The effects of government intervention on Tencent Music Entertainment, the leading music streaming platform in China, were visible in the first quarter as the company’s revenues dropped 15.1% to RMB 6.64 billion ($1.05 billion) from the prior-year period. Shenzhen-based TME operates QQ Music, Kugou Music, Kuwo Music and WeSing.

In a statement, executive chairman Cussion Pang attributed the decline to “headwinds in an evolving market landscape,” a reference to the difficulties created by increased Chinese regulations and increased competition from Cloud Village, the music streaming platform spun off by Netease in Dec. 2021, and Quishiu Yinyue, a new music service by Douyin, the Chinese version of short-form video platform TikTok.

The quarterly report's bright spot was music subscriptions: Paying customers rose 31.7% to 80.2 million from the prior-year period, primarily due to content, services, promotions and "improvement in paying user loyalty," stated TME. Subscriptions now account for 13.3% of mobile monthly active users, up from 9.9% a year earlier. However, following a trend seen at other music platforms, each TME subscriber paid less in the first quarter, with monthly average revenue per user falling 10.8% to RMB 8.3 ($1.22) in the prior-year period, primarily due to "promotions offered to attract users," according to TME.

But TME suffered another decline in users of its mobile music apps. In the first quarter, music MAUs dropped 1.9% year-over-year to 604 million, after falling from 636 million in the third quarter of 2021 to 615 million in the fourth quarter. The annual decline in music mobile MAUs was primarily churn of casual users and reduced marketing spend.

Advertising revenues fell year over year "due to the impact from industry adjustments on splash ads and the COVID-19 pandemic in some major cities," the company stated. Especially popular in China, a splash ad is an all-encompassing form of advertising that appears on a screen for a few seconds after an app is launched. In November, China's State Administration of Market Regulation proposed new rules for online advertising — namely live streaming platforms that promote goods or services — that ensure ads do not mislead users or interfere with normal internet use. In addition, online platforms must create a system for registering advertisers and reviewing ads' content.

Gross margin fell 24.6% to RMB 1.86 billion ($293 million). As a percent of revenue, gross margin fell to 28.0% from 31.5% in the prior-year period. Pang pointed to TME's "efforts to optimize cost structure and improve operating efficiency." While cost of revenues did decrease 7.7% year-over-year, that was lower than the 12.3% decline in revenue. Net profit was RMB 649 million ($102 million), down 31.5% from the prior-year period.

TME's social entertainment business fell across most metrics from the first quarter of 2021: Revenue dropped 18.1% to RMB 6.6 billion ($635 million) and paying users declined 26.5% to 8.3 million. Social entertainment's ARPU increased 8.1% to RMB 161.8 ($23.84). The company said it is improving the competitiveness of its social entertainment division through audio live streaming, virtual interactive product offerings and international expansion. Live streaming in particular got more difficult last week, however, after Chinese regulators banned minors under 16 from buying and sending virtual gifts — a common way to tip content creators on live streaming platforms. 

In China, a music platform can no longer differentiate itself through exclusive licensing agreements that give a deep-pocketed music company an advantage over its competitors. So, TME and other platforms emphasize original content and tools for independent musicians to expand their audiences. Over the last 12 months, TME distributed over RMB 200 million ($29.5 million) on the Tencent Musician Platform, a suite of self-service tools for independent artists that attracted over 100,000 creators in the quarter.

"In an era of increasing entertainment choices, the ability to sustain a competitive advantage is awarded to those who offer users a differentiated experience," said Pang. "We are encouraged by the increasing benefits our original content production investments and Tencent Musician Platform have brought to our users, musicians and the overall content ecosystem. With these initiatives, we continue to make critical investments that align with our long-term strategic goals and create sustainable value for all our music stakeholders."

TME's share price rose more than 1% to $4.20 in after-hours trading following the earnings release. TME shares rebounded from a low of $2.95 on March 14 but have remained depressed following numerous Chinese regulator interventions in 2021. In addition, investors view TME and other Chinese stocks with uncertainty due to the Holding Foreign Companies Accountable Act, a 2020 U.S. law that de-lists foreign corporations listed on U.S. exchanges that do not submit to financial auditing by the Public Company Accounting Oversight Board. TME trades on the New York Stock Exchange.

Financial metrics

• Revenue: RMB 6.64 billion ($1.05 billion), -15.1% y/y
• Gross profit: RMB 1.86 billion ($293 million), -24.6% y/y
• Gross margin percentage: 28.0%, down from 31.5% y/y
• Net profit: RMB 649 million ($102 million), -33.7% y/y

User metrics

• Online music MAUs: 604 million, -1.8% y/y
• Social entertainment MAUs: 162 million, -27.7% y/y
• Online music subscribers: 80.2 million, +31.7% y/y
• Social entertainment subscribers: 8.3 million, -26.5% y/y
• Online music monthly ARPU: RMB 8.3 ($1.22), -10.8% y/y
• Social entertainment monthly ARPU: RMB 161.8 ($23.84), +8.1% y/y