Behind the rapid rise of NetEase Cloud Music in the past eight years is a beautiful past involving Ding Lei's personal taste, product design, etc.; while the commercial realization problem faced by NetEase Cloud Music is another kind of naked reality. Tencent Music's antitrust investigation has caused subtle changes in the competitive landscape of online music.

Editor Li Wei

Photography Shi Xiaobing

On the verge of listing, NetEase Cloud Music has held back.

Recently, NetEase Cloud Music confirmed to "China Entrepreneur" that based on the consideration of the current overall market environment and other comprehensive factors, the company's management decided to postpone the IPO of NetEase Cloud Music. In the future, we will choose a better time to promote IPO related matters as soon as possible. Previously, in May 2021, NetEase Cloud Music launched an attack on the Hong Kong Stock Exchange. On August 1, NetEase Cloud Music passed the hearing of the Hong Kong Stock Exchange.

The rise of NetEase Cloud Music seems to be an alternative story in business.

In 2000, after NetEase went public in the United States, "People's Daily" interviewed founder Ding Lei and asked him what he wanted to do most at that time. Ding Lei said he wanted to open a record company.

After 13 years, in February 2013, NetEase Cloud Music was officially launched. As a new product, NetEase Cloud Music faces competitors who are all popular products that have been around for 5 to 10 years: KuWo Music, QQ Music, etc., and each of them has over 100 million users. But NetEase Cloud Music still stood out from the red sea.

By 2018, the number of NetEase Cloud Music users exceeded 500 million in just five years. In November 2018, NetEase Cloud Music received more than US$600 million in financing from investors including Baidu, General Atlantic, and Boyu Capital.

Looking at the prospectus of NetEase Cloud Music, it seems that you can find the answer to Ding Lei’s postponement of listing: in terms of products, NetEase Cloud Music’s revenue has doubled for two consecutive years, with monthly active users reaching 181 million, and the paying user ratio reaching 8.8 ; But in terms of business, NetEase Cloud Music has been losing money and the amount has been increasing. It lost more than 7 billion yuan in the three years from 2018 to 2020. The loss in the first three months of 2021 has reached 1.7 billion yuan, and it only lost 500 million yuan in the same period last year. .

In addition, the prospectus specifically stated: "We expect to continue to suffer losses in the years ending December 31, 2021, 2022 and 2023."

NetEase Cloud Music 8 years Behind the rapid rise in China is a beautiful past involving Ding Lei’s personal taste, product design, etc.; while the commercial realization difficulties faced by NetEase Cloud Music are another naked reality.

NetEase has many businesses that are closely related to Ding Lei’s personal interests and hobbies, including NetEase Cloud Music and NetEase Selections.

In addition, there is a tradition within NetEase that if Ding Lei attaches great importance to a certain project for a period of time, the project team will "enjoy" the "preferential treatment" of sitting outside Ding Lei's office. NetEase Cloud Music has enjoyed this "treatment".

The rapid development of NetEase Cloud Music has continuously increased its importance within the company. In April 2016, NetEase Cloud Music was upgraded from the second-level "Music Product Center" originally affiliated to NetEase Hangzhou Research Institute to the first-level "NetEase Music Division", and then began to operate its business independently.

Before the launch of NetEase Cloud Music, NetEase conducted serious internal research on Internet music products. In their view, the products on the market are all music library products, which are just tools. Users know the song from other places and come here to search for it.

“Competition among music library products is zero-sum competition. What competes between platforms is the number of music libraries, while NetEase Cloud Music wants to emphasize the efficiency of music discovery.” A NetEase Cloud Music early stage employee employees told China Entrepreneur.

In order to achieve product differentiation and improve the efficiency of music discovery, the first thing NetEase Cloud Music does is to mobilize users who like music and form a huge relationship network among users, allowing users to spontaneously spread. Therefore, the earliest communication point after the launch of NetEase Cloud Music is "music socialization". If we only look at product experience and user reputation, NetEase Cloud Music's social media presence far exceeds that of other music products.

However, such a design that violated users’ past usage habits did not achieve the expected results at first. When users opened NetEase Cloud Music, they were surprised to find that the playlist could not be found. There were only my favorite music and my collection of playlists on the function list. "Bad review, uninstall", there were complaints in the early product review area.

However, NetEase Cloud Music still believes that the design of the playlist is not wrong, but they have lowered the threshold for creating a playlist. Before this, the playlist was more of a toy for niche groups such as music enthusiasts. The revised playlist function can independently complete functions such as cover design, which greatly lowers the user threshold.

In the early days of the launch of NetEase Cloud Music, the official launched a playlist that collected epic music, most of which were majestic and inspiring. It became a gathering place for most college entrance examination party members and postgraduate entrance examination party members. On social networks such as Weibo, After fermentation, this playlist alone helped NetEase Cloud Music acquire nearly 200,000 users. In the comment area of ??the playlist, you can see inspirational comments such as "The postgraduate entrance examination party passed by, 1, I have energy again!"

NetEase Cloud Music has truly connected the playlist with users’ lives, and it has caught up with Weibo when it was most popular. When Kobe Bryant retired in 2016, many "Kobe fans" spontaneously created playlists on NetEase Cloud Music, and started spontaneous discussions in the comment area. Some expressed love, while others expressed regret. The user data even reached the volume of discussion on Weibo.

In addition to the playlist, NetEase Cloud Music’s second trump card is personalized recommendations. After doing a lot of user research, the product design team summarized the characteristics of a Chinese user who listens to music - they may often hear a song, but do not know the name of the song or the name of the singer. These are exactly the same memories that everyone grew up with.

At that time, the comment area of ??NetEase Cloud Music had become active. The technical team set keywords and crawled user data such as "finally found", "memory" and "surprise" in the comment area. From then on, it will trigger Songs that are popular among the public and are similar to the content, style and other characteristics of the songs the user has listened to before are recommended to the user.

Users feel that NetEase Cloud Music is “easy to understand”. Through this very low-cost method, NetEase Cloud Music has formed a reputation among users.

The above-mentioned early employee of NetEase Cloud Music recalled to "Chinese Entrepreneur": "Previous market reports said that only 5% of users would read reviews (of online music products), but it turns out that NetEase Cloud Music 50% of users read comments, but our product features only one comment and one like.”

In 2017, NetEase Cloud Music printed the content in the comment area into promotional materials, covering the entire Hangzhou subway, and later on. Social media flooded the screen and triggered countless discussions. "Good songs often carry countless personal stories. Rather than listening to music, it is better to think of watching other people's moments. These moments bring out the shocking music or the clear sense of picture. Music is life, and it is vividly reflected here. Not just a music player," one user wrote.

If previous Internet music products were started by programmers and were more of a tool for stylized rationality, NetEase Cloud Music has further explored the spiritual attributes and emotional value of music, and gained insights into users’ psychology. , landing products, reaching a consensus with users.

Just when NetEase Cloud Music was at its peak, it suddenly encountered a copyright crisis.

In July 2015, the National Copyright Administration issued the "Notice on Ordering Online Music Service Providers to Stop Unauthorized Dissemination of Music Works", which was called "the most stringent copyright order in history." The notice required all online music service providers to remove all unauthorized music works from the shelves. Immediately, more than 2.2 million unauthorized pieces of music were removed from the shelves within one month.

The original intention of the copyright order is to combat piracy, protect copyright, and standardize the authorization system for online music software. However, it has also objectively led to uneven possession of copyright resources among various online music service providers.

After smelling the crisis, QQ Music, a subsidiary of Tencent, began to seek more security in terms of copyright on the basis of building its original music library resources. In July 2016, QQ Music merged with China Music Group (CMC), which owns two major music platforms: "Kuwo Music" and "Kugou Music", and the new Tencent Music Entertainment Group (TME) was born.

At that time, Kugou Music’s market share was 28, QQ Music’s market share was 15, and Kuwo’s market share was 13. The three together accounted for 56 market shares. Coupled with Tencent's karaoke app "National Karaoke", Tencent's influence in the Chinese music market has exceeded half of the country.

After the establishment of Tencent Music Entertainment Group, Peng Jiaxin became the first CEO. During his tenure, he continued his previous copyright thinking and won the music library of Universal Music, the world's largest record company. In the copyright war Gaining a decisive advantage finally promoted Tencent Music Entertainment Group to be listed on the New York Stock Exchange in the United States on December 12, 2018.

Before the IPO, Tencent Music Entertainment Group learned from the overseas Spotify business model and allowed record companies to hold shares. The three major record companies Universal Music, Warner Music and Sony Music all held its shares; after the IPO, Tencent Music Entertainment Group acquired 10 shares of Universal Music in December 2019 and part of Warner Music in June 2020. Since then, it has formed an inseparable and integrated strategic pattern.

In terms of music copyright, Tencent’s music platforms (QQ, Kuwo, Kugou) have 30 million copyrighted songs. Copyright partners include Jewel, Warner Records, Emperor Entertainment, China Records, and Sony Music etc. Copyright cooperation artists include Jay Chou, Leslie Cheung, Eason Chan, Taylor Swift, Lady Gaga and other top celebrities.

NetEase Cloud Music has 10 million copyrighted song resources, and its copyright partners are Tianyu Media, Huayan International, Fenghua Records, etc. Its artists include SHE, Stefanie Sun, Lin Youjia, and Mao Buyi.

Xiami Music Platform also joined Alibaba in 2016 and grabbed 20 million copyrighted song resources. Its partners include Rolling Stone Records and Media Asia, and its artists include Rene Liu, Mayday, etc. However, on February 5, 2021, Xiami Music was officially shut down. The "2020 China Online Music Industry Report" shows that Xiami Music's monthly active data is only 10 million, less than one-tenth of QQ Music's. In September 2019, Alibaba became the lead investor in NetEase Cloud Music’s US$700 million financing.

Contrary to the story of Tencent Music's successful listing through capital mergers, on April 1, 2018, NetEase Cloud Music lost Jay Chou's songs because Tencent no longer resold some copyrights to NetEase Cloud Music. The copyright authorization of the song "Rainbow" caused hundreds of thousands of users to complain and howl in the comment area of ??the song "Rainbow".

Exclusive copyright is something that Ding Lei hates very much. He has denounced it in financial reports many times. In May 2019, during NetEase's first quarter financial report conference call, Ding Lei mentioned that some companies monopolize and hoard copyrights at high prices, which is not conducive to the healthy development of Chinese music.

During NetEase’s first quarter financial report conference call this year, Ding Lei once again mentioned exclusive copyright. He said that in the past few years, the exclusive sales model adopted by the world’s three major record companies in China has made China’s music operators, including NetEase , Huawei, Xiaomi and other companies that need to purchase music copyrights have paid two to three times more than the reasonable price.

On July 24, 2021, the "State Administration for Market Regulation ordered Tencent to lift the exclusive copyright of online music and other penalties" published on the website of the State Administration for Market Regulation, stating that the State Administration for Market Regulation has imposed penalties on Tencent for its acquisition of China Music in 2016. The group is under investigation.

In 2016, the relevant market shares of Tencent and China Music Group were about 30% and 40% respectively. Tencent gained a higher market share by merging with its main competitors in the market. After the concentration, the exclusive music library resources occupied by the entity exceeded 80%.

According to Article 48 of the Anti-Monopoly Law and Article 57 of the Interim Provisions on the Review of Concentration of Operators, the State Administration for Market Regulation made an administrative penalty decision in accordance with the law and ordered Tencent and its affiliated companies to take 30 Measures to restore market competition include lifting exclusive music copyrights within days, stopping high advance payments and other copyright fee payment methods, and not requiring upstream copyright owners to give them better conditions than competitors without justifiable reasons. TME's stock price fell from US$36 to US$10 that day, and its market value shrank by 60%.

In fact, as early as September 2017, the National Copyright Administration interviewed the heads of Tencent Music, Alibaba Music, NetEase Cloud Music and Baidu Taihe Music, and gave a practical solution - —Actively promote sub-licensing. In the end, Tencent Music and NetEase Cloud Music mutually authorized music copyrights to reach more than 99%, but even a copyright difference of 1 still allowed Tencent Music to maintain an advantage.

An Internet music practitioner told "Chinese Entrepreneur", "After this supervision, Tencent Music may still not easily release Jay Chou's copyright."

However, Copyright is only one of the factors hindering the development of NetEase Cloud Music. The bigger problem is that NetEase Cloud Music has not yet explored a better business model.

Throughout 2020, Tencent Music’s annual net profit was 4.16 billion yuan, while NetEase Cloud Music’s annual net loss was 3 billion yuan. The key to Tencent Music investing heavily in exclusive copyrights but still achieving profitability before going public is that Tencent Music's main source of revenue is social entertainment businesses such as national karaoke and live broadcasts, not online music services.

In fact, as early as 2018, Ding Lei also realized this. NetEase Cloud Music successively launched products such as LOOK live broadcast and electronic music label Fangsta.

However, comparing the prospectuses of Tencent Music and NetEase Cloud Music, you will find that the revenue sources of both parties are almost the same, which are divided into online music services and social entertainment services. The former includes membership fees, music sublicensing fees, advertising revenue, etc., while the latter is mainly revenue from live streaming rewards.

The two companies have very different proportions of revenue in different companies. Tencent Music's total revenue in 2020 was 29.15 billion yuan, of which revenue from online music services was 9.35 billion yuan, accounting for 32%; revenue from social entertainment services and other businesses was 19.80 billion yuan, accounting for 68%. NetEase Cloud Music's revenue in 2020 was 4.9 billion yuan, of which online music service revenue was 2.6 billion yuan, accounting for 53%; social entertainment services and other revenue was 2.3 billion yuan, accounting for 47%.

In addition, the difference in user payment rates between NetEase Cloud Music and Tencent Music is not large. Tencent Music had 56 million paying users in the fourth quarter of 2020, with a payment rate of 9; NetEase Cloud Music had 15.96 million monthly paying users of online music services in 2020, with a payment rate of 8.8. However, due to the gap in user base, NetEase Cloud Music has nearly 16 million fewer paying users than Tencent Music.

In NetEase Cloud Music's prospectus, it stated that its losses were mainly due to business expansion, which led to an increase in marketing expenses and R&D expenses. At the same time, the prospectus also stated that the company's profitability is still uncertain. Due to the company's continued investment in content, research and development, marketing activities, etc., it is expected to continue to lose money in the next three years.

Ding Lei also seems to be aware of the seriousness of the problem. Starting from the end of 2020, he began to personally take charge of NetEase Cloud Music. Zhu Yiwen, the former CEO of NetEase Cloud Music, was rumored to be demoted. However, Ding Lei has not yet seen any big moves in cloud music.

In April 2021, Tencent Music Group began organizational changes. This was the first management team adjustment after Tencent Music was listed on the New York Stock Exchange. Liang Zhu, the former general manager of QQ Music, became CEO of Tencent Music.

Liang Zhu worked for Huawei in his early years and joined Tencent in 2003. He is the first executive in Tencent’s history to hold a doctorate title. He had many interactions with Tencent’s entertainment business before. He served as the general manager of QQ Music from 2014 to 2016. During this period, he won the copyright war and launched the National Karaoke APP. The product also entered Tencent's "Famous Product Hall" in 2017 and is still one of Tencent Music's important sources of income. one. Before returning to Tencent Music, Liang Zhu was the vice president of PCG's platform and content business group and the head of QQ, and during his tenure he led the development direction of QQ's youth.

Behind the coaching change between the two parties, it is still a fierce battle for NetEase Cloud Music to seek commercial profits. More importantly, Wang Shimu, the former head of NetEase Cloud Music products, once led NetEase Cloud Music’s review of subway advertising Senior executives such as Li Yin, the vice president of marketing who broke the social network, have resigned.

Tencent Music’s exclusive copyright can no longer continue. Ding Lei should work harder to think about how NetEase Cloud Music can make money.