Text | Entertainment Capital on Bean Sprouts
On August 19th, Netease Cloud Music topped the list for one day, because many users found that Netease Cloud logged in abnormally and displayed "Failed to obtain data".
You know, this kind of large-scale technical BUG of Internet manufacturers is usually fixed soon before the news spreads widely. The BGU failure of Netease Cloud Music lasted for 2 hours, and the related Weibo hot search was also hung up for nearly one day in turn.
During this period, even the chat records of suspected insiders flowed out, breaking the news that "it is to develop and delete libraries to run away" and attribute this BUG to the contradiction between migrant workers and capitalists. This cool story further accelerated the spread of the fault, and netizens even began to play with stalks, "carrying buckets and running away, taking away the whole pyramid!"
At 3 pm, Netease Cloud officially replied, saying that "due to infrastructure failure, all ends of Netease Cloud Music can’t be used normally". After rumors spread everywhere, at 5 pm, the official came forward to rumor again, "There was no deletion of the library, no running away, and the failure has been fixed one after another ~"
The government has also introduced a compensation plan at the same time, and users can search for "listening to music" and receive 7 days of membership rights.
The rumors of long downtime and mixed self-contained spread genes have made Netease Cloud Music’s BUG the focus of public attention. Besides "deleting the library and running", the truth behind it is also controversial.
Later, some media learned from Netease’s internal technicians that "this downtime may be related to the relocation of the computer room in the second quarter of this year". According to official sources, in 2023, it is determined that the overall service of cloud music will be relocated to Guizhou computer room. "Netease established a computer room in Guizhou, and its business was relocated in stages. In 2024, Q2 Netease Cloud Music just completed the relocation of the computer room in Guizhou." "Coupled with layoffs, even troubleshooting will take a long time."
However, whether it is the relocation of computer rooms or layoffs, they all point to a more core factor-reducing costs and increasing efficiency.
In fact, Netease Cloud Music has always faced "profit pressure". After years of losses, in 2023, Cloud Music finally ushered in a reversal, and turned losses into profits for the first time. Behind this, it is not unrelated to reducing costs and increasing efficiency.
Netease Cloud, which is profitable, has not ushered in a high-light moment. Like many music streaming platforms, while the social entertainment business is declining, how to enhance profitability is still a big challenge.
01 Netease Cloud "Collapse", the disaster caused by reducing costs and increasing efficiency?
Although it is not entirely due to "layoffs to the aorta", according to various sources, it can be judged that the technical BUG is indeed related to the company’s cost reduction and efficiency improvement.
Before discussing Netease Cloud’s cost reduction strategy, let’s take a look at its overall financial situation:
It can be seen that before 2023, Netease Cloud Music has been at a loss. When the profit and loss turned around in 2023, the official attributed it to the increase in membership subscription income, operational efficiency and cost optimization of cost control.
However, compared with the space brought by revenue, it is obvious that the interest rate space brought by cost compression is greater. In 2023, the total revenue of Netease Cloud Music was 7.867 billion yuan, down 12.51% year-on-year. The operating cost decreased from 7.699 billion yuan in 2022 to 5.764 billion yuan, and the cost expenditure decreased by as much as 1.935 billion yuan, a decrease of 25.1%.
Among them, including the cost of content services, research and development expenses and management expenses, a number of costs have declined.
The relocation of the computer room that is questioned by the outside world and may be related to this failure is probably also a part of the cost reduction strategy. According to media reports, Netease’s relocation also claimed to have achieved a substantial cost reduction.
In terms of the number of employees, the 2023 financial report shows that Netease Cloud had 1,359 employees on December 31, 2023, compared with 1,540 employees in 2022, a year-on-year decrease of 181 employees.
Observing the past financial statements, cost optimization has always been an important factor in the process of gradually reducing losses. Therefore, it can be judged that Netease Cloud Music is indeed continuing to "reduce costs and increase efficiency" and has shown positive feedback in the financial statements.
Of course, it is biased to attribute the profit and loss entirely to the cost reduction. It cannot be denied that the growth of online music business has brought blessings to Netease Cloud Music’s profit reversal.
The 2023 financial report shows that the number of monthly active users of online music services reached 206 million, an increase of 8.7% year-on-year. Among them, the number of monthly paid users of online music reached 44.12 million, a year-on-year increase of 15.3%; At the same time, the monthly income per paying user of online music business has increased from 6.6 yuan to 6.9 yuan.
With the increase in the number of paying users and the monthly income per paying user, Netease Cloud Music’s income from subscribing members increased by 20.2% year-on-year.
In order to increase the revenue of online music business, Netease Cloud has previously introduced a series of measures, such as "5 yuan Student Member", incentive advertisements, and vinyl members’ increasing the rights of multi-terminal music libraries, so as to attract paying users by lowering the membership threshold and enhancing their rights and interests.
Under the joint action of reducing costs and increasing efficiency and online music business, Netease Cloud Music achieved its first annual turnaround in 2023.
But going back to this large-scale technical BUG, as important as exploring the reasons, is the loss it brings.
From the brand point of view, this failure will not only affect the user experience, but also do some damage to the brand image of Netease Cloud Music. "Do you have to use Netease Cloud?" "Is it not fragrant to use other apps?" "I just laid off the real technicians" and "Am I the only one who listens to music with bilibili?" …… On social platforms, there are not a few such comments.
Not only that, Netease Cloud Music will also bear direct economic losses. As compensation, the "vinyl VIP" issued by Netease Cloud has a minimum monthly subscription in 8 yuan. According to 8 yuan, 206 million users and 7 days, the corresponding value of Netease Cloud Music Compensation Scheme is as high as 389 million yuan.
Netease Cloud Music needs to bear the direct economic losses such as the sharing of copyright fees, server and bandwidth costs, operation and maintenance costs. However, how much impact it will have on the financial side needs further attention.
From the perspective of enterprise development, it is understandable to find ways to make profits. However, in the process of structural adjustment, it is also a wisdom to make long-term plans to stabilize its own development, especially the development of online music industry, which itself needs to be steady and stable, attracting users with real content and experience.
Turn losses into profits, but Netease Cloud Music is still anxious.
Combined with the development of music streaming media industry, it is really not easy for Netease Cloud Music to enter the road of profit.
But turning losses into profits does not mean that you can sit back and relax. Netease Cloud Music will also face the challenge of income structure under the change of industry and more urgent competitive pressure.
First, let’s take a look at the revenue section of Netease Cloud Music, which is composed of online music services and social entertainment services. However, the problem is that under the impact of the rise of short video platform and the tightening of supervision, the social entertainment service of music streaming platform has been obviously impacted, and the income brought by social entertainment service will inevitably shrink in the future, and online music business is the real core competitiveness.
Tencent Music, whose profitability is superior to that of its peers, recently released its financial report for the first half of 2024. The data shows that online music service revenue reached 10.431 billion yuan, accounting for 74.89%, while social entertainment services and other services accounted for only 25.11%.
Netease Cloud Music is also actively adjusting the operation strategy of social entertainment services, by reducing the exposure of some functions and reducing the proportion of revenue sharing, so as to enhance the user experience of core music and enhance profitability.
According to the financial report, in 2023, Netease Cloud Music’s online music service revenue reached 4.351 billion yuan, exceeding the income brought by social entertainment services and others, but in contrast, social entertainment services-related businesses still accounted for nearly half of the revenue.
Therefore, Netease Cloud Music needs to continue to tap the commercial potential around the online music business.
The data shows that by the end of 2023, Netease Cloud Music has collected about 149 million pieces of music. We have started new cooperation with well-known brands such as Believe in Music, Makoto Shinkai, Minced Fish and RYCE Entertainment (represented by Jackson Wang), and continue to make efforts in the expansion of copyright content. In terms of self-made content, as of December 31, 2023, the platform registered nearly 684,000 independent musicians and uploaded about 3.1 million music tracks.
At the same time, Netease Cloud Music is also improving the experience and expanding the scene to attract more users. For example, the music player is embedded in the game scene of "Egg Party", and the online "private DJ" function is available.
Secondly, based on the development of online music business, the growth of core data such as active users, paying users and ARPPU is also related to the future profitability of Netease Cloud Music.
According to public data, these core operating data of Netease Cloud Music are growing, but the growth rate has declined, especially the number of monthly paying users. According to this growth rate, it can be judged that the growth of its online music business will not be too fast.
On May 23rd this year, Netease released its financial results for the first quarter of 2024. The data shows that the net revenue from cloud music is 2 billion yuan, a year-on-year increase of 3.6%, and the growth rate is relatively limited.
In addition, Netease Cloud Music is also facing a lot of competitive pressure.
In the industry, Tencent Music, Spotify and Apple Music are all carving up the market. In particular, Tencent Music and Spotify far exceed Netease Cloud in volume. However, in terms of profitability, Spotify is not stable enough. In 2023, although the total revenue reached 13.247 billion euros, it was not profitable. The financial report in the second quarter of this year shows that the total revenue reached 3.807 billion euros and the profit reached 274 million euros. The profitability of Tencent Music has always been in the forefront of the industry.
In contrast, Netease Cloud Music, which has just achieved profitability, still has a long way to go.
In the pan-entertainment industry, the rise of short video platforms such as Tik Tok and Aauto Quicker has a big impact on the whole music streaming industry, and the reduction of social entertainment service income of Tencent Music and Netease Cloud Music is the most direct impact.
However, Netease Cloud Music is not without advantages. The good community atmosphere precipitated for a long time is its unique label and assets, which corresponds to higher user stickiness and the trust of original musicians. Previously, many original musicians said that they were more willing to publish their works on Netease Cloud Music.
In a word, online music business is not an opportunistic business, but also tests the platform’s steady and steady content and user experience, as well as the continuous optimization of commercialization ability. Although this technical BUG will not bring a fatal blow to Netease Cloud Music, it also sounded an alarm. In the fierce competition, it will take time to verify whether Netease Cloud Music, which makes many users "love and hate", can break through.
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