Why QQ Music, China's Spotify, is profitable while other streaming music providers aren't
While more people move to streaming music over downloading as a consumption method, global providers like Spotify still struggle to turn a profit.
But thanks to its massive scale and diverse revenue opportunities, China's version of Spotify, QQ Music, is actually making money, the company claims.
According to Chinese reports, the general manager of the music division of QQ's owner Tencent, Wu Weilin (Andy Ng), said this week at a music industry forum that the service has managed to turn a profit.
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Tencent is a Shenzhen-headquartered internet giant that is perhaps better known for its dominant WeChat messaging app. Its other big brand name, QQ, is a family of sites that includes a blog, a games platform, and a social network.
QQ's ability to be profitable is no mean feat, where plenty of Western competitors have fallen by the wayside. The biggest player in the market now, Spotify, showed a net loss of over $200 million last year -- despite raking in a massive $2 billion in revenue.
The main outflow of money goes to song royalties to record labels and copyright owners -- more than 70 percent of Spotify's revenue went to that.
Other big names like Pandora report growing revenues too, but the company lost $169 million in 2015.
Apple Music, which doesn't have a free tier, says it has upwards of 15 million subscribers, but is unlikely to be profitable as a division just yet.
While QQ also has to deal with royalty payments, it's had a number of advantages.
Tencent has serious negotiating power at the table with record labels.
For one, as one of China's biggest dotcoms -- WeChat has 762 million [pdf] active users -- the company has far better negotiating power at the table with record labels.
Back in 2014, Tencent already used this to its advantage, striking exclusive Chinese distribution deals with large music producers the likes of Sony, Warner Music and South Korea's YG Entertainment.
Second, the majority of Chinese users are plugged into its ecommerce system, where they already buy tickets and book cabs cashlessly through WeChat.
This allows QQ Music to offer products like concert tickets, providing an additional line of revenue to its freemium model of advertisements and paid subscription.
QQ's enormous subscriber base
QQ's user numbers have also well eclipsed the competition. QQ Music reports 100 million daily active users, and 400 million monthly actives.
Spotify, in comparison, has about 100 million monthly actives, although it has 30 million paying subscribers -- three times QQ's 10 million paying subscribers.
Still, despite QQ's smaller proportion of subscribers, Chinese analyst iResearch estimates that over half of users in China would have paid for something on their music apps this year. That could be a one-off purchase like an album or concert tickets, even if it's not an ongoing subscription.
Last Dec., Singaporean singer JJ Lin released a single on QQ exclusively. Within a week, 610,000 people paid 2 yuan (30 cents) each to download it.
That month, a new single from Faye Wong's daughter, Dou Jintong, sold 25,000 copies for the same price within three days.
The willingness to pay is key. iResearch added that beyond the 57 percent that already pay, a further fifth of users surveyed say they would be open to paying for something down the line, meaning QQ has a receptive audience with potential to spend.
And now, QQ is about to get even bigger. Tencent said two weeks ago it plans to merge QQ Music with two other popular music services, Kugou and Kuwo, run by China Music Corporation.
The spun-off entity will be run by Tencent, and will reach well over 800 million users across the three members.
Victoria Ho is Mashable's Asia Editor, based in Singapore. She previously reported on news and tech at The Business Times, TechCrunch and ZDNet. When she isn't writing, she's making music with her band
