Industry

Online Music and Audio Entertainment in China

Tencent Music Entertainment Group (TME) sits at the top of a Chinese online music market that — at its current scale of 547 million monthly users [1] and 125 million paying subscribers [1] — is the second-largest pool of music-streaming payers in the world after Spotify [2]. Yet the industry is structurally different from the global market: it is closed to foreign apps by the Negative List [3], entered the paid era only after a 2015 copyright crackdown by the National Copyright Administration [4], and bundles music streaming with social entertainment (live streaming, karaoke virtual gifts) and a fast-growing live-events / merchandise IP layer [5]. Understanding TME is therefore inseparable from understanding the rules and the cycle of this domestic arena.

Sources: Q4 FY25 results press release operating metrics [6]; full-year financials [7]; FY25 20-F multi-year operating metrics [1]; FY25 20-F catalog and SVIP scale [8]. The bottom-right tile relabels the headline FY25 revenue growth (15.8%) as the proxy for music-led growth.

1. What this industry actually is

China's "online music and audio entertainment" industry is best thought of as three businesses welded onto one app-suite, all subject to a heavy Chinese internet-content licensing regime. TME — operating QQ Music, Kugou Music, Kuwo Music and the WeSing karaoke app, plus the JOOX overseas app and the Lazy Audio long-form audio app — is the canonical example of the structure [9]:

• Online music services — on-demand streaming sold by paid subscription (multi-tier: ads / standard / SVIP), plus advertising and emerging "music-IP value-chain" revenue (offline performances, artist merchandise, digital album sales, content licensing). For TME this was 81.2% of FY2025 revenue [5], up from 62.4% in 2023.
• Social entertainment services — live streaming of music performances and online karaoke, monetized primarily through virtual gifts (consumable, time-based and durable virtual items purchased by viewers and shared with performers under a revenue-share). This is not music streaming in the Spotify sense; it is a music-themed creator-economy product, governed by a separate regulatory regime that caps spend per gift and prohibits minors from gifting [10]. At TME this was 18.8% of FY2025 revenue [5].
• Long-form audio — audiobooks, podcasts, talk shows; structurally important because Chinese listeners pay for narrative content in app, and because TME's pending acquisition of Ximalaya (the largest standalone long-form audio platform in China) is the industry's next major consolidation event [11].

Management is explicit that this is "a relatively new and evolving market" [12], and Q1 2026 commentary calls it "increasingly competitive" [13] — that is the lens to read the rest of the tab.

2. A market built by a regulatory shock, not by a hardware cycle

The single most important fact about this industry is that the paid Chinese music market did not exist until 2015. China was a long-tail piracy market until the National Copyright Administration issued the July 8, 2015 Circular regarding Ceasing Transmitting Unauthorized Music Products by Online Music Service Providers, which forced platforms to delete unlicensed content by July 31, 2015 and threatened sanctions against those that continued to transmit it [4]. Two consequences flowed from that single rule and still shape the industry's economics in 2026:

1. Scale became a moat. Only the platforms able to license the catalog at scale could survive — driving the 2016 merger of Tencent's QQ Music with China Music Corporation (Kugou and Kuwo) that created TME in its current form [14]. NetEase Cloud Music is the only other major Chinese-language streaming pure-play that survived the consolidation [15].
2. Subscription monetization is a learned behavior, not a launch product. Building a "pay for music" habit took a decade. China's online-music paying ratio is still climbing — TME's paying ratio went from 17.1% in 2023 to 22.9% in 2025 [1] — and ARPPU remains a fraction of Western levels (see §6).

A second structural fact: foreign streaming services cannot operate domestically. Value-added telecom and internet cultural services sit on the Negative List for foreign direct investment [3], which is why Spotify is absent from mainland China and TME's overseas offering, JOOX, runs in Hong Kong and Southeast Asia rather than at home [9]. Like every major Chinese internet operator, TME accesses these licenses through a VIE (variable interest entity) structure — its Cayman Islands holding company contracts for the economics of the PRC-licensed entities rather than owning them directly [16]. The arena therefore looks like one in which a domestic duopoly (TME and NetEase Cloud Music) competes inside a regulatory wall, against a fragmented set of time-and-attention rivals from outside the music vertical.

3. The two-engine business model — and the rebalancing that has reshaped the industry

The defining strategic event of the last five years is the secular shift from social entertainment (live streaming gift revenue) toward online music (subscription + IP value chain). For TME, that reweighting has been dramatic: social entertainment was the larger segment as recently as 2022 (RMB 15.9B vs RMB 12.5B for music), and is now barely a fifth of revenue [5].

Source: TME segment data file built from Q4 press releases FY2018–FY2025 (reconciled to Q4 FY2025 release income statement) [7] and 20-F segment table [5].

Three forces are driving the rebalance and they are not unique to TME — NetEase Cloud Music shows the same pattern (online music +12.0%, social entertainment –32.0% in FY2025) [17]:

• Regulatory ceiling on live streaming. Successive rules from the Cyberspace Administration of China (CAC) and others have capped per-gift purchase amounts, set monthly spending caps, prohibited minor gifting, required real-name registration with face recognition, mandated tax reporting on streamer earnings, and restricted "operation strategies that encourage viewers to purchase virtual gifts irrationally" [10] [18]. Management attributed the FY2025 7.3% decline in social entertainment specifically to "adjustments made to certain live-streaming interactive functions and more stringent compliance procedures implemented" [19].
• Subscription habit finally taking hold. Paying users grew 24% over 2023–2025 even as overall MAUs declined (more on this in §4).
• A new IP-value-chain layer above subscription. Music subscriptions were 16.0% YoY in FY2025; "music services other than music subscriptions" — offline performances, advertising, artist-related merchandise, digital albums — grew 39.2% [20]. In Q1 2026 that same non-subscription music line grew 28.0% YoY [21], and offline-performance revenues posted "triple-digit year-over-year growth" — TME alone hosted 20 concerts for G-DRAGON's 2025 tour across eight Asia-Pacific cities, drawing over 260,000 attendees [22].

The investment implication: the industry's center of gravity has moved from "minutes engaged in interactive live streaming" to "monetizable music IP" — closer to a Western model, but with a continuing live-events / merchandise tail that Spotify does not have.

4. The core unit economics — more payers, paying more, on a slightly smaller user base

The Chinese music industry's economic story can be read off a single three-row table.

Source: FY2025 20-F multi-year operating metrics table [1].

Three observations:

1. The user base is now mildly contracting. MAUs fell 7% over two years (589M → 547M), and the Q4 2025 figure was down 5.0% YoY [6]. The free music-listening audience is mature in China; growth from here is no longer about acquiring listeners, it is about converting and monetizing the ones already present.
2. The paying-ratio is the durable upside. A 22.9% paying ratio is still well below mature Western markets — Spotify's Premium Subscribers (290M) are 39% of its MAUs (751M) [2]. Each one-point gain on TME's paying ratio at current ARPPU is worth roughly ¥780M of music-subscription revenue per year (derived: 547M MAUs × 1% × ¥11.8 × 12).
3. ARPPU is rising, slowly but consistently. Up 18% over two years, driven by SVIP — a super-premium tier that surpassed 20 million subscribers by year-end 2025 [23], and a newly launched ad-supported subscription plan that fills the other end of the price ladder [20].

A reader-relevant disclosure note: starting Q1 2026, TME stopped reporting MAU/paying users/ARPPU quarterly and now reports them annually only [24]. Quarter-to-quarter visibility on the funnel will therefore shrink — the new operating shop window is revenue and segment growth.

5. Gross margin and the licensing economics

Gross margin is the cleanest read of where this industry's profit pool is forming. TME's gross margin moved from 35.3% in 2023 to 42.3% in 2024 to 44.2% in 2025 [19], and reached 44.9% in Q1 2026 [21]. The driver is mix, not pricing — the shift from social-entertainment revenue-share payouts (a content-creator gift-revenue split) toward higher-margin music subscriptions is mechanically widening the margin.

Sources: FY2025 20-F Results of Operations [19]; Q1 FY2026 Financial Review [21].

The cost structure tells the same story from the other direction. Service costs (royalties to labels, revenue-sharing fees to streamers, content-delivery costs) are declining in absolute terms — from RMB 14.2B in 2023 to RMB 11.3B in 2025 — even as other cost of revenue (offline events, merchandise, ad costs) more than doubled, from RMB 3.8B to RMB 7.0B [19].

Source: FY2025 20-F cost of revenues breakdown [19].

Two things are happening at once. First, the lower revenue from social entertainment mechanically drops the revenue-share payouts to streamers. Second, TME has explicitly negotiated a "lower revenue sharing ratio for social entertainment services" [20] — the platform retains more of the unit economic on each gift. The offset is that other costs (organizing concerts, producing merchandise, paying for ad placements) are scaling, dampening but not erasing the margin expansion.

The licensing economics underneath are a function of who the labels are. TME licenses on non-exclusive terms with tenors of one to three years from domestic and international labels, with payments structured as a fixed licensing fee plus revenue-sharing royalties [8]. In 2025 it renewed contracts with Sony Music Entertainment, Warner Music Group, Bin-music, Starship and YG Entertainment (K-pop), JVR (Jay Chou) and others [8] [25], and supplements label content with the Music Copyright Society of China (MCSC), which handles musical compositions and lyrics not covered by direct deals — for an advance fee plus revenue percentage [8]. The catalog now exceeds 300 million music and audio tracks [8].

The investment implication: gross margin will keep grinding higher while the segment-mix tailwind is intact, but the structural ceiling is closer than the trajectory suggests — once social entertainment normalizes around the high-teens of revenue, further margin gains will need to come from pricing power on music subscriptions and operating-leverage on the new live-events / merchandise layer.

6. China vs the global model — the same product, very different economics

The most useful cross-check on this industry comes from holding TME against Spotify side-by-side. The headline disconnect: similar paying-user scale (290M Spotify Premium vs 127M TME paying), but radically different ARPU.

Sources: TME FY2025 20-F operating-metrics table [1] and Q4 FY25 income statement [7]; Spotify FY2025 user metrics [2] and Premium ARPU [26]; NetEase Cloud Music FY2025 financials [17]. USD conversions of RMB and EUR figures use period-end FX rates disclosed in the source filings. TME revenue uses the company-published US\$4,705M translation of RMB 32.90B at 6.9931.

What the table shows:

• ARPPU is roughly 3× lower in China. TME's RMB 11.8 monthly ARPPU is about US$1.70 at current FX; Spotify's quarterly Premium ARPU was €4.70 in Q4 2025 (≈US$5.00) [26]. This is the structural willingness-to-pay gap a China analyst must internalize: Chinese consumers pay in single dollars per month for music, not five.
• TME's gross margin is higher than Spotify's — 44.2% vs Spotify's 32% consolidated [27]. Three reasons: (i) social entertainment is mostly a digital-virtual-goods business which is much higher margin than music streaming once revenue-share is netted; (ii) TME licenses on non-exclusive terms with no equivalent of Spotify's "most favored nations" royalty floor regime [8] and (iii) Spotify's mechanical-rights costs are set by the U.S. Copyright Royalty Board (currently Phonorecords IV, in force through 2027) [28], a regulatory floor Chinese streamers do not face.
• NetEase Cloud Music's gross margin (35.7%) is the right base case for a pure-music streamer in China [17] — the ~9-point gap to TME is the social-entertainment / scale advantage.

Note that the chart pulls only TME, NCM and Spotify; the run also indexes peers (Bilibili, Kuaishou, Hello Group, YY) under competitors/, but those are not music streamers and should not be benchmarked as direct comps for music-industry margin. Bilibili and Kuaishou are short-form video / live streaming platforms; YY and MOMO are social/dating live-stream apps. They do compete with TME for user time-and-attention, however — which is exactly how the FY25 20-F characterizes the competitive set (see §7).

7. The competitive arena — a domestic streaming duopoly under attention-economy pressure

TME describes the competitive landscape with unusual clarity in the 20-F: it competes "with other online music and audio entertainment providers in China for users' time and attention" and "from various online content offerings, including long- and short-form videos, karaoke services, live streaming, radio services, literature, and games provided by other online service providers" [29]. Read this as a layered map:

Sources: FY25 20-F Competition discussion [29]; Negative List rules [3]; Q1 2026 CEO remarks [13]; Spotify competitor list (which itself names JOOX as a competitor abroad) [30].

Two observations matter most:

• The "music streaming" battle is a TME–NetEase Cloud Music duopoly. NCM's FY2025 online music revenue of RMB 6.0B [17] versus TME's RMB 26.7B [20] gives TME roughly 4.5× the music-segment scale, and TME's catalog (300M tracks) is multiples of NCM's — NCM emphasizes a different content strategy built around 1,000,000 independent artists contributing 5.6M tracks plus K-pop/OST partnerships and an aggressively young-skewing community [31]. NCM is profitable (gross margin 35.7%, operating margin 20.9% in FY25) [17], which means TME does not have the option of pricing-out the second player.
• The bigger threat is time-and-attention competition from short-form video and games. Spotify itself names "JOOX" (TME's overseas app) as one of its rivals, but the Spotify competitive list is mostly other music services [30]. TME, by contrast, must contend with Douyin (TikTok) and Kuaishou as the dominant attention sinks in Chinese mobile internet. Management's response is to lean on the Tencent ecosystem (Weixin / WeChat Video Account integrations) [25] — leveraging its 50%+ shareholder, Tencent Holdings [32] — and to convert "casual background music (BGM) discovery into high-quality music streaming" via funnel partnerships with Weixin [33].

A note on AI: generative AI is both an opportunity (the FY25 results say more than 150,000 artists and 10M users have created or produced music on TME's "one-stop AI music production platform" [23]) and a risk — China has a layered set of rules from the CAC and CAC-joined authorities covering algorithm recommendation, deep synthesis, and generative AI services, all of which the 20-F flags as "evolving" and requiring continuing compliance investment [34] [35]. The 2026 Q1 CEO commentary is on-point: "AI is broadening participation in content creation, [but] it does not replace human creativity and… reinforces the scarcity and intrinsic value of premium IP" [36].

8. The regulatory architecture — a stack of permits and a moving rules layer

China's online music and audio entertainment industry is one of the most heavily licensed verticals in the country's internet sector. Five separate permit families are operationally critical, plus a fast-moving rules layer on top.

Source: FY25 20-F Licenses, Permits and Regulatory Approvals table [37] and Regulations section [38] [10].

On top of the permit stack sits a continuing flow of behavioral rules. The ones an investor should track:

• Live-streaming virtual gifting — caps on per-purchase amounts and monthly spend, prohibition on minor gifting, real-name verification and face-recognition requirements, tax reporting on streamer earnings, prohibition of "operation strategies that encourage viewers to purchase virtual gifts irrationally" [10] [18]. These are the rules behind the declining social-entertainment segment.
• Algorithm and AI — CAC's Algorithm Recommendation Provisions, Deep Synthesis Provisions, and Generative AI Interim Measures impose registration, content-labeling, and security-review requirements [34] [35]. For a platform whose recommendation engine is its product, this is a material live-area.
• Cross-border data and cybersecurity — Cybersecurity Review Measures require CAC review for "network platform operators holding over one million users' personal information" prior to foreign listing, and Regulation on Network Data Security Administration (effective January 1, 2025) widens the data-processing review trigger [39]. TME notes it has not yet been subject to cybersecurity review by the CAC [40].
• HFCAA / overseas-listing oversight — the Holding Foreign Companies Accountable Act regime and PRC CSRC overseas-listing rules. TME's response was the September 2022 dual primary listing in Hong Kong (stock code 1698) — a permanent risk-reduction move that is now a template for U.S.-listed Chinese ADRs [11] [41].

The investor takeaway: the regulatory regime is not a one-time risk; it is an ongoing operating cost and a structural ceiling on segment-mix. A live-streaming-heavy investor exposure in this sector is exposure to a rule-set Beijing is still tightening; an online-music exposure is exposure to copyright rules Beijing has been steadily reinforcing in TME's favor since 2015.

9. Where the industry cycle sits — and what to watch next

Pull this together and the cycle picture is unusual:

• Volume signal cooling, value signal accelerating. MAUs have peaked (declining ~3% YoY in 4Q25 across the broader audience [6]); subscription revenue, ARPPU, and the new IP-value-chain layer are all accelerating into 2026. Q1 2026 was the first quarter on the renamed "music related services" disclosure, where music plus IP-adjacent revenue grew 12.2% YoY and member services grew 6.6% [21].
• Margin tailwind largely played. From 35.3% to 44.2% in two years; the next 200 bps will be harder, as the social-entertainment drag normalizes and the lower-margin offline/merchandise revenue grows fastest.
• An industry consolidation event in flight. The pending acquisition of Ximalaya (the largest standalone long-form audio platform in China) is annexed in full to the FY2025 20-F as an Agreement and Plan of Merger [11]. The deal would consolidate long-form audio under one operator with similar regulatory permits already held — closing the last open content vertical.

Sources: FY25 20-F operating metrics [1] and Results of Operations [19]; Q4 FY25 results [20] [23] [24]; Q1 FY26 results [21]; NetEase Cloud Music FY25 [17]; Spotify FY25 user metrics [2]. Computed ¥780M sensitivity derived from MAUs × ¥11.8 ARPPU × 12.