Chinese music streaming company Tencent Music Entertainment saw its paying users grow to 103 million in the third quarter, up 20.8% year over year and 3.6% better than the previous quarter, the company announced Tuesday (Nov. 14). 

A 42% gain in subscription revenue to 3.2 billion RMB ($438 million) helped online music revenue grow 32.7% to 4.55 billion RMB ($624 million). Not only has Tencent Music Entertainment gained paying customers, but they’re also paying more: Average revenue per paying user (ARPPU) rose 17% to 10.3 RMB ($1.41) in the third quarter.

“We will continue to drive solid growth of our online music business, with subscription revenue driven by the subscription base growth and also ARPPU expansion as well,” said executive chairman Cussion Pang during Tuesday’s earnings call. “Outside of the subscription revenue, we expected the revenues from advertising and new initiatives, such as artist merchandise, to continue to grow healthily.”

Tencent Music Entertainment’s 103 million subscribers is well behind Spotify’s 226 million subscribers, but its subscriber base has grown steadily from 85.3 million and 71.2 million in the third quarters of 2022 and 2021, respectively. Its ARPPU of 10.3 RMB ($1.41) is also far lower than Spotify’s ARPU of 4.34 euros ($4.72), reflecting the relatively higher prices in the North American and European markets where Spotify is strongest. Still, Tencent Music Entertainment’s ARPPU showed strong growth last quarter after dropping from 8.9 RMB ($1.23) in the third quarter of 2021 to 8.8 RMB ($1.21) in the third quarter of 2022.

Tencent Music Entertainment operates the music streaming apps QQ Music, Kugou and Kuwo. It also owns WeSing, a social karaoke game. The music-focused company additionally offers podcasts and ventured into audiobooks with its 2021 acquisition of audiobook platform Lazy Audio.

The company touts what it calls a “dual-engine” strategy that improves both the content and the platform’s features and technology. In the third quarter, Tencent Music Entertainment expanded its partnership with K-pop company YG Entertainment to include ticketing, which gave subscribers the ability to purchase BLACKPINK concert tickets. A partnership with another South Korean company, Cube Entertainment, gives Tencent Music Entertainment a 30-day window of exclusivity on new song releases. On the technology side, a new music production tool in the Kugou app allows users to create music in multiple languages. “Through a brief training session, it can effectively and efficiently produce songs in Mandarin, Cantonese, English, Korean and Japanese,” said Pang.

Gains from the music side of the company couldn’t make up for steep declines in Tencent Music Entertainment’s social entertainment segment, however. Company-wide revenue declined 10.8% to 6.57 billion RMB ($900 million) due to a 48.8% year-over-year decline in social entertainment revenue and a 16.8% drop in social entertainment mobile monthly average users.

“For the social entertainment services, we will continue to execute our current operational strategy with the backdrop of the macro factors and competition for 2024,” said Pang. “Our primary target is to stabilize the business and better serve our core users.” 

Gross margin improved by 3.1 percentage points to 35.7% due to growth of music subscriptions and the company’s use of its own content. “Looking forward [to] Q4, we expect subscription revenue and advertisement revenue will continue to be strong,” said CFO Shirley Hu. “On the cost side, we expect our in-house made content will have a positive impact on gross margin continually and we will continue to increase our operational efficiency and monitor cost items.” 

Shares of Tencent Music Entertainment rose 3.1% to $7.66 on Tuesday. That was slightly better than the gains most stocks posted following a report that inflation was flat in October and up 3.2% from the previous year. The news sparked hope amongst investors that the Federal Reserve would stop hiking interest rates to help tame inflation. The Nasdaq composite gained 2.4% and the S&P 500 gained 1.9%. 

Tencent Music Entertainment third-quarter financial and user metrics: