Records Are Dead and Streaming Still Doesn't Pay: Xiami Music Looks for a New Way Out | Founders Speak

"Xiami has always wanted to help musicians. Five years ago I did it mostly by promoting their work; today I do it by building a platform. The goal hasn't changed: I really want musicians to be able to make a good living."

After nearly 20 years of working with the internet and with music, Wang Hao has found it has become a business that is harder and harder to make money in.

In 1998, while still at university, he built a music forum called Shengyin Wang ("Sound Net") so that people like him, who played in bands and made music, could talk to one another. It had no revenue and no business model, and a few years later the site quietly faded away.

In 2006 he founded Xiami Music, trying to build a new paid model linking users, musicians and record labels. After gathering more than 10 million users and holding on for seven years, he sold the company to Alibaba.

He had left Alibaba to found Xiami Music; then Alibaba bought Xiami Music. Ten years on, Wang Hao is back where he started, clocking in every day like any ordinary company employee, with endless meetings and a stream of orders and instructions. Getting used to it, he says, has not been easy.

Over those ten years, China's whole music industry has changed enormously. The record business is dead, and online music services like Xiami Music have become one of the main ways people consume music.

That hasn't earned Xiami Music enough money. On the contrary, Wang Hao told QDaily, Xiami Music nearly died in 2010 and 2011. That was a big reason he sold it to Alibaba: to keep the company alive. "I'm not like some people who say, 'If only we hadn't sold back then.' That kind of talk is meaningless. If we hadn't sold, we would have died that year, and there'd be nothing to complain about," Wang Hao said.

After the Alibaba acquisition, Xiami Music was soon drawn into a copyright war, just as Wang Hao had expected. Tencent signed exclusive rights with Warner Music and Sony Music, while Xiami Music won exclusive rights from labels such as Rock Records and HIM International Music.

With capital pouring in, the result was that copyright prices were bid higher and higher. A few years ago a record label's catalog might have cost just 50,000 yuan; in recent years the price can leap to several million in one go.

Wang Hao doesn't think this is good for the music industry. "The market has become really boring. Five years ago people at least still competed on product. Now it's just dull: it's all copyright. How much do you have, how much do I have, and that's it."

Soaring copyright prices have also become a huge obstacle for Xiami Music. In 2013 its revenue could still just about cover what it spent on copyright, but by 2014 breaking even had become quite hard.

Without Alibaba behind it, Xiami Music might have slid back into the near-collapse of 2010 and 2011.

For Wang Hao, this is a strange loop. Looking back over the road Xiami Music has traveled all these years, it seems to have gone round in a circle and ended up where it began. Xiami doesn't look any better off, and it hasn't made the music industry as a whole any better either.

Where did things go wrong? Is it Xiami itself, or the market? Did Xiami miss some opportunities? Or is Xiami's fate just a small-scale picture of a record industry that gets worse every year?

Wang Hao, founder of Xiami Music

Q: QDaily

W: Wang Hao

Q: Why has it come to the point where everyone is just fighting over copyrights?

W: Because none of us is any good at service. None of us can build a distinctive feature or service into our product; we're all just players. So at that point you have to grab content to attract users. Say you grab The Voice of China. What else can you do? There's only so much good content. So you grab it: you bid 15 million, I bid 20 million.

Q: One consequence of the copyright grab is that the barrier to entering the industry gets very high.

W: Right, you could say that. In 2012 and 2013 the industry was just heating up, but today, if you wanted to start a music service on your own, it's basically impossible. Either you stay away from copyright entirely, or, once you touch copyright, don't even think about playing unless you have several hundred million yuan. The barrier is extremely high.

Q: Copyright now seems to have become a weapon, and the whole situation has turned into everyone suing everyone and paying each other damages.

W: We haven't got to the point of paying each other damages yet. Often people go to court for the PR. Even if you win over a song, the damages are only 400 to 1,000 yuan, even for a Jay Chou song. If we were a company set on doing wrong, I'd just wait for you to sue me and pay you the money. But before that, I might already have piled up lots of users through all kinds of piracy, and might already have raised several funding rounds on the back of that. Everyone does it this way. We're the only ones who don't.

Q: But Xiami didn't do that?

W: Put it this way: Xiami has taken down far too many songs over the past few years. People may feel that a lot of content ought to be on Xiami and isn't, and that's because we really wanted to protect copyright. But the reality is that most people in this industry don't follow the rules. What Xiami can do is follow the rules itself first, even if that means losing users and other consequences, because what we want is to change this industry. If we didn't follow the rules ourselves, we'd be working against the reason we started.

Q: So for the foreseeable future, it's a money-losing business?

W: Yes.

Q: When you cultivate these independent musicians, do you want to make money from their music? Or cash in some other way?

W: Cashing in isn't really what we want to do. We hope these musicians can grow up on this platform, rather than me picking out a few people I like, signing them, putting them under my label and then commercializing them myself.

Q: How do you think your approach differs from the way traditional record labels discover artists?

W: Setting up a record label to do this is already a mistake. It's completely unnecessary. I think about how to make the platform more solid, not just about how to harvest things. As I see it, that money isn't theirs to earn. That's the difference between us and them: we always stay with the platform, because what matters most to a platform is having a group of high-quality users. Users can tell us what music they want to hear, how they want to communicate with musicians, what shows they want to see, or what shows will look like in the future.

Cheng Bi, a musician in Xiami Music's "Searching for Light" program

In September 2010, Li Zhi and Zhou Yunpeng, together with a dozen or so independent folk singers, issued a joint statement calling for a boycott of Xiami.

Two years later it happened again. The musician Zuoxiao Zuzhou wrote on Weibo: "Xiami's fudging is disgusting! I've met lots of fans who tell me they pay Xiami, but I've never received a cent, which shows how many musicians are still being cheated by Xiami. It keeps saying it's all for promotion. Fuck off! Everyone boycott Xiami!"

In Xiami's early days, users uploaded high-quality music to the site; Xiami reviewed it, filled in album and song information, and built up its catalog. Users could stream for free, or pay by monthly subscription or per song to download 320 kbps high-quality files. Users who uploaded music were rewarded with experience points.

Xiami kept records of users' purchases and download revenue. When rights holders came asking for usage fees, it handed over the income and negotiated a revenue split.

Judged purely by outcome, Xiami was indeed paying for copyright. But as Zuoxiao Zuzhou, Li Zhi, Zhou Yunpeng and others charged, it was also a way of infringing first and going legitimate later, since rights holders had not authorized the music when users uploaded it.

Q: Do you think Xiami entered the music business at a good time? Was Xiami too early?

W: Not early. The ones that were early are all dead. Really. There used to be a company in Hangzhou called Jiutian Music. Does anyone remember it now? The first company in China to sell music downloads. Gone.

Q: What were the biggest market changes over these six or seven years? There are two fairly obvious trends: from downloads to online streaming, and from the internet to the mobile internet.

W: Yes, but to me neither of them made any difference. I once looked back and asked whether, if I did it all again, I could do better, or whether Xiami could have grown bigger. I've thought about it. We actually had many such chances. For example, if Xiami had gone after mobile internet users earlier, or had used that "internet thinking": grow the user count first no matter what, then raise money, then clean things up afterward, and never mind how shamelessly I behave along the way. In theory it all works, but I still couldn't do it. I didn't want to become, in the course of building a company, the kind of person I hate most. There are things I still won't touch.

Q: What did you mean by going after the mobile internet earlier?

W: If we're talking about early, we were the first in China to start on mobile. Before Android phones caught on, we tried to offer online music on Nokia phones. Data was very expensive then; the standard plan was 30 MB. Our first iOS version came out in 2009, which should have been the earliest in China. So why didn't we ride the wave? I can't call it a disagreement with our investors. It was that we had a fairly big bug on the investment side, which nearly killed us in 2010 and 2011.

Q: When Xiami Music was still independent, quite a few similar music services appeared. Who did you see as your competitor?

W: Honestly, back then I thought Xiami's biggest competitor in this industry was QQ. I looked down on every other product. We felt only QQ was worthy of being our rival, and that's it. I think they did well.

Q: What do you think they did well?

W: They have a very steady product plan, step by step, with no big swings, making solid progress all the way to now. Their users may not have grown explosively, but they don't mind, because they have QQ behind them, and now WeChat. They never lack ways to move users from one product to another. They really have thought things through, and their structure is very sound.

Q: From Xiami's point of view, what is your competitive edge in the new market?

W: I think it's taste.

Q: Taste sounds rather vague. How do you define it?

W: Put it this way. On the one hand, as I said before, it's about which users get which services. On the other, I also believe mainstream cultural consumption in China is bound to improve, because economically a real middle class will emerge, and these people will expect more from life. You can't expect them, once they have money, to keep buying their clothes at Uniqlo, right? Music is the same; they'll want more there too. What we can do is this: we already have very good taste, so we need to seize the market.

Q: But how would new Xiami users know your taste is good?

W: A new user will try several services and pick the one that suits them. Frankly, young users with good taste are not a large share. When you look at a music service, each has a different character, and you can't change it even if you want to. If you told me to turn Xiami into Kugou, I couldn't do it.

Mew, the Danish alternative rock band Xiami brought to China

Over the past few years, consolidation in the online music market has kept accelerating. News in March this year revealed that Kuwo Music and Kugou Music had in fact merged back in April 2014, forming a new online music group, Ocean Music Group, together with Ocean Music.

In July this year, Alibaba Group announced the creation of Alibaba Music Group, with Gao Xiaosong as chairman and Song Ke as CEO. One of the new group's main tasks is to fully integrate all of Alibaba's music businesses, including Xiami and TTPod.

According to a report from Sootoo Research Institute, Ocean Music will hold about 46% of the online music market and Tencent's QQ Music 17%, while Alibaba Music, counting Xiami Music and TTPod, will hold 10.64%.

Since both Tencent and Alibaba have deep pockets, some describe the market today as a three-way standoff. Xiami Music's own share is 2.47%, a rather pitiful number. (By Xiami Music's own tracking across all platforms, however, its market share is between 5% and 10%.)

Part of the reason is that copyright constraints kept Xiami Music from growing quickly. More important, though, is how Wang Hao positions Xiami Music.

"I have no need to chase being number one in the world, number one in users. There's nothing worth chasing there. That was never what you were supposed to be doing, and only by serving this group of users can you add value and make money on that foundation," Wang Hao said.

Q: From 2005 and 2006 through 2011, was Xiami's growth steady or fast?

W: We were actually always fairly fast. Until about 2012, users and page views grew five-fold every year.

Q: Once users reach a certain number, it's hard to keep growing. That's a real bottleneck for small companies.

W: Right. As I see it now, small companies come in just two kinds. One kind shoots up overnight, then a few months later vanishes and nobody remembers it: the overnight-sensation kind.

The other kind moves slowly. My own style is to do things steadily. I'm not after overnight fame, just growth at a stable rate. Of course, at a certain stage growth stalls. For a while we felt that the audience in China that understood music best was all with us already, and we faced a choice: whether to go after the mass market, because going that way would inevitably change the existing community atmosphere.

If that kind of people came in, it would certainly affect the old users, and the service would have to cater to them too, and then the flavor would be wrong. So looking back now, I think it's fine as it is. I have no need to chase being number one in the world, number one in users. There's nothing worth chasing there. That was never what you were supposed to be doing, and only by serving this group of users can you add value and make money on that foundation.

If I also brought in lots of "diaosi" users, the low-spending mass crowd, well, look at Kuwo: why doesn't it charge? Because it can't. The moment it charges, everyone runs away. So if I know these users will behave like that, why would I want them?

Q: But market share and user numbers must still matter quite a bit, surely?

W: But when you come down to it, chasing something you can never get is meaningless. All the energy spent on it is proven a waste in the end.

Q: So what is Xiami's business model?

W: Put it this way: on charging and on the rules of the copyright game, we can do the best that can be done. Look at Spotify and iTunes and you'll see how that turns out. Every copyright is handled by the book, and with rights holders so powerful, 70% to 80% of revenue goes to them, so what you can earn is very little.

And you'll find that under these rules musicians are left out, because the big labels hold them hostage. Last year, for example, we signed a few extremely expensive copyright deals, and afterward some of the artists ended their contracts with their label and came to us to complain: they sold my copyright for so much, and I never got a cent. Is that fair? No.

So I think the music industry of the future needs new ways of working and new rules. That's what we're going to do, because only when you set the rules, lead the game, or provide the platform will you see new hope. Otherwise even a company as formidable as Spotify still loses money.

Q: What value has Alibaba created for users since it came in?

W: For us that has never changed. It's simply to give people who truly love music a service worthy of them.

Q: Is combining music with e-commerce something you want to push, or something the company requires?

W: We never said music had to do this or that with e-commerce. We're just helping musicians find more ways to cash in and earn money. For instance, we invite musicians to endorse certain Taobao products or sing for them. I think there are opportunities there, so since nobody was doing it before, we'll do it first.

Q: The music industry has changed a lot in the past few years, and seems much livelier?

W: It has changed a lot. Before we entered this industry, many independent musicians couldn't survive and earned very little in a year. In recent years, between rising festival fees and the rise of independent musicians, they've truly entered the mainstream. So the industry is slowly getting better. At least the top independent musicians can now live quite well. To us that's a good evolution.

Q: I think one fairly big change is in live music, both in China and abroad.

W: For China I don't think the change is especially big. Maybe more people go to see live music, because so many festivals may have drawn in lots of people who never went before, but the base is still very small.

It's nothing like abroad, because abroad music comes with a rich range of offline settings, and people don't treat going to a festival or a concert as a big deal. In China, for ordinary people, it's still quite a big event.

I believe many Chinese people have never been to a music festival or a concert in their lives. So, for example, if the share going to festivals used to be one in 10,000 and is now five in 10,000, that's still far too small.

Q: How much do variety shows affect you? It seems you haven't partnered with The Voice this season?

W: The Voice didn't actually bring us much. Whatever variety shows bring is temporary. And the show itself may be slowly cooling off, and its viewers, well, at least they aren't the same kind of people as Xiami's users.

Song Ke and Gao Xiaosong, who joined Alibaba Music

For Xiami, the direct help Alibaba can bring is money. With funding, Xiami Music can buy more copyrights.

Last year Xiami Music paid 30 million yuan for the music rights to the third season of The Voice of China. In early March this year, Xiami Music announced it had won exclusive music rights from several well-known labels, including Rock Records, HIM International Music and B'in Music, covering singers such as Mayday, S.H.E, Yoga Lin, Karen Mok, Chang Chen-yue, Jonathan Lee and Fish Leong.

On March 30, the German music rights company BMG (Bertelsmann Music Group) announced a digital music distribution agreement with Alibaba Group that would bring Alibaba the rights to more than 2.5 million songs.

But these copyrights alone cannot let Xiami Music beat its rivals. For one thing, however deep Alibaba's pockets, it can never get enough rights to monopolize all music.

More important, once Xiami Music has these rights it still has to sublicense them. That is, Xiami cannot sit on these music rights and refuse to share them with other services. In other words, at most these rights let it earn some licensing fees from other music services. Crushing rival services with copyright is impossible.

If even copyrights bought with cash can't do much for Xiami, the other support Alibaba can give Xiami Music is more limited still.

One obvious problem is that Alibaba lacks a product like Tencent's WeChat, which can quickly gather users and steer them to other related services and apps. This makes it very hard for Xiami Music to expand its user base, especially since WeChat barred users from sharing music in Moments from any service other than QQ Music.

In the live-performance market that has only just taken off, Alibaba has little to show either. Xiami Music has not become a show promoter like Modern Sky, has not joined in livestreaming concerts online like Tencent Video or LeTV Music, and has certainly not become a ticket seller like Damai and Gewara.

Q: You still seem fairly optimistic about music?

W: I still want to do this, so I have to be a bit optimistic. Otherwise what else would I do?

Q: And you're doing a lot more now than before, like starting to sell concert tickets.

W: It's not that we're doing more. It's that I want to build a platform, so these are all basic functions I need to have. In the future Xiami will certainly be more than just a place to listen to music.

Q: That's completely different from what you thought five years ago, isn't it?

W: Not really. Deep down, nothing has changed. I've always wanted to help musicians. Five years ago I did it more by promoting their work in the product; later we used a recommendation engine to solve that problem. Today I use a platform to do it. The goal hasn't changed at all: I really want musicians to be able to make a good living.

Q: Many singers now make a point of releasing digital albums, throwing in photo books and so on, and boasting of sales of 800,000 or a million.

W: It's a gimmick. Maybe older-generation artists still care a lot about album sales, like Taylor Swift, whose thinking is really old-fashioned. Can you stop obsessing over how much you make from users? That doesn't matter at all. Once you let go of that, there are many more fun things you can do.

Q: Do you think China has more ways of combining music with the internet, with e-commerce or video sites for instance, than the US?

W: Not really. It's just that we can hear any song we like, because nobody enforces copyright. We're still in a jungle era, not yet at the point where a hundred flowers bloom. While everyone is still arguing about user numbers, it's not fun enough yet; it's still rather lawless.

Q: But overall, the government is bringing order to the music industry, isn't it?

W: Yes, but slowly. Then again, no company should stake its success on some policy the state issues. That's the least reliable thing there is.

Q: Is competition fiercer now than it used to be?

W: Definitely now, because so much money has been poured in that everyone is going all out. Before, we didn't make money, but we didn't lose much either. The intensity, and how seriously people take it, are on a different level now.

Q: But Xiami still wants to be small and beautiful, and take a different path?

W: Yes. Admitting you're small is a pretty good thing too.