Under pressure from competitors, Tencent Music heads to Japan to bend the karaoke business

HONG KONG — As Tencent Music Entertainment built itself into China’s dominant music streaming company with $4.9 billion in revenue by 2021, it was helped by its booming online karaoke app WeSing. But in March, facing a sudden decline in its karaoke business due to increasing competition from local rivals such as Alibaba and NetEase Cloud Music, TME took an unusual step: It set foot in Japan, the country that gave birth to the global singalong sensation of the 1970s, by acquiring a controlling stake in a company that operates Pokekara, Japan’s leading karaoke app.

While karaoke is often associated with hospitality areas such as bars and restaurants, companies in Asia have created a thriving online business. One in two mobile phone users in China (51%) use a karaoke app, up from 36% in 2017, according to market consultancy iiMedia Research.

Mobile karaoke apps – which generate publishing and performance fees for the music industry, as well as virtual gifts (or tips) from users to artists – are gaining traction among tech-savvy and Gen Z Chinese users. The online karaoke business is expected to grow to 17.6 billion yuan (US$2.5 billion) by 2022, tripling from 5.7 billion yuan (US$829.5 million) in 2017, predicts iiMedia. It also estimates that China will have 570 million online karaoke users by 2022, more than double the 280 million in 2017.

Changba, a Beijing-based startup, was among the first in China to provide an online platform for users to upload and share their karaoke performances. In 2013, it had over 100 million users. So in 2014, TME launched WeSing, a free app that lets users enhance their performances with filters and effects and allows giveaways. By the end of 2016, WeSing had over 300 million registered users. It was particularly popular among a younger, wealthier demographic living in major cities, according to BigData Research.

TME built WeSing’s success by integrating it with its social networking platform WeChat and its music streaming platforms, says Charlie Chai, an analyst at 86Research. “WeSing helped Tencent build its music empire,” he says. (As of late 2020, TME, which licenses Billboard China, controlled 77% of the streaming market in China through its music apps QQ, Kuguo and Kuwo.)

But early in the pandemic, TME’s biggest rivals began entering the online karaoke market. In January 2020, e-commerce giant Alibaba launched Changya (Sing Duck), which allows users to create their own style of backing tracks. And that June, NetEase unveiled Cloud Music Yinjie (Music Street), which targets younger audiences with features to personalize performances, sing along with friends across devices, and connect with other users through songs and recordings.

In late 2019, ByteDance’s short video platform Douyin (TikTok in the US) also released a karaoke mini-program, Douchang (“shake and sing”), which allows users to sing along with music influences through pre-recorded short music videos.

The new competitors ate into TME’s “social entertainment service” revenue, which shrank 20.6% to 4 billion yuan ($583 million) in the first quarter of 2022 from the same period in 2021. (This sector, which includes karaoke, makes money mainly from virtual gifts and memberships and accounts for around 60% of TME’s total revenue.)

“Increased competition and [a] changing macro environment” resulted in fewer monthly active users and paying users of TME’s social entertainment services, chief strategy officer Tony Yip said in an earnings call.

As of November 2020, WeSing was still ranked first among Chinese karaoke apps, but with 165.9 million monthly active users. NetEase’s Changba came in second with 41.7 million users, according to iiMedia. Last year, WeSing had DKK 130 million.

Now, facing declining karaoke revenue in China, TME is expanding into international markets to continue its old business. In March, it acquired a controlling stake in M&E Mobile, the company founded by Chinese businessman Hu Dianwei that runs Pokekara, Japan’s leading karaoke app, founded in 2018, and one of the country’s three fastest-growing apps overall, as rated by App Annie, a data analytics company.

TME CFO Shirley Hu told analysts that her company made the acquisition to stabilize declining revenue due to new entrants in the space.

To analysts, the strategy to acquire rather than expand a Chinese app in Japan seems clear. Japan has always been at the forefront of Asia in terms of entertainment and has a more developed music copyright ecosystem and users willing to pay for services, says iiMedia founder/CEO Zhang Yi.

Zhang says a karaoke app’s success depends largely on the number of songs it can acquire. In Japan, a karaoke service provider needs publishing rights from the Japan Society for Rights of Authors, Composers and Publishers (JASRAC) and performance rights from music companies that own the original masters. The cost of obtaining copyrighted content creates a barrier to new entrants, making TME’s Pokekara acquisition an understandable move.

Akira ItoGM of Japanese publisher Nichion, says it remains unclear how much revenue karaoke apps can generate by licensing copyrighted content, as publishing revenue from karaoke apps is distributed as “interactive transmissions” revenue that includes other digital use , such as streaming platforms such as Apple Music and Spotify.

Amid the pandemic, karaoke bars in Japan have been asked to shut down, hurting the country’s personal karaoke business. Offline royalties fell 28% to 2.1 billion yen ($14.8 million) from March 2020 to March 2022, according to JASRAC. (Online royalties also fell 36% to ¥1.1 billion [$8 million]in the same period.)

“Karaoke apps can complement the existing karaoke market,” he says Ichiro Murakamivp of business administration at Sony Music Publishing Japan.

But in China, despite growth forecasts, some analysts say the appeal of online karaoke as a business may be waning as younger users devote more time to short video platforms such as Douyin and Kuaishou.

“Given the company’s revenue model, monetization has its own ceiling as there is a limit to how much a user is willing to spend on virtual gifts,” says 86Research’s Chai. “This issue is more prominent at a time of macro slowdown and regulatory tightening.”

Additional reporting by Rob Schwartz.


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