BAT Has All but Consolidated China's Music Industry. How Much Room Is Left for NetEase Cloud Music?

NetEase's biggest advantage is a good user base and a product made with care. But how to keep moving forward against expensive licensing and fierce competition — judging from our interview, the company hasn't figured that out yet.

Given where it started — the Music Product Center, a second-tier department under NetEase's Hangzhou Research Institute — NetEase Cloud Music has done well to reach its present position in three years.

NetEase set up the Hangzhou Research Institute in 2006, originally as a shared technology department supporting the company's other businesses: games, email, the portal. Later the institute also took on the job of incubating products. Kaola, NetEase's Tumblr-style blogging platform Lofter, and NetEase Open Course all came out of it — and so did NetEase Cloud Music.

NetEase's attitude toward these incubated products has been described as neither supporting nor opposing them, and setting no performance targets. That gave the product teams plenty of freedom, but it also meant they could expect only limited support from NetEase.

NetEase Cloud Music was a slightly special case, because founder William Ding treats music as a personal passion and keeps tabs on the product himself. Even so, Ding never planned to pour serious money into it at the outset.

In 2013, Ding told Southern Metropolis Daily: "NetEase is now a company with 8 billion yuan in annual revenue. Spending tens of millions on a small product like this is nothing." A year later, Wang Lei, then senior director of NetEase Cloud Music, confirmed the same "tens of millions" figure in an interview. Since 80% of that went to licensing, the money actually spent on NetEase Cloud Music itself was not much.

That is now changing. In early 2016, reports said that in the three years since Cloud Music launched, NetEase had put in 1 billion yuan in cash, and that other spending could push the total past 2 billion yuan. NetEase has a call to make: put more money into music and fight the giants, or keep it in a corner as a "small but beautiful" product?

NetEase Cloud Music itself rejects the "small but beautiful" label. This July it held a press conference claiming 200 million registered users. But in an interview with QDaily, NetEase Cloud Music CEO Zhu Yiwen would not disclose how many of those users are active, and said the company wants to push both its user numbers and its engagement higher.

Getting there means facing formidable rivals: BAT appears to have already finished consolidating China's music industry.

First, in March, Alibaba Music pulled TTPod together with other resources inside Alibaba to launch Ali Planet, a product built around two things — fan economy and trading within the music business.

In July, Tencent merged with Ocean Music, which owned the online music apps Kugou and Kuwo. That put the three most-used music products in China under a single group.

In October, Baidu Music, spun out of Baidu, completed its merger with Taihe Music Group, formally becoming a full-chain music company spanning record labels, licensing agencies, live performances and ticketing.

In this fight, the most important and most basic thing is still music licensing. China's rights war began around 2012 and 2013. Within a few years, licensing prices shot up from tens of thousands of yuan to millions.

Tencent has won the licensing war of the past two years. Of the world's three major record labels, both Warner and Sony handed Tencent exclusive licensing rights. Alibaba and Tencent split what remained of Universal Music, but Alibaba also holds exclusive rights for labels such as Rock Records and HIM International.

NetEase Cloud Music signed a sublicensing deal with Tencent that gave it rights to roughly 1.5 million songs. According to a report by EntGroup, NetEase Cloud Music's library now holds about 5 million songs — far below QQ Music's 15 million. And under a sublicense, NetEase Cloud Music is at Tencent's mercy: if Tencent ended the partnership, songs would come down and users would leave in large numbers.

Beyond licensing, on the other front of this competition — building out the music industry chain — NetEase Cloud Music also looks behind.

Taihe Music, now merged with Baidu Music, is a genuine full-chain company, a complete loop from producing music upstream to distributing and selling it downstream.

Alibaba Music and Tencent Music have built out more on the user side. The former pushes fan economy, feeding users celebrity news and selling fan merchandise; the latter has Kugou's livestreaming platform Fanxing, and can stream concerts through Tencent Video's Live Music. Both squeeze more revenue out of each user.

Building a licensing library or a position along the industry chain takes more money. One change: since July, NetEase Cloud Music has been promoted from the Music Product Center under the Hangzhou Research Institute to a first-tier department, the Music Business Unit. That puts it on a level with games, email and media, and means it can expect more support from its parent.

NetEase Cloud Music has also started raising money on its own. Zhu Yiwen was reluctant to say much about it, but reports have put the target at 1 billion yuan, to be spent on licensing, marketing and other links in the music chain.

The spending has already begun. A week ago, NetEase Cloud Music held a press conference in Beijing announcing 200 million yuan to support independent musicians. It has also tied up with Sound of My Dream (《天籁之战》), a variety show now airing on Dragon TV, hoping to "let more people know the NetEase Cloud Music brand."

Measured against the whole market fight, none of this is nearly enough.

The rules of the music business have changed completely. For a musician, there are two effective ways to break out: become an idol like Lu Han or Li Yuchun, or get yourself or your song onto a variety show — the way I Am a Singer made G.E.M. a star, or Super Boy lifted "Miss Dong" (《董小姐》) and the man behind it, Song Dongye. For musicians, what a music app can do has weakened.

For listeners, what matters most is still whether they can hear the songs they want on a given app, and whether the app is pleasant to use. Luckily, the second is NetEase Cloud Music's greatest strength.

Since its launch in 2013, NetEase Cloud Music has grown fast on the strength of the product itself: a black-and-red interface modeled on vinyl records; music organized by playlist rather than the traditional album-and-single format; a carefully tended comments section under every song, where the comments read like stand-up one-liners and offer entertainment apart from the music…

For the long run, the story NetEase Cloud Music is telling is still social music — or in Zhu Yiwen's words, "a music platform with very strong social DNA."

On NetEase Cloud Music, social activity comes down to four kinds of behavior: making playlists, writing comments under songs, translating lyrics, and a Moments-style feed for posting updates. These lower the bar for users to make something, but none of them touch the songs themselves — and songs are the most essential, most basic thing about a music app. To keep expanding quickly, this more entertainment-minded kind of socializing does not look like enough on its own.

Socializing also brings NetEase Cloud Music no revenue by itself, and Chinese users' habit of paying for content is far from mature. Turning a profit still looks some way off.

These are the problems in front of Zhu Yiwen, a professional manager. NetEase Cloud Music has largely settled on a distinct position; the growth and the profit that come next are Zhu's to deliver.

Q: QDaily

Z: Zhu Yiwen, CEO of NetEase Cloud Music

How will NetEase Cloud Music win new users?

Q: From Cloud Music's side, what has the Sound of My Dream partnership brought you?

Z: First, the brand — getting more people to know the name NetEase Cloud Music. We think it matters that a good product be known by more people. This is one of the things we're exploring.

Q: Everyone thinks of NetEase Cloud Music as "small but beautiful," while Sound of My Dream is a more mass-market entertainment product. Is there any clash of tone between them?

Z: Cloud Music isn't small anymore. Beautiful, yes, but not small. It's become fairly mainstream. Our coverage is already fairly high. So we feel we need to get more people to know the product. Our whole model of spreading it has been word of mouth — friends telling friends this product is good, go use it. That kind of spread is very sticky, but slow. The point of this experiment is to see whether more people can learn about the product quickly.

Q: How do you define "big and beautiful"?

Z: Engagement.

Q: On users — is the 200 million you announced registered users or active users?

Z: Registered users. We've never made active users public.

Q: What are your targets for user growth?

Z: We haven't deliberately set a KPI or a number for how much users should grow. But internally we have expectations — who our rivals are, when we want to pass them. The specifics are hard to say; some of it we only discuss behind closed doors, which rivals we expect to overtake.

Q: Beyond partnering with variety shows, what else are you trying for growth?

Z: Before, it was mostly word of mouth, letting users spread the product themselves. That's still the main thing — organic spread accounts for more than 90% of our brand's reach. Trying variety-show partnerships is another experiment.

The Sound of My Dream deal I just mentioned is also about brand. Then there are things like ad partnerships, paid placements, and promotion in second- and third-tier cities — we've already covered the first and second tier. The second and third tier may need some marketing tactics, some visual stimulation.

Q: So is it fair to say deliberate, large-scale marketing is something you only started recently?

Z: Yes, and it isn't that large-scale. One of our directions for the second half of the year is a stronger brand. In this partnership we're stressing the brand more, not pushing downloads or adding acquisition channels. Making the brand bigger and stronger is what matters most. Getting people to know the product is the most important thing.

Q: A lot of people say the internet's easy growth is over and there are fewer and fewer users left to win. Is that a big challenge for you?

Z: I think it's fine. Everyone listens to music, after all. From the day we launched we were in a red ocean, never a blue one — we've always been fighting other players for users. So whether the mobile internet boom is still on or already over makes no difference to us. We've always been competing. Anyone who comes to us has used another music product before, and they came because they thought this one was better. Our most important goal is to make the product better and get more people to like it.

Q: So what does a new user cost you now, roughly?

Z: That's also hard to say. Sorry.

How will NetEase Cloud Music make money?

Q: Is there pressure to turn a profit?

Z: Yes. Not this year, of course.

Q: So you're still burning cash?

Z: Every music product is. Revenue from users still isn't enough to cover what licensing costs.

Q: Is there a target for profit in the next few years?

Z: Yes, though the timing is hard to pin down. Every product carries that expectation — QQ Music, for instance, plans to go public in two years. We also think a big jump in paid subscriptions could come around then. Everyone is pushing this together.

The trend is getting clearer — paying for content, paying for video, all of it. Young people are more and more willing to pay for something good. The trend is already here. I think in two years it'll be quite mature, because by then there may be no pirated content left at all. This may be the only place to listen to music. Records or ordinary CDs won't really exist anymore. It'll just be internet music.

Q: Paid video has clearly taken off these past two years. Why hasn't music?

Z: I think Baidu hurt music more deeply. Back when Baidu enabled piracy, the damage was severe. Users still don't have much sense of paying for music. It's already quite good in first- and second-tier cities, but plenty of users elsewhere probably still don't think that way.

Q: Inside NetEase Cloud Music, are there ways to steer users toward paying?

Z: Mainly memberships and digital albums — those are the big ones. I think it happens naturally, without much need to cultivate it. It's more about guiding people through features — a song can't be downloaded and you have to pay to hear it, so you pay. And this is happening across the whole industry at the same time. Every music product does it this way. So everyone is pushing it together.

Q: In the US, streaming subscriptions replaced the digital-album model. Why do the two coexist in China?

Z: Because China has so many fans chasing stars. Very few songs and artists actually work as digital albums — really only the top artists. So only those get made into digital albums; not every new album becomes one. There aren't many of them.

Q: Besides memberships and digital albums, how else does NetEase Cloud Music make money?

Z: There are data packages, but that's small. And we do tipping, that's another one.

Q: How much of your revenue comes from advertising?

Z: Not much.

Q: Of all these, which matters most?

Z: Memberships. Still memberships. It comes from the content and goes back into the content — a very direct way to make money. I think it'll be the biggest piece in future too.

Q: It seems music platforms still haven't found a good way to make money.

Z: I think that's temporary. Eventually music itself will certainly become a profitable business.

Q: So what's your annual revenue now, roughly?

Z: Can't say — that counts as a trade secret.

Q: There's talk in the market that you're raising money independently.

Z: Can't say much about that for now either.

What are NetEase Cloud Music's plans for the music industry chain?

Q: Will there be big moves at the industry-chain level?

Z: Everyone is still exploring at that level. We are too. So far there hasn't been much real progress. Still exploring — everyone is. Everyone is just starting. The timing is just starting too.

Q: That doesn't sound like a very optimistic forecast.

Z: It's only a question of timing. There's actually a lot you can do exploring the chain, upstream and down. Alibaba has been fairly thorough about it — they went at the upstream first, though nobody really knows how it's going. They've been at it for several years, with things like Ali Planet, and it hasn't made much impact inside the industry. We're doing it too, but our way may be a bit different. We lean more toward helping our musicians grow.

Q: Can you say more about the musician side?

Z: We're holding a press conference on this before long. There'll be a detailed breakdown then; it isn't convenient to say more now.

Q: Plenty of music apps are working on independent musicians. What's your edge?

Z: Our edge is going with the momentum we have. Our momentum is already strong — we already have the biggest influence, and the biggest presence in live shows. So we ride that to push these musicians further. Other platforms don't really have the users. A site like Douban has very few users left now. It used to. Not anymore, so this is hard work for them. For Douban to make an artist popular is starting from zero, which is very hard. On our platform it's fast. The way we pushed Haomeimei Band, the way we pushed Chen Li — they got popular quickly. We have our big data, personalized recommendations, all kinds of tools, and our playlists. That helps our users discover music quickly, in a way other platforms can't. It's not as if I'd search for Chen Li on my own and happen to like her — that's very unlikely. I heard her by chance while listening to a playlist and liked her a lot. Then gradually I go to her shows, gradually I go and enjoy her music with everyone else, buy her merchandise. It's a very smooth process. So we think this is something you do by going with the momentum.

Q: Beyond musicians, are there other links in the chain?

Z: Other things we're doing now — musician merchandise, for one, and we've done a lot on hardware, smart hardware. Recently we made merchandise for Diu Huoche band that sold extremely well. It surprised even them how well our merchandise could sell. That's another way of helping them. They don't have to put in anything themselves; lending their name is enough to get the business rolling. We've found that a lot of musicians think in fairly traditional ways — I'll make merchandise, but only during the promotion window, only when the album drops, and I'll make 100 pieces. After I sell 80, the other 20 sit in a warehouse. I can't sell them, so I leave them there. That's a very traditional way of promoting yourself. Cloud Music can help them do this kind of thing 365 days a year. I think that's a very good business model.

Q: On smart hardware, you invested in a headphone company called Yinfu. What's the thinking there?

Z: We'll both invest and build our own. Building our own has already started, with a dedicated team, though our team is fairly small. NetEase also has a shared department called the Smart Hardware Division that helps us with more advanced work, including artificial intelligence.

Q: Does manufacturing in-house make NetEase Cloud Music a heavier business?

Z: Personally I don't think so. We still lean toward the product and the concept. The ODM model behind it is very mature — ODM in Chinese manufacturing is already quite mature. Mostly we do quality inspection, set the specifications, put in our requirements, and then have it made.

Q: Can you say more about the design philosophy?

Z: What we want to do is simple. The music platform is already good, its reputation is good. But the tools people listen with haven't been made particularly well. When I get home and want music, I'm still holding my phone with the speaker on. That's a poor experience — there's no integrated music experience. We want to make that integrated experience close to perfect: not just the sound quality, the whole experience.

Q: So will musicians and smart hardware be the main ways you make money going forward?

Z: Maybe. It's still early. We hope so. We have targets, but it isn't convenient to say.

Q: So you do hope to pull more value out of your users?

Z: Let me put it another way. What we hope for more is to genuinely help users through the experience, to serve them well. And by users we don't just mean the people listening to music — we also mean our musicians. We want to give them a better experience too, to serve them well. That's why we do all-hands customer service: it's also about serving them well. It makes them feel this is a humane community. And then there's a strong sense of ownership: every problem I raise gets solved, so this community is mine, I helped build it. Every experience comes with service.

Q: Last August you did a livestreamed concert.

Z: We've done livestreaming, but we haven't made it a strategic priority. Mostly it was an event we ran ourselves. We did a music battle.

Q: Would you consider more livestreaming like that?

Z: Not necessarily. The technology is there. Exploring it, we found it's already mature. We can pull off a large-scale livestream like that — at the time we had 700,000 to 800,000 people watching at once, which is a large event. We won't rule out going that way in the future, but right now it isn't a priority.

In livestreaming right now, only LeEco is really doing it, and Tencent. Tencent Music rarely does, because going all in on livestreaming might sit a little oddly with what people think a music platform is. And even if that gap in perception didn't matter, there's another problem: livestreaming is an occasional thing, a small-volume thing. How many concerts does China have in a year? Not that many, right? Can you livestream a concert every day? No.

Then there's quality. Take live houses — can they do it to a certain standard? A lot of the live house streams I've seen are honestly pretty weak: one camera, maybe two angles, and off they go. The experience is very poor, and that experience hurts a musician's brand. There's another problem too: many musicians don't want their concerts livestreamed, because it hurts ticket sales.

Q: Broadly, what is NetEase Cloud Music's strategy going forward?

Z: Independent musicians are a very important business for us. There will also be a lot of exploring around music and everyday life. Some of it isn't convenient to discuss now, but we may see it come out fairly soon.

Q: How do you position NetEase Cloud Music?

Z: We're a comprehensive music platform — more precisely, a music platform with very strong social DNA, moving into music-social territory. Really, we should say we're a music community. And we have a strong ability to incubate artists, which is an important thing that separates us from rivals. For our users, we're very good at helping them find new music. On that base, there's a lot you can build. It may look scattered to you; to me it's one thing. When I promote an artist like Diu Huoche band, they need offline events, they need merchandise, they need one-on-one interviews online, user meetups, then livestreaming. All of it sits on a single thread. It isn't scattered at all — it's all built around the relationship between the artist and the users.

How much support can NetEase Cloud Music get from NetEase?

Q: What was behind the decision to move NetEase Cloud Music from a second-tier department to a first-tier one?

Z: This was never a big deal. We've never cared about first-tier versus second-tier departments.

That said, we'll certainly put more weight behind it. You can see that from buying into Sound of My Dream recently — we're going to spend more on the brand. NetEase Cloud Music has become a product NetEase is proud of, probably the company's best product — no "probably" about it, really — apart from games, where we have Onmyoji, right? NetEase Cloud Music has become NetEase's best product outside gaming, and it's grown very large. So staying a second-tier department wasn't appropriate. It had always been a second-tier unit under the Hangzhou Research Institute, because the institute's job is to incubate products, and once a product matures it's perfectly normal for it to leave and become a first-tier department. To us this looks natural and logical. We probably think it should have become one a year ago. It's a perfectly ordinary thing — though in news coverage it may look like more.

Q: Does it mean NetEase will give NetEase Cloud Music more resources and investment?

Z: Resources and support have nothing to do with the department tier. NetEase has plenty of small first-tier departments and plenty of large second-tier ones. I don't think you should carve this up along administrative lines. By product importance, NetEase Cloud Music has always been NetEase's most important product outside gaming — it should rank first. Administratively, honestly, nobody cares. Administrative status has no real value.

Q: But can the change still be read as a watershed for NetEase Cloud Music?

Z: You could read it that way. We do expect more of Cloud Music now. NetEase expects more of it.

Q: What does NetEase expect?

Z: I'm just talking off the top of my head… you'd have to ask Ding himself… but the boss certainly wants the product to keep getting better and engagement to keep rising. We're already the most influential player where musicians are concerned. But we want to be bigger — to help more people become more and more popular through the NetEase brand and the NetEase Cloud Music platform. That's what we're trying to do.

How does NetEase Cloud Music see the licensing fight?

Q: Licensing has been a key battleground for music apps. NetEase Cloud Music signed a sublicensing deal with QQ Music. Is that enough for you?

Z: We keep a fairly good relationship with QQ Music on licensing. We don't want to do much in the licensing war. What matters most to us is still getting the rights and serving our users well. I think licensing is a fairly sensitive subject.

Q: Why sensitive?

Z: The licensing war between Alibaba and Tencent has forced every user to install at least two music apps. That's not a good state of affairs. I think it's a step backward for the music industry. Listening to music is supposed to be continuous. If a song disappears and I have to switch apps, or download it locally to keep listening, either way the experience is poor. From a product manager's view, I can only call it a step backward. Because in the future licensing has to be shared. It can't be a monopoly, or a core weapon everyone uses to attack each other. That hurts every user.

Q: With the rights held by Alibaba and Tencent, it looks like NetEase doesn't have much room to move.

Z: We're running a somewhat defensive strategy too. Licensing is rented, not bought outright, so that approach — the licensing arms race — has no long-term meaning. Driving licensing prices up ends up hurting users, because to avoid losing money everyone has to raise membership prices.

Q: What is this defensive strategy?

Z: That's also hard to say. Let's leave it for now. I'll tell you when there's something concrete.

How does NetEase Cloud Music see rivals like Tencent, Alibaba and Baidu?

Q: Competition across the music market is intense right now, especially with Baidu back in it. Does that put pressure on you?

Z: I think everyone competing together is a good thing — there's not much pressure. An oligopoly is the real problem, and it's bad for users. Better for everyone to compete and make the market bigger and better together.

Q: Everyone talks about BAT throwing money at this market.

Z: NetEase has plenty of money too. Personally, I don't think music is a product where whoever spends more automatically wins. It needs a deep understanding of music and real feeling behind it. Ding says the other products don't have music in their DNA, don't really understand it. NetEase has always been a company with feeling, with culture, with a fresh, understated sensibility. We've done a lot on the culture side: Lofter, for instance, and our games, every one of them a quality title; and music; we're quite good at reading too, and before that we did education, we did open courses. All of it has had a very good reputation. Our exploration of culture and entertainment has always carried the company's DNA. Other companies just don't have that culture, don't have a culture of patiently raising a product. That's the genetic difference. So there's a bit of a gap in the taste that goes into making a good product.

Q: So going forward, is the product itself still the key to this competition?

Z: The product is certainly a very important part of it. If the product is bad, it doesn't matter how good everything else is — you've already left the internet-music business. You're doing something else, a different business entirely. But if you're doing internet music, a good product has to be the most important thing.

Q: So is it fair to say positioning yourself up and down the chain doesn't help much in the competition?

Z: It's a long-term thing. It depends which part of the chain. We've done a lot on this front too. We're always doing something different, always innovating. From day one, Cloud Music has led our rivals forward. We've made a lot of innovations others then followed — we did lyric-sharing, we did playlists, right? We did comments and they did too. Whatever we do, they follow. Turning from a player into a music community — we pulled them along in that direction as well. So we've led the whole direction, including now with musicians: other products are doing musicians too, following along. We're more about exploring forward, doing things through innovation. In that respect we're at least the explorer, or the pioneer, in China's music market. They're more the followers. And it's not that we explore and they catch up and pass us — we keep moving. They've never caught up, not on social, not on innovation. What I said about going with the momentum really means we build on the strengths we have to explore new things — things that also happen to fit our users and our sensibility, and that let the product grow further.

Q: Is going with the momentum basically finding needs and then meeting them?

Z: Right. At the root it has to be about meeting user needs, or finding users' deeper needs. That's the root. On that root we create innovations that meet needs users may not have known they had — they may not have known a playlist would be such a good feature, and we built it. They didn't know that reading comments while listening mattered, and we built that too. Now maybe 50% of users have shifted into that mode. That's leading a change in user habits.

For readability, the order of the Q&A has been rearranged.