NetEase, Inc Yun Music formally submitted its prospectus to the Hong Kong Stock Exchange on May 26th. As a target of the outstanding popularity effect of the capital market in the first half of the year, this prospectus has triggered different interpretations from different angles.

As far as we can see, there is a lack of analysis on several core issues of NetEYun music in the industry. Therefore, this paper attempts to analyze three key issues related to its investment logic core.

To grasp the future context of NetEyun music, these three basic propositions must not be bypassed: copyright costs, online music and social entertainment revenue capabilities, and user growth and stickiness. Getting through the logical relationship of these three issues is the key for investors to understand the future commercial space of the platform.

01、Copyright cost: can the high expenditure be alleviated?

The revenue and cost of NetEyun Music have three most prominent characteristics:

1. Revenue growth is indeed fast.

2. It is still losing money, and the range of loss is narrowing.

3. The current cost of copyright is very high.

Revenue:From 2018 to 2020, NetEase, Inc Yun Music's revenue was 1.1 billion yuan, 2.3 billion yuan and 4.9 billion yuan respectively, maintaining triple-digit growth and increasing by 101.9% and 111.2% respectively compared with the same period last year.

Cost:The operating cost is 5.49 billion in 2020. Among them, the cost of content services is 4.7 billion, accounting for 97.8% of revenue.

Judging from the extent of the loss:In the past three years, the gross loss rate has narrowed from 114.7% and 45.6% to 12.2% in 2020.

Purely from the narrowing of the loss, and combined with Tencent Music's comparative experience, the follow-up NetEase, Inc Yun music gross profit margin should not be a big problem. However, the biggest variable lies in the trend and trend of copyright costs.

After all, in terms of cost compositionThe original prospectus shows that the cost of content services, which accounts for 97.8% of revenue, is mainly divided into two parts: (1) content licensing fees paid to music labels, independent musicians and other copyright partners, and (2) revenue sharing fees paid to live performers and brokers.

Among them, the cost of copyright purchase is a big part of it.

So, what are the main factors that affect the cost of copyright purchase? Taking it apart, it can be divided into two parts:

1. The price of the same copyright content goes up and down.

2. The absolute quantity of copyright purchased.

In previous industry analysis, the first point was paid more attention to. However, the analysis and estimation of the second point is relatively small. Let's talk about it one by one.

First of all, the period of the fastest increase in music rights in China is over.

Public information shows that copyright in the music market has increased dozens of times in the past few years. In absolute terms, copyright is expensive at present. However, from the time dimension, the growth trend is difficult to sustain. The most important factor is that the music market was in a competitive state, and the music platform needed to gain an advantage through frantic competition for copyright, just like the taxi subsidy war at that time. And the current market Tencent Music and NetEase, Inc cloud music two strong pattern has been stable, the previous copyright price growth is obviously difficult to be accepted by the platform.

At the same time, the industry is also under antitrust pressure.The media have repeatedly revealed that government departments have interviewed music platforms and record companies. It is obvious that the exclusive sub-licensing model of the music market will encounter great challenges. Under a fairer copyright licensing model in the future, the cost of obtaining copyright for any music platform is likely to fall.

Secondly, in the previous "arms race", the music platform has completed the mainstream copyright deployment in stages, and the music library reserve of each platform has been relatively saturated.

Tencent Music, for his part, has long announced that the number of qu Ku has exceeded 60 million. In the prospectus of NetEase, Inc Yun Music, it also revealed a little reported data: the number of music libraries exceeded 60 million.

In 2021, from the perspective of the global market, both Europe, the United States, Japan and South Korea, the three mainstream records and independent record companies, such as Merlin, have completed copyright cooperation with Chinese mainstream music platforms. Only from the perspective of NetEyun music, there are certain lack of music copyright, such as Jewell, Modern Sky and so on. However, most of its overall copyright costs have been increased in the current financial statements, and there should be no significant increase in this area in the future.

Combining the above two factors, our view is that with the future music copyright market licensing more fair and open, whether Tencent Music or NetEYun Music, the copyright cost has entered a relatively controllable stage. For the two music giants, the high cost of copyright should be alleviated to some extent.

02、Revenue growth: how far is the ceiling of NetEase Cloud?

After looking at the cost, let's look at the revenue. NetEyun Music's revenue mainly consists of two parts: online music service revenue, social entertainment services and other income, accounting for 53.6% and 46.4% respectively in 2020.

I) online music service revenue

The growth space of online music services is mainly determined by the growth of paying users and the increase of payment rates.The issue of user growth will be discussed later, let's take a look at the room for growth in payment rates.

At present, the growth rate of the payment rate of the platform is relatively considerable. In June 2018, NetEase, Inc Yun Music upgraded its membership system and launched vinyl VIP service. Combined with MAU calculation, from this year to 2020, the payment rates for online music on the platform will be 4.0%, 5.9% and 8.8%, respectively, doubling within two years.

If you look at it in the roughest range, the long-term payment rate of NetEase, Inc Yun music should be higher than Tencent Music and lower than Spotify.

The financial results released by Tencent Music show that its online music payment rates in the past three years are 3.8%, 5.2% and 7.7%, respectively, which are slightly lower than those of NetEYun Music.

However, Tencent Music's payment rates are also growing rapidly, with 9 per cent for Q4 in 2020 and 9.9 per cent for Q1 in 2020. Based on this, it is not difficult to speculate that the payment rate of NetEase, Inc Yun Music Q1 this year should be more than 10%.

The reason why NetEyun's music payment rate is higher than Tencent Music may lie not only in the stickiness of the community, but also in its user structure. According to the prospectus, NetEase, Inc Yun has more than 60% of the first-and second-tier cities in the MAU.

Generally speaking, compared with overseas platforms such as Spotify, there is still a big gap in the payment rates of Chinese music platforms. As of December 2020, Spotify had 345 million monthly active users, including 155 million paying users, with an average payment rate of 45 per cent, according to the financial report.

Unlike overseas, the Chinese Internet has been accustomed to the "free mode" for the previous 20 years.In the short term, whether it is TME or NetEase, it will be difficult to get nearly half of its users to pay for subscriptions. However, in the medium to long term, with the continuous influx of post-00s with higher willingness to pay for content, there is still a lot of room to increase the payment rate of online music in China in theory.

II) income from social entertainment services

But it's obviously hard to make money from online music services alone. This is also the key for the industry to question whether music streaming makes money in the end. Take Spotify, the world's largest music platform, which has been unprofitable for most of its launch. There is a net loss of 581 million euros in 2020.

In this regard, the Chinese music market has become the benchmark for the world to take the lead in breaking the situation. TME has become the world's first profitable Internet music company, relying on social entertainment revenues such as live singing.

In the past two years, NetEase, Inc Yun's music social entertainment income has also increased from 541.4 million yuan in 2019 to 2.3 billion yuan in 2020, a year-on-year growth rate of 360%.

It is a well-known fact that NetEase, Inc Yun's social entertainment income mainly comes from live streaming.In October 2018, NetEase, Inc Yun Music launched LOOK Live. It is said that the business has grown rapidly since its launch, especially the revenue data of audio live streaming has entered the first camp of the industry, which is comparable to the live broadcast revenue of specialized audio platforms such as LIZHI INC.

However, NetEase, Inc Yun Music's social entertainment income also has a more important opportunity and challenge.

[1] opportunity point: broader "ear" business

In the live broadcast of NetEYun music, the most likely reason for the sudden rise of audio content is that music platform users have become accustomed to the "ear" economy. Data show that the number of daily active users of NetEase, Inc Cloud averages 76 minutes of listening to music every day.

Perhaps it is because of this that TME has announced its entry into the long audio field in the past year or two. Last year, it launched a new long audio product, "Cool I listen". Just this month, it completed the acquisition of lazy people to listen to books and launched the long audio brand "lazy people listening".

I do not know whether there are special considerations, compared with the high profile of TME, NetEyun on its own layout in the audio market, appears to be relatively low-key. Therefore, what has received less attention is that NetEase, Inc Yun has reached the top three in the domestic podcast market.

According to the PodFest China 2020 Chinese Podcast audience and consumption Survey, the top three channels most commonly used by Chinese podcast listeners are Apple Podcasts (49.7%), Himalayas (37.9%) and NetEYun Music (35.0%). The popularity of users of these platforms is even much higher than professional audio platforms such as LIZHI INC fm/ dragonfly fm.

Of course, NetEase, Inc's consistent style is to make a fortune in silence. Behind the low-key layout of the audio track, there is likely to be a new growth story reserved for the next phase.

[2] Challenge point: how to deal with the erosion of short video platform?

Tencent Music said in the latest quarterly results that the MAU of its online music mobile phone dropped compared with the same period last year, mainly due to the loss of leisure users served by the pan-entertainment platform.

Here is a detail worthy of attention:

In this quarter, Tencent Music's mobile online music MAU fell 6.4% to 615 million from 657 million in the same period last year, while mobile social entertainment users dropped by 14.2% from 261 million in the same period last year to 224 million in this quarter.

In other words: its social entertainment sector is more affected by pan-entertainment platforms.

Just after Tencent Music released his financial results, Kuaishou Technology also released his first financial report after going public on May 24, showing that the DAU and MAU of Kuaishou Technology's apps rose to 295.3 million and 519.8 million respectively in this quarter. And live streaming is becoming the most important new growth point of Douyin Kuaishou Technology.

As we all know, all competition in the stock era is the competition of time. For any music platform and even content platform, the challenges brought by short video platforms such as Douyin and Kuaishou Technology must be faced squarely. What is really worth thinking about is what the platforms rely on to form an endogenous virtuous growth cycle.

For the social entertainment section of NetEase Music, the good news is that the most prominent area of its performance happens to be audio live streaming, which differentiates and competes with short video platforms. But what is more noteworthy is, to what extent will the overall growth of the platform be affected?

This issue will be discussed below.

03、User stickiness: is the moat of the music community wide?

At present, the Internet in China has entered the stock era.

According to the "QuestMobile2020 China Mobile Limited Internet Annual report", the average monthly MAU of the whole network in 2020 was 1.155 billion, a net increase of 13.03 million from 1.145 billion at the beginning of the year to 1.158 billion in December, with an average monthly growth rate of only 1.7 percent.

In the stock era, the user stickiness of the platform will become more important. For the music platform, the key to how to compete with competitors and pan-entertainment platforms such as short videos also lies in the stickiness of the platform itself. Take Tencent Music as an example, even if it is eroded by the short video platform, its core music users are spending more time on the platform.

As far as the small battlefield of music platform is concerned, the differential development route of NetEase, Inc Yun music provides it with a unique barrier. Prospectus data show that its users have a good performance in terms of stickiness: daily active users listen to music for an average of 76 minutes a day. UGC authoring accounts for 25% of users. The playing style of its music community, as it said, not only changed the traditional instrumental form of music products, but also formed its own differentiation advantages.

From the point of view of the pan-entertainment content platform, we are cautiously optimistic about NetEyun music.There are two main factors that determine the long-term competitive barriers of NetEase, Inc Yun Music:

1. Where do users listen to music

2. Where do users communicate

Why discuss where users listen to music? Because, at present, the short video platform is also actively doing this layout: just this year, Kuaishou Technology launched the new music App "Komori record", and byte beat is also testing his new music product "Fei Le".

For NetEyun Music, the challenge here is that the short video platform has indeed demonstrated its strong ability to promote popular songs. It is also noted that NetEYun, TME and Douyin, Kuaishou Technology formed a competing relationship to a certain extent. On the one hand, the music platform cooperates with the short video platform to create a popular divine song; on the other hand, it competes with each other for users on a larger scale.

However, NetEase, Inc Yun music also has relatively irreplaceable value: after all, the annual "Divine Comedy" is always only a few, and for the "majority" of the music market, their works are not so suitable for short video platforms such as Doukui.

In this regard, NetEyun announced that it would support original music as early as when it was launched, and it increased its bets on the original music track when it faced the huge pressure of copyright war a few years ago. Official figures show that it has more than 230000 original musicians by 2020, giving it a clear lead in the industry.

In addition to listening to the music itself, NetEase, Inc Yun said when he went online that he focused on the concept of "music socialization", encouraging users to discover and share music and communicate with each other. Under the competitive pressure inside and outside the industry, will more users choose to communicate with Tonghao in NetEase, Inc Cloud in the future?

Our view is that in the entire content platform, what can be seen at present are Douyin, Kuaishou Technology, Bilibili Inc. and NetEYun, which may be the four platforms that will have relatively more advantages in the competition for young users in the future. There will be diversion and fierce competition between each other, but on the whole, each platform has a unique atmosphere and therefore unique competitiveness.

Douyin and Kuaishou Technology are characterized by their huge size. The advantage of Bilibili Inc. and NetEYun lies in the absolute mind of young users, with the former having more than 80% of post-90s active users and the latter being close to 90%.

For each platform, the challenge is whether it can maintain its brand appeal to young users as space expands and time goes on. For each content community, there are two effects that are perhaps the most noteworthy.

[1] Spatial level: broken window effect

In the process of Bilibili Inc. 's rapid development, many analysts have raised a question: is Bilibili Inc. 's "circle-breaking strategy" correct? The reason why there is such a problem is that with the expansion of the community, the influx of new users may destroy the original good ecology.

In the past three years, NetEase's MAU has continued to grow, from 105 million in 2018 to 147 million in 2019 and 181 million in 2020. The problems faced by platforms such as Bilibili Inc. are also placed in front of NetEase, Inc Yun.

According to the broken window effect, if the bad phenomena in the environment are allowed to exist, it will induce people to emulate or even aggravate them. For example, in a building with a few broken windows, if those windows are not repaired, someone is bound to break more windows and even eventually break into the house.

This poses a great challenge to the circular operation ability of the platform. However, for NetEyun, the problems encountered in this regard may be relatively peaceful. The reason is that there is an important difference in content between the music platform and some platforms that express views on social topics. It is true that folk users may DISS rock users, but it is not as tearing apart the community as discussing the topics of men and women and pets.

[2] time level: puberty effect

When the industry discusses the development prospects of music platforms, the so-called "puberty effect" is often mentioned. The study found that the songs a person listens to during adolescence tend to affect their lifetime taste in music, so it is particularly important for music platforms to compete for young users. because these users may not be like the users of other platforms-- as their minds mature and their habits change-- they will become long-term loyal users.

We agree with this view as a whole, but I would like to add an important view here: the key to determining whether a music platform can have an adolescent effect is not the attraction of its songs to users "at the moment". It depends on whether these songs can be "retained".

In other words, if the platform is full of drooling songs, users may really like it at the moment, but it will be difficult to remember as time goes by. Only those works that really touch the hearts of users will continue to be remembered 10 or 20 years later.

From this point of view, NetEase, Inc Yun's advantage in original music may be of greater value. For the platform, whether it can continue to maintain and expand this advantage has become the most important challenge in the future.

04、Conclusion

Through the analysis of NetEYun music moneymaking mode, copyright cost and user stickiness, on the whole, we maintain a relatively optimistic attitude towards the future development of this music platform. Perhaps we can make a clear conclusion here: it is a large number of young "villagers" born in the post-90s who have single-handedly welcomed NetEase, Inc Yun into the Hong Kong Stock Exchange.

And like Bilibili Inc., who breaks the circle quickly, in the process of the overall scale continues to expand rapidly, whether NetEase, Inc Cloud can ensure its community atmosphere among young users, stay away from the broken window effect and produce puberty effect, will be the most key factor to determine how far it can go in the future.