Under Pressure From Rivals, Tencent Music Goes to Japan to Buoy Karaoke Business

HONG KONG — As Tencent Music Entertainment built itself into China’s dominant music-streaming company, with $4.9 billion in revenue in 2021, it was aided by its thriving online karaoke app WeSing. But in March, facing a sudden decline in its karaoke business due to increasing competition from local rivals like 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 in 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 spaces like bars and restaurants, companies in Asia have created a booming online business. One of every two mobile phone users in China (51%) uses a karaoke app, up from 36% in 2017, according to market consultancy iiMedia Research.

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

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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. By 2013, it had over 100 million users. Then in 2014, TME launched WeSing, a free app that lets users enhance their performances with filters and effects, and allows gifting. By the end of 2016, WeSing had over 300 million registered users. It was especially 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 network platform WeChat and its music streaming platforms, says Charlie Chai, an analyst with 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 Cloud Music unveiled Yinjie (Music Street), which targets younger audiences with functions to personalize performances, sing together 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 United States) also released a karaoke mini program, Douchang (“shake and sing”), which allows users to sing along with music influencers through pre-recorded short music videos.

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

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

By 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. As of last year, WeSing had 130 million.

Now, faced with declining karaoke revenue in China, TME is expanding in international markets to carry on its legacy business. In March, it acquired a controlling stake in M&E Mobile, the company founded by Chinese businessman Hu Dianwei that operates 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 firm.

TME CFO Shirley Hu told analysts that her company made the acquisition to stabilize falling 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 well-developed ecosystem of music copyright and users willing to pay for services, says iiMedia founder/CEO Zhang Yi.

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Zhang says the success of a karaoke app relies heavily on the number of songs it can acquire. In Japan, a karaoke service provider needs publishing rights from the Japanese Society for Rights of Authors, Composers and Publishers (JASRAC) and performance rights from music labels that own the original masters. The costs to procure copyrighted content creates a barrier for newcomers, making TME’s Pokekara acquisition an understandable move.

Akira Ito, GM of Japanese publishing company Nichion, says it is still unclear how much revenue karaoke apps can generate by licensing copyrighted content, as publishing income from karaoke apps is distributed as “interactive transmissions” income that includes other digital usage, such as streaming platforms like Apple Music and Spotify.

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

“Karaoke apps can be a complement to the existing karaoke market,” says Ichiro Murakami, vp of business administration at Sony Music Publishing Japan.

But in China, despite growth projections, some analysts say the appeal of online karaoke as a business could wane as younger users allocate more time to short-video platforms like Douyin and Kuaishou. 

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

Additional reporting by Rob Schwartz.