 yuan in 2019, the number of in-app paid subscribers in 2021/2022H1 is calculated to be 20.91 million/26.25 million, and the rate payable is 11.5%/14.4%, and the growth rate of paid members in 2022H1 is as high as 38% after excluding the 88VIP factor. The company still has a strong transformation ability in the case of backward copyright resources, largely thanks to the in-depth excavation of the products to the consumption points of the younger generation, personalized membership rights, rich activities and Easter eggs have all boosted user subscription.
Competitive differentiation for live audio streaming
Entertainment and social revenue growth was strong. In the social entertainment business segment, the growth rate of Tencent Music's paid users has gradually slowed down, and although there is still a big gap between the paying users of cloud music in the social entertainment business and Tencent Music, it has maintained rapid growth since its launch. From 2018 to 2021, the number of paid users of cloud music social entertainment increased from 5,800 to 683,000, with a year-on-year growth rate of 109% in 2021. From the perspective of revenue, the social entertainment business of cloud music has grown rapidly, and there is still more room for development. From 2019 to 2021, Tencent Music social entertainment business revenue increased from 18.3 billion yuan to 19.8 billion yuan, with a year-on-year growth rate of 36% to 0%, while cloud music social entertainment business revenue increased from 500 million yuan in 2019 to 3.7 billion yuan in 2021, with a year-on-year growth rate of 65% in 2021. In 2022H1, Tencent Music social entertainment revenue was 8 billion yuan, a year-on-year decrease of 21%; Cloud music social entertainment revenue was 2.5 billion yuan, a year-on-year increase of 57%.
The company widely deploys social entertainment services such as short videos, live broadcasts, K songs, and stranger social networking, and improves monetization channels such as advertising, subscription, commission, and value-added services; Home application and industry chain services have been carried out. As of February 1, 2023, Cloud Music has a total of six independent apps, namely Cloud Music, Miaoshi , Heart Encounter, Sound Street, Sonic, and LOOK Live Broadcast, and has widely deployed audio live broadcast and short video services. Its apps are designed with a simple and smooth UI and easy-to-use features aimed at the social entertainment market for young people. In terms of industry chain services, Cloud Music launched the Cloud Village Exchange in 2022, focusing on music copyright authorization services in commercial scenarios, providing partners with one-stop music solutions from music library formation, online playback, and copyright settlement. In terms of IoT, the company launched the TV version of the application and supporting new functions in 2022, trying to enter the smart home, and has launched Hisense, Dangbei, Tmall Magic Box, Haier and other TV terminals, which are currently in the promotion stage, and users can receive 3 months of free TV membership for the first login.
Competitive differentiation between live audio and live video. According to the company's financial report, the main revenue of cloud music social entertainment service comes from audio live broadcast, that is, the company's LOOK live broadcast service. Compared with ordinary live broadcast, audio live broadcast provides a place for anchors to show their talents through sound, which has fewer restrictions on anchors and scenes and lower costs than ordinary live broadcasts, so as to seize part of the market in the live broadcast industry that intensifies involution. The advantage of Cloud Music LOOK Live is that it has a cloud music traffic pool of nearly 200 million monthly active users and massive song copyright resources. Compared with TME, which also has song copyright resources, Kugou Live is still video-based, and Cloud Music LOOK Live is in the form of pure audio, and the two are differentiated.
Socializing with strangers, compared to TME, is still in the early stages of development. In the past two years, the focus of cloud music social entertainment services has been stranger socialization, and the "listen together" function was launched in 2021; launched the stranger music dating platform "Heart Encounter"; Launch of the Magic App in 2022. In contrast, TME social entertainment revenue mainly comes from traditional live broadcasting, which has developed to a larger scale, with revenue reaching 19.7 billion yuan in 2021, and the number of payers for live streaming and K song services reached 6.4/3.9 million respectively. In 2022H1, the revenue of cloud music social entertainment services was 2.475 billion yuan, and the growth was mainly driven by the number of payers (the number of monthly payers increased by 149% year-on-year to 1.2 million), and the growth potential is huge.
4. Profit forecast
Revenue: In 2022, cloud music revenue will be 8.992 billion, a year-on-year increase of 29%, maintaining a high growth rate. We split the company's total revenue for 2023/2024 into online music services and social entertainment services and two other segments.
In terms of online music services, revenue increased 15% year-over-year to $3,778 million in 2022, mainly due to a significant increase in membership subscription sales. In the membership subscription service section, as Cloud Music continues to increase original content and copyright cooperation coverage, it is expected that the membership payment rate will further increase to 21.2%/21.9% in 2023/2024; MAU size is expected to grow slightly on a steady basis, from 1.89 billion in 2022 to 2.06 billion/2.21 billion in 2023/2024. We predict that the number of monthly users who pay for cloud music membership subscription services will steadily increase to 43.86 million/48.34 million in 2023/2024. The average ARPPU in 2022 decreased by 1.5% year-on-year to 6.6 yuan, mainly due to the fact that Cloud Music has cooperated with other platforms to launch joint member meals since 2020 and sold membership subscription services at discounted prices, ARPPU decreased from 9.3 yuan in 2019 to 6.6 yuan in 2022. We expect that the promotion will remain at the current scale, and with the gradual optimization of the membership pricing strategy, the company's ARPPU will stabilize and recover, and it is expected to be 6.8/7.1 yuan in 2023 and 2024 respectively. Benefiting from the increase in the payment rate of membership subscription services, we expect membership subscription service revenue to increase by 18%/16% year-over-year to 3,578 million/$4,141 million in 2023/2024. In the advertising services segment, due to the regulatory pressure of the Ministry of Industry and Information Technology on screen opening advertising in July 2021 and the overall decline in advertising demand during the epidemic, the growth rate of advertising revenue slowed down in 2021-2022, and it is still expected to show a healthy growth trend in the long term with the adjustment of cloud music to advertising forms; Other businesses (including sub-licensing and digital albums) have gradually shrunk due to the introduction of new regulations such as non-exclusivity and digital album purchase restrictions. Advertising Services and Other revenue is forecast to grow 20%/5% year-over-year to $793/$836 million in 2023/2024. As membership subscription services remain the main growth driver among online music services, we expect the total revenue of cloud music online music services to grow by 16%/14% year-on-year to 4.37 billion/4.98 billion yuan in 2023/2024, accounting for 41%/40% of the total revenue.
In social entertainment services and others, revenue in 2022 increased by 43% year-on-year to RMB5.293 billion, mainly due to a 95% year-on-year increase in the number of monthly payers during the period to 1.332 million, and a year-on-year decrease in monthly ARPPU of 27% to RMB326. Based on the high-quality and active community base, we predict that the number of paying people will maintain a medium-high growth rate in 2023/2024, up 24%/22% year-on-year to 1.652 million/2.015 million. As the Social Entertainment Services Month ARPPU is already at a high level, we predict that its 2023/2024 will decline slightly, -6%/-4% year-on-year to $306/294. We forecast that total revenue from social entertainment services and other services will increase 17%/18% year-over-year to $6,205 million/$7,323 million, accounting for 59%/60% of total revenue.
Based on the above analysis, we expect that the company will achieve operating income of 10.576 billion yuan/12.299 billion yuan in 2023/2024, an increase of 18%/16% year-on-year.
Profit: We expect the company's net profit in 2023/2024 to be -221 million and -73 million yuan, respectively, and the first profit is expected to be realized in 2024.
(This article is for informational purposes only and does not represent any investment advice from us.) For information, please refer to the original report. ）
Selected report source: [Future Think Tank]. 「Link」