Tencent Music Entertainment Group (TME) Q4 2019 Earnings Call Transcript

Tencent Music Entertainment Group (TME -2.20%)
Q4 2019 Earnings Call
Mar 18, 2020, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2019 fourth-quarter and full-year earnings call. Today, you will hear discussions from the management team of Tencent Music Entertainment Group, followed by a question-and-answer session. Please be advised that this conference is being recorded today.

Now, I'll turn the conference call over to your speaker host today, Ms. Millicent T. The floor is yours, ma'am.

Millicent T. -- Vice General Manager

Thank you, operator. Hello, everyone, and thank you all for joining us on today's call. Tencent Music announced its quarterly financial results today after the market close. An earnings release is now available on our IR website at ir.tencentmusic.com as well as via newswire services.

Today, you'll hear from Mr. Kar Shun Pang, our CEO, who will start the call with an overview of our recent achievements and our growth strategy. He will be followed by Mr. Tony Yip, our CSO, who will offer more details on our operations and business development.

Lastly, Ms. Shirley Hu, our CFO, will address our financial results before we open the call for questions. Before we proceed, please note that this call may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and observations that involve known and unknown risks, uncertainties, and other factors not under the company's control, which may cause actual results, performance, or achievements of the company to be materially different from the results, performance, or expectations implied by these forward-looking statements.

All forward-looking statements are expressly qualified in their entirety by the cautionary statements, risk factors and details of the company's filings with the SEC. The company does not assume any obligation to revise or update any forward-looking statements as a result of new information, future events, changes in market conditions, or otherwise, except as required by law. Please also note that the company will discuss non-IFRS measures today, which are more thoroughly explained and reconciled to the most comparable measures reported under the International Financial Reporting Standards in the company's earnings release and files with the SEC. You're reminded that such non-IFRS measures should not be viewed in isolation or as alternative equivalent IFRS measure and other non-IFRS measures are not uniformly defined by all companies, including those in the same industry.

With that,I'm now very pleased to turn over the call to Mr. Kar Shun Pang, our CEO. Kar Shun?

Kar Shun Pang -- Chief Executive Officer

Thank you, Millicent, and hello, everyone, and thank you for joining our call today. 2019 marked an important year for TME. We made significant contribution to upholding music copyright protection, supporting original content creation, and designing innovative monetization models to unlock the intrinsic value of music, all of which are beneficial to the long-term sustainable growth of the industry. Our strategic transaction to pay for streaming service, continuous investment in premium self-produced and licensed content, product upgrades, and technological enhancements have led to better user retention, attracting more subscribers, content creators, performers and users to our widened ecosystem.

One of the significant highlights is accelerating year-over-year growth of our online music subscription revenues to 48% and 60% in the first and fourth of 2019, up from 26% and 32% in the first two quarters of 2019. Online music paying users reached 39.9 million, growing 48% year-over-year with 4.5 million net adds, the largest net increase since 2016. The paying ratio reached 6.2% during the fourth quarter of 2019, up significantly from 4.2% and 3.2% for the same quarter of 2018 and 2017, respectively, showing a recognizable trend of acceleration. Such a great outcome was primarily driven by continuous efforts to improve paying user retention and our effective content paywall strategy.

As the proportion of our music streams behind the cable expanded further, looking forward into 2020, our paywall content will be further enriched and is expected to grow at a similar pace compared to 2019 as we add more genre, including those from big three music labels. Another important highlight is our unique fan-based economy, which connects fan to fan and fan to idol, is gathering strong momentum. We have helped many artists, whether international, domestic, established, or up and coming, promote their music and expand their fans base. In 2019, we recorded an impressive high double-digit year-over-year growth in the number of users buying digital albums.

As a highlight, KUN, Cai Xukun's first personal digital album, YOUNG, sold more than 12 million copies on our platform by February 2020, breaking digital album sales record on a single platform with an absolute dominance and setting a new milestone in the industry. All these achievements would have been impossible without the dedication of every single TME staff, and their passion to bring personalized, engaging, and interactive music entertainment services to over 800 million monthly active users on our platform. Our commitment to enriching content offering has continued to strengthen our content leadership. Not only do we offer the most comprehensive music library in China, but also expanded to various forms of music-centric content, including more short-form videos, long-form audios, variety shows, and high-quality user-generated content on our platform.

For 2019, to cater to user demand, particularly for the younger demographics, we've added more popular genres including K-pop, Chinese ancient style and ACG music to our library. We are also seeing further penetration of younger demographic in 2019, especially generation seed as a percentage of total online music users. We continue to cooperate with producers of films, videos, games, variety shows, and literature to coproduce high-quality original soundtracks to capture user demand. Example, in 2019, the digital album of [Inaudible] [Foreign Language], a web drama series produced by Tencent Video, broke the sales record of the domestic OST offerings and drama series.

The theme song for the hit mobile game Honour of Kings [Foreign Language] was among the top ranking of multiple music charts. Our library now covers over 90% of OST for films and drama series and all OST copyrights of the most popular variety shows launched in 2019. Additionally, in 2019, we were committed to nurturing and promoting original music content through our indie musician program. We are glad that more independent musicians have chosen to join our musicians program in recognition of our strong promotional capabilities, industry reputation, copyright protection, and better financial supports.

For 2019, we're proud to say that for concerning promotion efforts, the number of users listening to our musicians original content reached almost 1 billion. Additionally, both the number of participating musicians and the original songs created more than double year-over-year by January 2020. And streaming of this original work as a proportion of all streams also nearly doubled from a year ago, with even more explosive growth for our exclusive indie musicians. Our stepped-up efforts in supporting young and talented musicians has also used many successful cases.

Our platform serves as a powerful launching pad for [Inaudible], a male grassroot singer. The streaming volume of its original new song titled Girl by the Bridge [Foreign Language] became viral quickly after release, achieving over 1.1 billion streams on our platform as of February 2020 and attracting hundreds of KOLs to perform cover versions. Under our musician program umbrella, in August 2019, we launched a unique program targeting young talents [Inaudible] call it Produce X, by leveraging our user insights and strong promotional capabilities. It produced many popular songs such as Almost Love [Foreign language] and the Boy I Missed [Foreign language] and promoted high potential young artists like Yongbin Ryan B and Uu to become supervising stars.

With such encouraging results in 2020, we plan for a strategic upgrade to take our indie musician program to the next level of development by offering more financial and operational support to independent musicians in order to help them realize their dreams. Another area that we have made important strides and will expand more proactively is long-form audio. Last year, we added rich categories, including audio books, talk shows, and a diverse set of topics on history, romance, and humanity, et cetera. And we are pleased to see the proportion of long-form audio users on our platform grew at a healthy pace.

An average long-form audio user's daily time spend was more than twice offset by an average user on our platform in December 2019. In March 2020, we signed a five-year strategic partnership with China Literature, the leading copyright owner of online teacher in China, to expand aggressively to capture huge potential within China's massive but underpenetrated long-form audio market. China enjoys the world's largest online audio user base. And according to iMedia Research, it is expanded -- it is expected to reach over 600 million this year.

Through this strategic cooperation, we will have access to China's Literature's broad online library and licensed to produce certain audio books. These audio books will be made available on both TME and China Literature's platforms, thus reaching a much broader audience. This cooperation allows us to significantly expand our long-form audio content library very quickly. At the same time, we will encourage the generation of premium UGC and attract high-quality KOLs, further enriching our content ecosystem.

Based on experience of overseas online music platforms, the penetration ratio of long-form audio users as a percentage of total monthly active users could reach mid-teens, producing strong user base advantage and growth potential for TME. If we can achieve this penetration ratio, we will have the opportunity to become the No.1 long-form audio platform in China. Furthermore, we expect to realize strong synergies between long-form audio and our exciting services and to not only improve user experience and increase the overall user engagement, but also further strengthen our content leadership. We also advanced our leading industry position by forming strategic partnership with upstream music partners.

In December 2019, we announced a proposal to acquire an equity interest in UMG, or Universal Music Group, the largest recording music company and the second-largest music publishing company globally. As the music industry in China continues, marching toward digitalization, we expect our strategic collaboration with UMG to strengthen our position to capture the extraordinary growth opportunity. We will also leverage our user insights and promotional capabilities to promote music in UMG's vast content library and bring more of the high-quality international artists to China market. Overall, we are very pleased with the well-rounded progress that we have achieved during the past years, and there are many new opportunities that we are excited for year 2020.

Through the development of indigenous programs, broadening our content and categories and formats, deepening cooperation with more partners in the music entertainment industry, we start to make our content ecosystem more differentiated and self-sustaining. Lastly, I would like to touch on the recent coronavirus epidemic that has been challenging our nation and now around the world. Like every other company, our thoughts are with people who have been impacted by the outbreak. We have taken effective measures to make sure that our employees are safe, for their health and well-being.

As a corporation with strong social responsibilities, we leveraged our Tencent Musician Program to help thousands of musicians, [Inaudible] more than 500 songs for charity. We also offered a seven-day free membership for our online music and online karaoke services, making our platform available to people to express their thoughts and good wishes to one and another. As a leading online music entertainment platform in China, TME has been highly recognized by China's mainstream media. During the epidemic, TME was honored to be invited again to participate in the Wuhan [Inaudible] song in China program.

The touching melody and narrative of Wuhan Not Alone achieved more than 100 million times of exposure on the day of its release on our platform. We also worked with the people daily to bring music to the affected areas, strengthening the bond between medical staff and patients to overcome the epidemic. Next, Tony will discuss fourth-quarter results of our social entertainment services as well as our other focus area. Tony, please go ahead.

Tony Yip -- Chief Strategy Officer

Thank you, Kar Shun. Hello, everyone. Apart from our strengthening content leadership, there are a few other areas that we have excelled in both our online music and social entertainment services. For online music, to begin with, our promotional capabilities have been further strengthened.

Our comprehensive promotional infrastructure not only leverages TME's online platform but also through cooperation with external online and offline channels. In the fourth quarter of 2019, we successfully held the first Tencent Music Entertainment Award, TMEA, in Macau and live-streamed it online on our platform, presenting a strong lineup of top domestic and international singers such as [Inaudible], [Inaudible], Westlife, and Lay, Zhang Yixing, et cetera. This event became a national hot topic and generated tremendous media exposure, both online and off-line for our artists. Within two weeks of TMEA, the cumulative page views of the topic on the Internet reached nearly 7 billion.

Second, in order to improve satisfaction of more than 600 million online music users, we constantly strive to find innovative ways to enhance our products. In the second quarter of 2019, we premiered a product innovation by adding short videos onto Kugou Music streaming page to fulfill users' needs, to consume music-centric short videos while listening. By leveraging better algorithms to recommend higher-quality content, the average daily streams of short videos increased almost 50% at the end of the fourth quarter of 2019 compared with the end of the third quarter. We have encouraged and attracted users to upload self-produced short videos.

And by the end of 2019, over 60% of the streams of shop videos were user-generated content. As you may recall, in the second quarter of 2019, we upgraded our QQ Music app with a more distinct tab for personalized recommendation. We continue to see positive user response and achieved 30% higher streams quarter-over-quarter, driven by the personalized recommendation tab during the fourth quarter of 2019. We significantly raised the weekly retention rate on the personalized recommendation tab to as high as 90% at the end of 2019, with added new features such as personal song list.

Our upgraded features such as daily recommendation and personalized radio stations also yielded double-digit percentage increases in average time spend after the upgrade. Following these, in December 2019, we launched an upgraded version of Kugou Music app with a complete revamp of our user interface, which has a younger image and highlights personalized recommendation, short videos and long-form audio. The new UI design has continued to receive positive feedback, particularly from young users. Two weeks after the added upgrade, DAU for both the personalized playlist and short videos increased by double-digit percentage.

Thirdly, on technology advancement, we recently upgraded QQ Music's song recognition to be able to continuously recognize songs embedded in short videos for various use cases, which helped increase the number of daily active users of song recognition feature by double-digit percentages in the fourth quarter compared to the third quarter of 2019. The core song recognition technology, audio fingerprint extraction, and our audio processing capability, MIDI Extraction, won two world championships in the music information, retrieval, evaluation exchange competition in November 2019, breaking three world records. Turning to our social entertainment services. Overall, it achieved a nearly 33% year-over-year top-line growth as our paying user base expanded 22%, and ARPPU grew 9% year-over-year, maintaining a steady expansion rate.

One of the highlights during the fourth quarter is our annual flagship social entertainment galas, which provided performers, KOLs, and music lovers with captivating and interactive experience, attracting record-high participation and contributed to the solid paying user growth and average spend expansion, demonstrating its effectiveness to improve user engagement on our platform. For Kugou Live, in 2019, we continued to attract a growing number of music-centric live streaming performers onto our platform, resulting in double-digit percentage growth in the number of active performers, while increasing the number of exclusive performers by more than 300% compared to 2018. One of our key competitive differentiators is the virtuous cycle of value creation between our social entertainment and online music services. For example, we successfully discovered [Inaudible], a live streaming performer on our Kugou Live platform and helped her become an Internet celebrity with 12 of her songs advancing to top five on Kugou Music charts in 2019.

We also hosted more than 500 new song releasing events [Foreign language] for emerging artists and performers in 2019, demonstrating the attractiveness and the promotional effectiveness of our integrated online music and social entertainment platforms. Additionally, to better meet user demand, we expanded live streaming content categories to include online games, dating, and virtual anchor live streaming. While still at an early stage, these additional content offerings have achieved good initial user feedback for we think, during the past quarter, there are a few areas of improvement that we have started to see traction. First, on short video, we improved overall conversion from recording to publishing a song by adding various short videos assisting tools.

As we transformed content format on the platform from audio to video, we strive to make sharing more entertaining. Secondly, on social attributes, which are unique, too, we think, we substantially bolstered user interactions through the function of group messaging and private messaging, leading to a more than 40% sequential increase in the number of users adopting this feature in the fourth quarter. Additionally, we optimized online singing room features by emphasizing user groups with similar interest and profiles which resulted in sequential improvement on user attractive -- activeness and penetration, particularly within the younger demographic. Overall, we started to see positive results from the efforts that we have deployed to make online singing an engaging social and fun experience to retain users and improve their stickiness on the WeSing platform.

WeSing's average user time spent with user activities and the penetration rate of its monthly active users on – of -- for the online singing room feature all improved sequentially in the fourth quarter of 2019. The engagement of paying users was further strengthened by our UGC reward system, resulting in solid growth of monthly retention rate of paying users throughout 2019. During the 2020 Chinese New Year holiday, we saw the average daily time spend per person increased by 30% compared to pre-holiday period and the number of users with song recordings increased by more than 35%. We're confident that we will continue to see healthy improvements in user engagement and further increase in the core user group activities and loyalty throughout 2020.

Looking ahead, to leverage the expertise and operational track record that we have built over the past decade, we are very excited to share with you that QQ Music will be officially launching its live streaming services within the QQ Music app in the first half of 2020 and gradually ramping up over the course of the next few quarters. This product will focus on the discovery and cultivation of star performers and artists as we leverage QQ Music's powerful promotional capabilities, massive organic traffic and dynamic fan-based ecosystem. In conclusion, we ended 2019 on a strong note and are excited that the new initiatives, including long-form audio expansion and QQ Music live streaming, will provide new growth avenues for TME in the years to come. With that, I would like to turn it over to our CFO, Shirley Hu, for a closer review of our financials.

Shirley Hu -- Chief Financial Officer

Thank you, Tony. Hello, everyone. We achieved strong financial results throughout 2019. For full year 2019, our total revenues were RMB 25.4 billion, up 34% year-over-year.

Our non-IFRS net profit was RMB 4.9 billion. In the fourth quarter of 2019, our revenues were RMB 7.3 billion, up 35% year-over-year, driven by 41% growth in online music services revenues and 33% growth in social entertainment services revenue. Online music service revenues were RMB 2.1 billion, up 41% year-over-year. The increase was mainly driven by outstanding performance from music subscriptions, supplemented by growth in advertising services and the sales of digital music albums, partially offset by a decrease in sublicense revenues.

Music subscription revenues were RMB 1.1 billion, up 60% year-over-year, driven by record high growth of subscribers and the improvement in ARPPU. Basically, the number of subscribers increased 48%, and the subscriber ARPPU grew 8% year-over-year, reflecting success of our pay-for-streaming service strategy and the premium memberships offering. Consequently, we have seen continued improvement in user retention rates and the increased user willingness to pay for premium content. Social entertainment service and other revenue were RMB 5.2 billion, up 33% year-over-year, primarily driven by growth in live streaming and online karaoke services.

In the fourth quarter of 2019, our flagship and new social entertainment gala contributed to solid paying user growth and the user spend expansion, resulting in paying user growth of 22% and ARPPU growth of 9% on a year-over-year basis. Cost of revenues were RMB 4.8 billion, up 34 -- 35% year-over-year, driven by higher revenue sharing fees and the content expenses. Our gross margin was 34.1% in Q4 2019 and improved slightly from Q4 2018, driven by gross margin improvement in online music services as a result of revenue growth despite ongoing margin pressure from increased revenue sharing ratio in social entertainment services. Total operating expenses were RMB 1.4 billion, up 5% year-over-year.

Total operating expenses as a percentage of total revenue was 19.4% in Q4 2019, down 5.7 percentage points from 25.1% in Q4 2018, part of which was due to the fact that IPO-related expenses incurred in the fourth quarter of 2018 did not recur in 2019. The decrease also reflected success of our continued effort on operational efficiency in various areas such as user growth spending and the brand and content promotion expenses. Our effective tax rate was 12.4% in Q4 2019. Our net profit attributable to equity holders of the company was RMB 1.0 billion.

Non-IFRS net profit attributed to equity holders of the company was RMB 1.3 billion, and the non-IFRS net profit margin was 18.4%. As of December 31, 2019, our combined balances of cash and cash equivalents, term deposits were RMB 22.9 billion, representing an increase of RMB 1.8 billion from RMB $21.1 billion as of September 30, 2019. The increase in the balances was primarily due to cash flow generated from operations of RMB 2 billion in the fourth quarter of 2019. Overall, we achieved strong growth across our online music and the social entertainment business in the fourth quarter and full year 2019, driven by strength of our products and the content.

Looking forward, we will remain focused on content investments to further enhance user engagement and monetization and continue to expand our product and service offering such as live streaming in QQ Music and the long-form audio. This concludes our prepared remarks. Operator, we are ready to open the call for questions.

Questions & Answers:

Operator

Thank you, ma'am. We will now begin the question-and-answer session. [Operator instructions] And the first question we have will come from Wendy Chen of Goldman Sachs. Please go ahead.

Wendy Chen -- Goldman Sachs -- Analyst

Hi, Kar Shun, Tony, Shirley, and Millicent. Thanks very much for taking my question. So my question is about the new initiatives on social entertainment side in particularly adding live streaming featuring into QQ Music. I'm just wondering what magnitude of incremental revenues does management expect this new initiative can bring to us in 2020.

And for the near-term strategy, we focus more on user adoption or monetization for this addition. And if I may add a simple follow up, a similar question to our long-form audio initiative, like how does management see our competition landscape in this new field? And what is our near-term strategy for this new initiative in 2020? Thanks.

Kar Shun Pang -- Chief Executive Officer

Hi, Wendy. Thank you for a question. We intend to launch live streaming services for QQ Music likely in the second quarter. This product, initially, we focus on the discovery and cultivation of star performance and artist.

We still very strong in leveraging our experience and know-how. Our massive user – music-centric user base, as well as our powerful promotional capabilities and dynamic fan base ecosystem to gradually scale it up. While we don't expect it to contribute to 2020 revenue in a significant manner, we do expect it to ramp up over the course of the next few quarters with more meaningful results contributing to 2021.

Tony Yip -- Chief Strategy Officer

I would like to add on the long-form audios part that Wendy mentioned about. We are so committed and thinking that the long form audios is new area that we can further expand our user base and also our website in the future. What we are doing is, as we mentioned it before, during the second half of 2019, we actually have been already enhancing our applications and letting our users to have a better user experience on the long-form audios. At the same time, we are also partnered with many different content providers to provide more long-form audio content.

One of the very exciting examples that I have just announced to every one of you is, we have already entered a five-year contract with the Chinese literature, which means that we are going to have a ripen and very large library of long-form audios and we are going to produce audio books for our users, and which will help to drive the further engagement of our users on the platform. So, it's going to be an exciting journey in this area for us. Thank you.

Wendy Chen -- Goldman Sachs -- Analyst

Thanks very much.

Kar Shun Pang -- Chief Executive Officer

Great. Thank you.

Millicent T. -- Vice General Manager

Next question, please.

Operator

The next question will come from Alex Poon of Morgan Stanley.

Alex Poon -- Morgan Stanley -- Analyst

Hi, management. Thanks very much for taking my question. My first question is regarding the ARPU growth. It is showing very visible improvements in the fourth quarter.

So, can you give us some color on the percentage mix now of membership signing up the green diamond mix? And also, what is your expectation of ARPU growth in 2020? And then my second question is regarding the master agreements. If with the first one potentially ending in second quarter, how should we expect a change in licensing income and your cost structure and margin in the second half and after? Thank you very much.

Kar Shun Pang -- Chief Executive Officer

I will take the first question regarding the ARPU. And right now, according to us the online revenue is very important and healthy business model for us. And what we are -- our focus is on the paying ratio, which has been continuously improving in the past few years. And we are also seeing pretty good acceleration on the paying ratio as well.

In terms of ARPU, I think that is most likely increasing. This is because more and more users are also trying to subscribe to our VIP plan. And also, we are seeing that the retention rates of our monthly subscribers keep improving as well. So, this is going in a really healthy manner.

So maybe Tony and Shirley can take the second questions.

Shirley Hu -- Chief Financial Officer

OK, about sublicense revenues, because we expect we will transmission out of some major labels from master license -- master agreement, so we expect that the sublicense will be increased, and our margin will be increased because we did not put the money front when we signed agreement with labels. If some third-parties form the larger -- so meant to form answer, we will have some numbers. So, we expect our cost margin, if we don't sign master agreement, our margin will be reset.

Tony Yip -- Chief Strategy Officer

Yes, just add to that, I think you all know that last year, we had signed a couple of the bigger contract in the form of master licensing where we have to pay a very chunky high fee up front that covers not only our platforms usage but also the potential revenue that we might be able to recoup by sublicensing to other platform. But as we all know, in the second half of last year, we were not able to recoup some of that sublicensing revenue, which resulted in the loss in foregone revenue for us. And therefore, going forward, we'll be evaluating the master licensing. And to the extent that we decide not to renew certain contracts on a master license basis, we would be only doing so because it would be costs and will be margin accretive to us because we will no longer have to take that risk of having to pay a high upfront licensing fee, not just for our platform usage but also for the third-party platform usage.

So we no longer need to do that if we are not extending on a master license basis. So that could potentially be a margin-accretive event for us.

Alex Poon -- Morgan Stanley -- Analyst

Thank you very much.

Millicent T. -- Vice General Manager

OK. Next question.

Operator

Yes, ma'am. That will come from John Egbert of Stifel. Please go ahead.

John Egbert -- Stifel Financial Corp. -- Analyst

Thanks for taking the question, the digital service, it seems like TME is in a much better place than many of its peers in terms of corona virus impact during the first half of 2020. I'm wondering if you could talk through some of the puts and takes that could impact your results during the first half of the year, both positively and negatively between the different products in your portfolio and, you know, some products usage might benefit than others maybe spending might be a little bit tougher, but maybe you could walk us through some of those. That'd be really helpful?

Tony Yip -- Chief Strategy Officer

Sure. Well, first of all, I think you know, before addressing the question about sort of the outlook to 2020. We want to reiterate that we are very pleased with the Q4 performance, with total revenue growing 35% year-over-year, which is a faster pace than Q2 or Q3. And especially our online music subscription revenue to 60% year-over-year, which is continuing on the accelerating growth trends, we -- which we expect to continue into Q1.

And at the same time, our social revenue grew at a very solid 33%, which is a similar pace compared to the last quarter. And then in terms of kind of outlook, again with the relevant disclaimers for formal case, I'll first address the online music service and I'll talk about social entertainment, and then I'll sum it up for overall. For online music services, for Q1 we expect overall online music services revenue year-over-year growth rate to be lower than that of Q4, primarily due to declining sublicensing revenue as well as advertising revenues impact from the virus. However, we expect subscription revenue, which is our core focus to continue to see year-over-year growth rate to accelerate in Q1 compared to Q4.

And similarly, for the full year in 2020, we expect overall online music services revenue year-over-year growth rate to be lower than 2019 levels due to lower sublicensing revenue. But full year's subscription revenue is expected to grow at a faster pace than 2019, which is very, very excitingly driven by growth in both subscribers and ARPU and not just being driven by subscriber growth. And you've already seen that our ARPU growth has already seen three straight quarters of year-over-year increases, so we can expect that trend to continue. And then for social entertainment services, we expect revenue growth to be pressured in Q1 due to short-term impacts from the corona virus from adjustments to some of our live streaming interactive features for compliance reasons and the top comparison due to the timing shift of the leasing [Inaudible] to Q4.

However, we are already taking steps to mitigate these impacts. And we expect revenue growth to improve into the second half. In addition, we're very excited about the growth potential from the launch of live streaming services including music in the first half, which we expect to contribute revenue more meaningfully next year in 2021 and become an additional growth engine for social entertainment services. I think, specifically worth mentioning about the social entertainment MAU, which, while there is a sequential drop in fourth quarter, for reasons I've outlined in Q3 earnings call, which I will repeat again, we're very pleased to share that we expect MAU to rebound in Q1.

And we are already seeing the numbers on track to deliver that in January and February, driven by a very well-executed set of growth initiatives that I also outlined during last quarter's earnings call, just namely to improve user engagement by lowering the user usage barrier by substantially increasing short video elements on the platform as well as by focusing on growing the social network, which is the core competitive advantage within resetting. And as a result, we expect MAU for social entertainment to resume a healthy growth trend throughout 2020. So in terms of overall total revenue for the company, for reasons outlined above, we expect Q1 total revenue year-over-year growth rate to be much softer, but to accelerate over the next few quarters. And for the full year, even though total revenue growth is expected to be slower than original expectations due to the short=term impacts in the first half, we expect revenue growth to improve in the second half.

And we feel very confident about -- more so, we feel very confident about the long-term growth potential of TME. You'll remember that a year ago when we started implementing the pay-per-streaming strategy, which has proven now to be very successful. We were leading the music industry to adopt a brand-new model that will build a much better future for the whole industry and for all participants involved platforms, content producers, musicians. And today, we feel even more confident about the prospects of the music subscription business.

If you compare it to the Western comparable where they're running at around 50% paying ratio. We're currently have 6%. And if you compare us to other online video platforms in China, where as a whole, they are between 300 million to 400 million subscribers, our platform has only 40 million. There's 8x to 10x potential that you could see by those comparisons.

And lastly, we are constantly exploring new opportunities in light of the macro backdrop. One such example is our recent launch of TME Live, a new live streaming model that integrates offline concerts on to online live streaming experience. Given large gatherings are limited during the virus outbreak. And coupled is with the launch of live streaming and QQ Music expansion into long form audio that Kar Shun mentioned.

The scaling up of advertising and the continued growth in the musician program, we're confident that all of these investments contribute significantly to the top line growth over the years to come.

John Egbert -- Stifel Financial Corp. -- Analyst

Great. Thank you.

Millicent T. -- Vice General Manager

Thank you, Next question, please.

Operator

Yes, ma'am. That will come from Binnie Wong of HSBC.

Binnie Wong -- HSBC -- Analyst

Hi, and good morning, management. Thank you for taking my question. So if we look at, I think it's encouraging to see the uplift in the paying ratio. But if we look at the MAU site, dimension, which is your fundamental driver, both the MAU in the online music and social entertainment has also been seeing some decline.

If you look at social entertainment, despite the shape of the annual gala, it's both declining on a Y on Y and Q on Q. So -- and then just want to understand the reasons of the decline in the MAU here. And then with that -- also understand that if you look at them, we understand why there's a better economics of TME not choose to renew some of the master license. So how should we think about in terms of user acquisition strategy into 2020? Thank you.

Kar Shun Pang -- Chief Executive Officer

So MAU, we were absolutely not concerned by the slight drop in the music MAU in the fourth quarter because that's just part of seasonality. Every Q4 you would see a slight drop sequentially, but we expect to recover from that into Q1. And then for social entertainment MAU, we had alerted our shareholders and the investors in the last quarter earnings call that due to competitive pressures. We are seeing a slight decline in MAU on a sequential basis for social entertainment.

But like I mentioned, you know, we've implemented a very comprehensive and well-executed growth plan, tackling user acquisition as well as user engagement. And the plan is working very well, and it's showing very good traction, which is why we see -- we expect the social entertainment to rebound into one and to resume a healthy growth trend throughout 2020.

Tony Yip -- Chief Strategy Officer

In terms of the master licensing that you mentioned about, I think that we are still believing that master licensing agreement do have a very good value to the industry. So, which means that we will continue to have some of the master license agreement with certain types of labels, but not all of them. We will be -- have the wisdom to latter on which label are we going to adopt the master license agreement or which one we do not. As we mentioned about, especially the three labels, the three major labels, which accounting for most of the content costs, relatively for the content costs of our company, we are going to moving away from the master license agreement.

I think that is going to let us to be enabled to achieve some cost saving, as we have no longer need to have the commitment of front payment for the licensing. So I think that is going to be a good for us. And also, because we already have a very huge user base, we have over 800 million active monthly users, even though we are not going to have a modest licensing with the three major labels, if we have the license on a platform, it will serve the little demands of our users, which will serve the purpose. So, I think that we will be really carefully be selecting our strategies in terms of contracting with all the families' labels.

Kar Shun Pang -- Chief Executive Officer

So, to wrap up, I think in terms of, there was a slight question about how we would approach user acquisition from the content angle. I think as Kar Shun mentioned, we are very committed to enriching continuously our content offering to further strengthen our content, leadership, you know, which is already very strong. And we've added a lot of new content to cater for user demand, you know, especially for the younger demographics, like the Chinese Asian style, like the ACG or J-pop or K-pop, which are also showing very good results in terms of allowing us to further penetrating into the younger demographics, especially the Gen-Z.

Operator

Next, we have Alex Yao of JP Morgan.

Alex Yao -- J.P. Morgan -- Analyst

Thank you, management, for taking our question. First question is about the progress of the ever-expanding paywall. Can you share with us, by the end of Q1, what portion of the content library will be put behind the paywall? And how do you think about by the end of the 2020, what percentage will be behind the paywall? And then secondly, regarding the sublicensing revenue, we understand the appetites or demand for sublicensing, the professionally curated content from you guys is going down. Can you help us understand why is the competitor deemphasizing such content channel? And if the consumer demand for such content is generally going down, why do you need to spend aggressively on such content? Thank you.

Tony Yip -- Chief Strategy Officer

On the paywall, we will address Q1 when we report Q1 results. But what I'm happy to share is that we started embarking on the pay-per-streaming strategy in Q1 of 2019. So effectively, we started with zero percent of that content behind the paywall based on streaming volume share. And by the end of 2019, around 9% to 10% of the content is behind the paywall.

And so, you could expect a similar sort of pace in terms of the pace of content that we'll put behind the paywall during 2020.

Kar Shun Pang -- Chief Executive Officer

OK. And also in terms of the content that you're talking about, what we are doing in TME is we try to provide as much content as possible to our users, which basically, because the demand of a user is very complicated, they will like to listen to the top-tier access to creamier content, but at the same time, they will also like to listen to some long tail content by the indie musician as well. So, I think that -- note, we do not have a one way to satisfy all the needs of our users so there's a reason why we need to strike a balance, and we need to provide the most content which is available to our users. And this is what we continue doing and doing well in the past few years, and we will continue to doing this.

And in terms of the cost structures, I think that, yeah, some of the creamier content may be a little bit more expensive than the others but the things that we are also participating with many partners to co-produce some of our own content, so which will help us lower some of the funding costs as well. And we are going to help the industry, the more young and talented musicians to have the platform or a stage to help them to demonstrate their talent. So I think this is what we will continue doing this. And since the year of 2017, we have already put in a lot of efforts in helping the Indian musicians in China.

And we are achieving really good results, and especially on our Tencent Musician program. So, I think that our current strategies are very clear, and I'm showing that direction is correct. And we will achieve even further success in the in the years to come.

Millicent T. -- Vice General Manager

Thank you for your question. Next question, please.

Operator

It comes from Alex Ziyang of Macquarie.

Alex Ziyang -- Macquarie Research -- Analyst

Thank you, management, for taking my question. Just a really quick follow up on the master license, I guess could do give us some color on the main negotiation points when we're talking to music label suppose from the domestic or more independent labels and international ones? Thank you.

Kar Shun Pang -- Chief Executive Officer

Well, I think, you know, the -- in terms of obviously, we won't be we share a lot of details in terms of the negotiation points, given the highly sensitive nature. But I'd like to remind you that, you know, price is not the only discussion point. You know, in the past, we've often won contract without having to pay the highest price because our content partners really see us as a partner of choice. Given that, you know, we help them with copyright protection.

In China, we are the biggest platform that account for a vast majority percentage of the market share. You know, we are, by far, the most successful in terms of helping them monetize the music online. And our promotional capability, not only a strong on our own platform, but we also extend promotional capability beyond our online platform into external channels through our partnerships as well as through offline channels, such as live events, etc. So, all of these are very important factors that our content partners take into consideration, which is why we are able to have the confidence that will keep renewing the important content that matter to us.

Operator

Next, we have Hans Chung of KeyBanc Capital Markets.

Hans Chung -- KeyBanc Capital Markets -- Analyst

Management, thank you for taking my question. So, my first question regarding the social entertainment business. And there seems to be regulatory issues in our streaming platform in the whole sector, in early inning of this year and then -- and also I say that we have meet the impact for our Q1 guidance, and just wonder, what's our view on these? And then how should we overcome the regulatory issue? And then how are we competent with just getting back to normalize suppose in the second half. And then a follow-up question is regarding the gross margin.

And can management can just give some puts and takes about the gross margin for the whole year, given that we have a different moving parts going on this year that a faster growth for music, the renewal of the sublicensing deal, and also the softer [Inaudible] business in the first half and so on. So it just kind of general sense about our gross margin for the year compared to last year. Thank you.

Kar Shun Pang -- Chief Executive Officer

OK. I'll take the first part of the question and maybe Tony and Shirley can talk about the margin. So, when we're talking about social entertainments ideas. I think overall we have done a really good growth rate in the year 2019.

And the growth rate is very healthy and -- but recently interactive features adjustments, and also the corona virus has some short-term financial impacts to us, especially on social entertainment business in the first half of 2020. But since we have already got many years of experience in winning our social entertainment business and build a strong foundation. So therefore, we are confident to achieve a healthy and long-term sustainable goal of our social entertainment services in the future. And as we also mentioned it during the early part of this conference call we mentioned during that we are targeting to launch a QQ Music live streaming services in the second quarter of this year.

So once again, it's going to be another driver for us in the social entertainment that in the near future. And also, during the corona virus period, we're also seeing that we are having some result on the leasing platform as well. More people started to have more interaction with their friends through the social networks. And we are also seeing a strong comeback on the user base, very actively participating in our social entertainment platform.

So, we are expecting that recovery and a good growing trend in the second half of this year.

Shirley Hu -- Chief Financial Officer

OK. About the gross margin. We think the margin is a complex picture in 2019 -- 2020. First on the online music side, we think our gross margin will be improved because our sublicense revenue will be increased.

And when we charted out from the master agreement, the cost of that will be have benefited from it. So, overall, we expect that the gross margin will be improved on the online music side. Second, because of competition, we needed to invest more on the revenue-sharing ratio on the social entertainment that will impact our gross margin. The third, we need to invest more on the content especially in long form audio.

So that will also be impacted our gross margin. And the fourth, because the gross margin will be also impacted by the revenue structure because in 2020, we expect that the online music service revenue will be growth factor and social entertainment. So overall we think that in the 2020s the gross margin will be a little decreased.

Millicent T. -- Vice General Manager

Next question, please.

Operator

The next question will come from Thomas Chong of Jefferies.

Thomas Chong -- Jefferies -- Analyst

Hi, good morning. Thanks, management, for taking my question. I have a question regarding the cooperation of the literature. Can you just comment about how the business model works in terms of the revenue-sharing ratio or the cost that we need to pay to China division? And a follow-up on that, are we seeing there will be more synergies with other part of Tencent ecosystem, like gaming, the video.

Any thoughts on our most images on our music business? Thank you.

Kar Shun Pang -- Chief Executive Officer

Yeah. I'll first talk a little bit about the strategic angle with our cooperation with China. And then I'll let Shirley talk a little bit about the financial impact. I think it is very clear to us from our testing, that there are a lot of complimentary behavior between music users and long-term audio users.

And for -- based on our experience, we are already seeing that for users who listen to online, listen to long-form audio, the time spend that we spend on our platform is even longer than the time spend for our overall user base. And so, it's very effective in terms of being able to improve the user stickiness, as well as help -- allowing us to meet a broader set of users demand. At the same time, you know, from a long-form audio perspective, audio books is the number one biggest category of content consumption. And with the audio books, China Literature is by far the biggest provider, the biggest owner of these IP.

And so, through our strategic cooperation with China Literature, we are able to immediately get access to all -- to the most important audiobook licensing that allow us to create these audiobook content, so that we could ramp up the user penetration. And like we mentioned earlier, if you look at our Western peers, where within a short period of one year or maybe less than less than two years, one to two years, they will have achieved around 16% penetration of their online music users that are also listening to long-form audio. And if we are able to achieve a similar set of penetration ratio, given our very sizable online music user base, we -- there is an opportunity for us to become the No.1 long-form audio platform in China. And you know, the mid-teens penetration doesn't stop there, there is actually more room for that to grow, you know, to the 600 million target that's mentioned by the industry report.

And so there's very strong strategic synergies of why this corporation is very beneficial to both parties. And I'll let Shirley talk a little bit about the financial impact.

Shirley Hu -- Chief Financial Officer

About financial impact, because we – this -- in 2020, we needed to investment -- invested in the long-form radio, we will give literature a reasonable -- minimum guarantee for it. And we are very excited because we have a very strong subscriber user base. So, in long-form radio, we will focus on the subscriber equipment. We believe in following years after 2020 we can get benefit from this business.

Millicent T. -- Vice General Manager

Operator, we'll take the last question from the queue.

Operator

Yes ma'am. And that question will come from Zhijing Liu of UBS.

Zhijing Liu -- UBS -- Analyst

Congratulations on strong results. I have two questions. First one is, will QQ Music's new initiative of live streaming have cannibalization with our existing live streaming business for Kugou? And second question is regarding advertising supportive music, similar to Spotify, do you think it is achievable for TME in next one to two years? And how should we balance this new growth points with competition? Thank you.

Kar Shun Pang -- Chief Executive Officer

OK, I'll take the first question. Thank you for talking about the QQ Music, the live broadcasting, which is an exciting project that we're working on. First of all, both of the Kugou platform, and QQ Music platform, and Kuwo platform, they are already huge in size by themselves, and also the overlapping of users of them is very minimal. So, which means that they are serving it's own user base really well, and when we agreed to launch the live broadcasting services in QQ Music, it will even serve the QQ Music users even better and it's not going to have any cannibalizations among the platform itself.

So yeah, Tony can [Inaudible]

Tony Yip -- Chief Strategy Officer

I think, we -- also on in terms of QQ Music live streaming, we have a lot of experience in user segmentation across our three --four major apps. Even on -- I mean, similar to the music side, even though we are three music platforms, there are very minimal user cannibalization. In fact, by having multi-brand it will allow us to cover a bigger user base as a whole. And so, we are adopting a similar know-how and expertise onto a live streaming, whereby even though we have multi-platform, multi-brand on live streaming, but it will target slightly different user segments that allow us to broaden our reach.

And then in terms of audio, you know, we are certainly very committed to investing in this growth initiative. We see huge potential, especially – there's a lot of synergies between music and long-form audio. And we view -- obviously, we take reference to the Western peers experience and we target, we strive to achieve that. We won't set a timeframe on it because it's early days.

But you know, by through our cooperation with China Literature, we are leading a very strong swift solid foundation, very strong foundation that puts us in a very advantageous position in the starting gate.

Operator

I'm so sorry. I will not ask that question. Well, we have approached the end of the conference call. I will now turn the call over to speaker host today.

Miss Millicent T. for her closing remarks. Ma'am?

Millicent T. -- Vice General Manager

Thank you. Thank you, everyone for joining us today. If you have any further questions, please feel free to contact TME's IR team. This concludes today's call, and we look forward to speaking to you again next quarter.

Kar Shun Pang -- Chief Executive Officer

OK. So, listen. I just want to add quick conclusions. I think I would like to say thank you to every one of you joining the call today, especially for the support to TME.

I think the year of 2019 is a very special year for TME since it's the first completed financial year after we officially launched it and listed on the New York Stock Exchange back in December 2018. I think for this year, we are delivering a very good result, and we are 120% committed to continue to create values of our users, channels, and also our shareholders. I think during the period of the coronavirus epidemic, I think that I wish you and also your family with good health, and all survivors, and understanding that the virus has brought some negative impact to our society, or even the global economy. But I'm sure that after bad time is gone, the future is bright.

Som we're together, and I wish you and your family all the best, and god bless you all. Okay, thank you so much, for your time. Thank you.

Tony Yip -- Chief Strategy Officer

OK. Thank you.

Millicent T. -- Vice General Manager

Thank you.

Operator

[Operator signoff]

Duration: 73 minutes

Call participants:

Millicent T. -- Vice General Manager

Kar Shun Pang -- Chief Executive Officer

Tony Yip -- Chief Strategy Officer

Shirley Hu -- Chief Financial Officer

Wendy Chen -- Goldman Sachs -- Analyst

Alex Poon -- Morgan Stanley -- Analyst

John Egbert -- Stifel Financial Corp. -- Analyst

Binnie Wong -- HSBC -- Analyst

Alex Yao -- J.P. Morgan -- Analyst

Alex Ziyang -- Macquarie Research -- Analyst

Hans Chung -- KeyBanc Capital Markets -- Analyst

Thomas Chong -- Jefferies -- Analyst

Zhijing Liu -- UBS -- Analyst

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