Apple (NASDAQ:AAPL) has done very well in China since the launch of the iPhone 6. Revenue from the Greater China region rose 71% annually last quarter, accounting for 29% of Apple's top line. Last month, Apple overtook Xiaomi as the country's top smartphone maker, with nearly 15% of the market, according to IDC.
However, that probably still won't be enough to help Apple's new streaming music platform, Apple Music, gain much ground among Chinese users. In Western markets, Apple Music is considered a major threat to streaming services such as Spotify and Pandora Media. But in China, Apple must deal with cultural differences, lower price expectations, and intense competition from local rivals.
The business of Chinese music streaming
One key problem is that Chinese listeners are used to getting their music for free. There are over 100 pirated music websites in China. The most popular one reportedly gets 168.5 million visits per month: far more than any legitimate music download site. In China, 478 million people -- more than the entire population of the United States -- listen to music online. Yet Chinese users only paid $91 million for digital music last year, compared to $3.5 billion in the U.S., according to IFPI estimates.
Despite that massive disparity, Chinese companies have launched legitimate subscription-based streaming platforms. Internet giant Tencent offers QQ Music, a Spotify-like service that lets users stream most songs for free with ads.
QQ Music's premium Green Diamond membership, which costs $1.60 per month, offers a number of perks. Listeners can remove ads, get higher-quality sound, access members-only concerts, and win souvenirs and backstage passes. Green Diamond members also get free virtual items in Tencent's online games, which are tethered to Qzone, its social network that has 668 million monthly active users. Members can also add personal radio stations to their Qzone pages.
Not much revenue, but plenty of rivals
Tencent doesn't disclose its membership figures, but research firm Analysys International estimated that the mobile app has roughly 80 million monthly active (both free and paying) users. By comparison, Spotify recently announced that it had 20 million paid subscribers out of 75 million active listeners.
A monthly fee of $1.60 seems paltry compared to Apple Music and Spotify's monthly fee of $9.99. Still, labels including Sony Music Entertainment, Time Warner's Warner Music Group, and South Korea's YG Entertainment have all signed distribution deals with Tencent, since it's one of the only ways to sell digital music legitimately to Chinese listeners.
Tencent isn't the only company to adopt a freemium, perks-based digital music model in China. However, roughly 80% of the market is controlled by just five services, with QQ Music, Baidu (NASDAQ:BIDU) Music, and Alibaba's(NYSE:BABA) TTPOD being the three largest.
What Apple must do
If Apple wants to launch Apple Music in China, it needs to lower the price. Counterpoint Research analyst Neil Shah told The Wall Street Journal that to enter China, Apple Music needs to cost "about $2 to $5 per month" and should include "more meaningful and valuable premium features."
While Apple might be willing to lower its prices, it lacks the app and social ecosystem muscle of its Chinese rivals. However, Apple has industry clout, since its iTunes Store still accounts for up to 85% of all digital music sales worldwide. By combining streaming music and paid downloads, musicians generate digital album sales alongside streaming royalties. That's why top musicians such as Taylor Swift and Coldplay have pulled their songs off Spotify and signed with Apple instead.
Swift, who said her music "should not be free," requested last November that her albums be pulled from Chinese streaming platforms, and top players like Tencent and Alibaba complied. Therefore, if Apple enters China with the blessing of Swift and other popular artists not found on rival platforms, it might gain a competitive advantage.
A tough uphill battle
Apple's dilemma with Apple Music is similar to the one Microsoft faced with its software in China. In 2011, then-CEO Steve Ballmer complained that Microsoft's Chinese software revenue was only equivalent to 5% of its U.S. revenue, although the two countries had about the same number of PC users.
The problem is that rampant piracy has made it tough to establish legitimate business models. The Chinese government is cracking down on these sites, but two or more heads usually grow back (via mirror sites) after one is lopped off.
Apple hasn't stated yet whether it intends to expand Apple Music to China. It's a massive market, but the meager revenue might not be worth all the trouble.
Leo Sun owns shares of Alibaba and Apple. The Motley Fool recommends Apple, Baidu, and Pandora Media. The Motley Fool owns shares of Apple, Baidu, and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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