China-headquartered DeepSeek caused something of a panic among AI investors when it unveiled its AI chatbot in January, proving that sophisticated AI can be developed for far less money (and with far fewer AI chips) than had been previously thought.
The Chinese chatbot’s arrival sparked fears among some AI developers – including OpenAI – that DeepSeek had stolen elements of their large language models. (Some noted the irony of OpenAI – which is facing multiple lawsuits over its alleged use copyrighted materials to train its LLMs – now becoming worried about unauthorized use of its own IP.)
Whatever the facts, DeepSeek is now firmly part of the tech landscape — as evidenced by Tencent Music Entertainment (TME)’s announcement on Tuesday (March 18) that it has integrated DeepSeek into its music streaming service.
China’s largest operator of music streaming services has made DeepSeek a part of its music creation tools, CEO Ross Liang explained on the company’s latest earnings call.
DeepSeek is now part of TME’s AI-powered songwriting tool, with which “users can quickly create songs tailored to specific contexts or modes,” Liang said.
But DeepSeek’s participation doesn’t end there.
TME has also integrated it into its AI assistant, comment sections, recommendations pages and other “user touch points,” Liang explained. All of this enables users to enjoy “a more personalized music experience.”
TME’s move has echoes of Amazon’s recent announcement that the next generation of its voice assistant Alexa will be integrated with AI music generation platform Suno.
In an ongoing lawsuit brought by the music majors (Sony Music Entertainment, Universal Music Group, and Warner Music Group), Suno has all but admitted to using copyrighted songs without permission to train its AI.
Just as Amazon — owner of the Amazon Music streaming service — doesn’t appear to have an issue partnering with a potential copyright violator, so too does TME appear comfortable allying itself with an AI developer suspected of using copyrighted content without authorization.
And just as Amazon Music licenses music from copyright holders, so too does TME, which has previously signed licensing agreements with the likes of Sony Music, Universal Music Group, Warner Music Group, and K-pop giant HYBE, among others.
TME’s revelation about DeepSeek came as the company reported Q4 and full-year 2024 earnings, showing major improvements for both the year and the quarter.
One standout number in the report: TME’s revenue from paid music subscriptions surpassed USD $2 billion in 2024, rising nearly 26% year-on-year.
The growth in revenue came from both an increase in paying subscribers (up 13.4% YoY to 121 million in Q4 2024) as well as improvements in average revenue per paying user (ARPPU).
Some of that ARPPU growth came from the increasing popularity of TME’s “Super VIP” tier, which costs five times as much as a standard subscription and offers listeners long-form audio and online karaoke on top of music streaming, and comes with perks such as priority access to digital albums and ticket booking for live events.
TME didn’t update its Super VIP subscriber numbers in the latest report, but in the prior quarter report it said that 8% of paying subscribers had the Super VIP tier, which would have amounted to around 10 million subscribers at that time.
TME Executive Chairman Cussion Pang hinted at more and better perks for Super VIP subscribers going forward.
“We will roll out more VIP access, meet-and-greet opportunities, limited editions, merchandise, personalized experiences and more while empowering artists and record labels to explore new ways to interact with [the] targeted audience,” Pang said on the earnings call.
Overall, TME’s revenue rose 2.3% in 2024 RMB 28.40 billion ($3.95 billion) as the rapid growth of music streaming revenues was partly offset by continued declines in the company’s social entertainment segment.
The company announced its third share buyback – $1 billion in shares to be purchased over the next 24 months – and a dividend of $273 million for 2024.
Here are three other things we learned on TME’s latest earnings call.
1) The era of streaming services competing on price is over, even in China
It’s no secret in the music industry that, after years of keeping subscription prices low to compete for listeners, music streaming platforms have started raising prices to improve their bottom line – a tactic that has certainly worked for Spotify, which last year reported its first full year of operating profitability.
In the Chinese market, revenue per user is considerably lower than in the developed-world markets where Spotify has gained its strongest foothold. While Spotify ARPU (average revenue per user) for Premium subscribers came in at $5.18 in Q4, TME’s ARPPU in the same quarter was RMB 11.1, or $1.53.
That’s understandable given China’s relatively low incomes, but it doesn’t mean there isn’t room for price hikes, as certain analysts have suggested.
“We will not sacrifice our interest by rolling out aggressive low prices… for short-term growth.”
Ross Liang, Tencent Music Entertainment
CEO Liang seems to agree. On the earnings call Tuesday, Liang noted that paying subscribers are “quite price sensitive,” but TME’s strategy is that “we will not sacrifice our interest by rolling out aggressive low prices… for short-term growth.”
Currently, TME’s basic subscription costs RMB 8 ($1.10) per month, while premium memberships run between RMB 15 and RMB 18 ($2.08–$2.49) and Super VIP costs RMB 40 ($5.53).
“We hope that we can continue to improve our service by improving the price,” Liang said. “And by so doing, we will be able to consolidate this user base by improving the ARPPU for sustainable growth.”
Liang added that he expects the Super VIP tier to continue growing its subscriber base “no matter the price.”
2) Scaling up its own content has helped TME improve its gross margins
For years now, TME has focused not only on signing licensing agreements with major music rightsholders, but on creating its own music and other content.
To that end, TME has made prolific use of AI tech. In late 2022, the company revealed it had created some 1,000 tracks with AI-generated, human-mimicking vocals, and one of them had clocked more than 100 million streams.
It also launched a Tencent Musician Program back in 2017, through which some 390,000 independent artists had uploaded 2.3 million tracks as of 2022.
These types of initiatives help explain why TME’s music platforms — QQ Music, Kugou, Kuwo, and WeSing — now boast a huge library of 216 million “licensed and co-created” tracks, while global music streaming leader Spotify boasts “only” 100 million+ tracks.
(We will see how TME’s new DeepSeek affiliation may grow that 216 million number yet further…)
“The scaling of our own content further improved our gross margin,” Hu told analysts on the call. “This continues to be a key metric in managing our content royalty costs.”
Shirley Hu, Tencent Music Entertainment
But to what end is TME building this giant catalog? TME’s Chief Financial Officer Shirley Hu offered some insight into that on the earnings call.
“The scaling of our own content further improved our gross margin,” Hu told analysts on the call. “This continues to be a key metric in managing our content royalty costs.”
Given that music streaming services hand over something in the range of two-thirds of their revenue to rightsholders, TME’s ability to avoid licensing fees on some of its streamed music can certainly make a difference.
In Q4 2024, TME’s gross margin improved to 43.6%, compared to 38.3% in the same period a year earlier, “primarily due to strong growth in revenues from music subscriptions, including subscriptions to SVIP membership, and… revenues from advertising services, and the ramp-up of our own content,” TME said in its earnings report.
3) Live events are a growing part of the music experience
Among the more notable aspects of TME’s latest earnings call was Executive Chairman Pang’s focus on live music, and the growing role it has in the streaming music environment.
Pang asserted that streaming consumers are increasingly less likely to be satisfied with only the streaming experience.
Listeners “increasingly seek the live atmosphere and enjoyment that comes from experiencing live concerts and music festivals,” Pang said.
“In addition, we are also seeing that fans… want to show support to [their idols] through purchasing official merchandise. By attending… live shows, fans gain a more diverse and in-depth understanding of the artists, which in turn strengthens their [relationship with artists].
“For the artists, [it] encourages more song listening on our platform as well. So it’s going to create a positive cycle for music content consumption, which benefits all parties.”
“As more and more [live] shows are being held, users’ expectations for the quality of these shows have also increased.”
Cussion Pang, Tencent Music Entertainment
Live music has seen robust growth in China over the past few years, Pang said, “and the willingness of users to spend on such events has surged dramatically, with tickets for many top-tier artists’ concerts and music festivals selling out in seconds.”
TME has arguably done more to integrate live music with streaming than other major streaming services. It established TME Live in 2020, invested in virtual concerts, and partnered with music companies on regional concert tours.
Pang sees intensifying competition in the live music space.
“As more and more shows are being held, users’ expectations for the quality of these shows have also increased,” he said on the earnings call. “So the industry has now entered a phase where only the strongest survive, and the weaker are left behind.”Music Business Worldwide
