Is It a Good Time to Invest in China Music Market?

Is It a Good Time to Invest in China Music Market?

by Tracey Xiang – May 8, 2014

Mason Xu witnessed the rapid growth in China movie market in the past several years. After leaving Bona Film Group, a local movie distributor, as CFO in 2012, he co-founded a PE fund as CEO to make investments in movie industry. Now he argues, at a recent event, it’s time to make investments in China’s music industry which will take off like how movie industry did several years ago.

He’s not alone. More than a few insiders in China’s music industry have started talking about the possibility that the market will grow like how the movie market has been since major Chinese online video sites began buying video rights, instead of offering pirated content, and the number of cinema screens increased rapidly in China. They believe China’s music market is just at this turning point as a majority of digital songs on Chinese online music services or search engines like Baidu are legitimate and more and more offline music events are emerging.

Five years after 2007 the movie market in China would grow fivefold and was near four times the size of the combination of China’s PC-based and mobile music markets in 2012.

China Digital Music Markets and Movie Market by Revenue (Source: The Ministry of Culture of PRC)

From 2011 to 2013, digital music was the third most popular PC-based online service, after instant messaging and web search, and the fourth on mobile Internet where mobile news took the third place. It has been more popular than video streaming in China.

And digital music has so wider an audience in China than movies. The growth in China’s movie market was largely driven by the increased cinema screens which haven’t reached low-income consumers in rural areas. But those users are buying their first smartphones and may have consumed digital music through feature phones.

The problem has always been how to monetize digital music.

With the first two most popular two Chinese Internet giants came into existence — Tencent with instant messaging and Baidu with search. But none has grown to be big with digital music.

There were actually ambitious ones, such as Xiami and A8. Xiami wanted to build a peer-to-peer platform for digital song transactions, helping musicians or distributors (every user on its platform) make revenues through downloads — it offers music streaming for free. But it turned out that the paid downloads could barely cover the costs for music rights. Xiami was acquired by Alibaba Group in 2013.

A8 was one of many building iTunes-like stores after Apple launched the service. None iTunes clones succeeded. A8 managed to make money through other sources like mobile ringtones and got listed in Hong Kong in 2008. In 2013 the company’s total revenues decreased 45% year-over-year, turning to net loss, because of the decline in traditional mobile value-added services like ringtone. The company tapped into mobile gaming in 2013 for the sake of revenue.

Mr. Xu concludes that one major reason, as Mr. Xu points out, that the music market is way less prosperous than the movie market is music creators are not fairly paid. 37%-39% of the total revenues earned from a movie goes to movie makers in China while song writers can only get 2% — they could receive 8% – 12% in 1990′s when physical music albums sold well.

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The digital music market had already seen a significant growth in the past couple of years — 2012 saw a 379% growth rate, according to Xu, partly thanks to some creative business models.

Online music show, which generates revenues through virtual gifts bought by audiences to performers, now is a well-recognized business model in China. According to statistics released by Chinese ministry of culture, about half of the total revenues generated on China’s PC-based online music market in 2013 was from this business model.

Mr Xu points out that in 2013 the average revenue per paying user on YY Music, one of the largest such sites in China, is over 20% higher than that in China’s movie industry. Mr. Xu thinks, to increase the total revenues from online music shows, the approaches are 1) create more paid offerings and 2) grow paying user base.

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Xu thinks currently venture capital will and should chase distribution channels instead of content production companies, which is similar to investment cases that happened in movie industry. But content is always important in order to grow the value of distributors. Xu thinks the future competition must be in music rights which can be bought or through controlling content producers.