Ladies and gentlemen, good evening and good morning, and thank you for standing by. Welcome to the Tencent Music Entertainment Group 2020 first quarter earnings conference 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 will turn the conference over to your speaker host today, Ms. Millicent Tu. Please go ahead, ma'am.
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. Cussion Pang, our CEO, who will start the call with an overview of our recent achievements and growth strategies. He'll 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, 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 filings with the SEC.
You are reminded that such non-IFRS measures should not be viewed in isolation or as an alternative to the 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. Cussion Pang, our CEO. Cussion.
Thank you, Millicent. Hello, everyone, and thank you for joining our call today. I'm glad to meeting every one of you again after we released our 2019 annual results two months ago. Even though I'm still wearing a mask like last time, but we still have a smiling face under the mask, and every one of us at TME remain very positive. It is because we truly believe that what we have been doing is very valuable to our users and society. Music is really the medicine that can heal and accompany with people no matter what the situation is. I hope to see every one of you well during the pandemic period, and we are all together.
In the first quarter of 2020, our online music subscription revenues further accelerated its growth, increasing 17% year-over-year, compared with 60% and 48% in the fourth and third quarter of 2019. Online music paying users reached 42.7 million, up 50% year-over-year. Paying ratio expanded to 6.5%, up from 4.3% for the same quarter of 2019. ARPU for our online music services increased 13% year-over-year, primarily benefiting from users' increasing willingness to pay for premium subscription package. Our outstanding online music subscription revenues growth mitigated the softness in other non-subscription revenues, primarily arising from the COVID-19 pandemic, resulting 27% overall year-over-year revenue growth for our online music services. Some of our key strategic focus during the first quarter include further enriching our leading content offering, deepening our capabilities in content discovery and promotion, and supporting indie musicians.
In terms of further enriching content, to begin with, we have made significant progress in long-form audio and under-penetrated the fast-growing market in China that we are committed to serve. Recently, through the strategic partnership with China Literature and others, we have gained quick access to an extensive library of high-quality IPs and exclusive licenses for some page-turning online literature series with a tremendous fan base in China. Now we have obtained the audio adaptation right of the majority of China Literature's top 100 most favored online books. In addition to audiobooks, we will also produce high-quality audio drama to help super IPs to realize more derived value. Such fast progress is starting to position us at the forefront of the game. As we aggressively scale up content offering, the development of our podcast ecosystem has also achieved initial success.
By the end of April 2020, our platform attracted approximately 10,000 new podcasters and many established KOLs, including well-known artists, writers, and online broadcasters, to produce more premium UGC audio work. Our self-produced audio programs, our Idol Rhythms, "Fan Yin Yue Du," has achieved over 1 billion total streams by the end of last month and become a very popular audio show, particularly for the young demographic. On April 21st, we launched a new application for long-form audio, Kuwo Changting, taking another important step to provide dedicated audio entertainment services to our users. We also began to roll out a separate long-form audio membership package. All of these developments will help us build a solid foundation for our future development and realize more valuable synergies between online music and long-form audio business. Second, we continue to solidify our content leadership with popular genres enjoyed by the younger demographic.
The cooperation with Being Group, one of Japan's highest-selling record companies in the 20th century, enable us to seek more opportunities and we build a closer relationship. Apart from offering highly popular content by renowned Japanese artists, we also actively explored new interactive gameplays, such as the J-pop singing contest, to bring an interactive and comprehensive music experience of listening, watching, singing, and socializing. As a result, our platform has become a popular destination for J-pop fans in China. First, on supporting original content creation, time and again, we demonstrated our unique capability and know-how in talent discovery, cultivation, and promotion. Thanks to our fast-growing indie musician program, the number of participating musicians and original songs produced doubled year-over-year in the first quarter of 2020. We rolled out an attractive financial incentive plan earlier this year.
This has led to impressive growth in the number of indie musician songs that are exclusively licensed to us, which increased by more than 800% year-over-year. We went an extra mile to promote indie music. We launched the program Galaxy, "Yinhe Jihua," targeting emerging musicians and also formed a strategic alliance with Bilibili through the launch of program "Ganbei Jihua" to further enhance their cooperation with independent musicians and KOLs. Additionally, we continuously leverage our profound user insights and powerful promotional capabilities to support indie musicians to reach 100s of millions of music lovers. Last quarter, we shared the success story of Hai Lun, a grassroots singer, and his song, "Girl by the Bridge," "Qiao Bian Guniang." This quarter, I'm pleased to share two more successful stories.
The World is So Big to Meet You," "Shi Jie Zhe Me Da Hai Shi Yu Jian Ni," a song from Cheng Xiang, "Cheng Xiang," and "You," "Shao Nian," a song produced by Meng Jia, "Meng Ran." Both songs were released during the first quarter and have already achieved almost 5 billion cumulative streams on our platform. Their success is our success. As a fast-growing and leading indie musicians program with the largest music user base, we are very pleased to say, as of March 31st, 2020, we have successfully promoted indie musicians content to 100s of millions of users on our platform. While the COVID-19 global pandemic has changed the businesses and the ways of life in different aspects, it has also brought emerging opportunities in the digital era.
We have seen some behavioral changes during the lockdown and observed an increasing number of users listening to music with home apparatus, especially TVs and smart devices. As a result, in the first quarter of 2020, our online music MAU for mobile devices and in-home appliances increased by 3.5% on the year-over-year basis. Such behavior patterns could persist even after the life returns to normal post the COVID-19 pandemic, and potentially provide additional avenues for our paying user growth. The launch of TME Live is a great example of how we quickly and innovatively deploy technology to bring offline concert experience online through live streaming. Within five weeks after its launch in March 2020, we successfully held five online concerts.
This included ones for established artists like J.J. Lin, "Lin Jun Jie," and Rene Liu, "Liu Ruo Ying." Special themes such as an OST concert for the popular web drama series, Someday or One Day: Xiang Jian Ni, leveraging our solid partnership with labels and artists. We are very excited to have built a strong and diversified pipeline to anchor our events. We are also pleased that the user TME Live received exceed our expectations and affirmed the virtuous value creation cycle between online music and social entertainment services. This concludes my prepared remarks, and now Tony will discuss the first quarter result of our social entertainment services, as well as our other focus area. Tony, please go ahead.
Thank you, Cussion. Hello, everyone. Apart from what Cussion just mentioned, there are a few other exciting areas that we want to highlight for both our online music and social entertainment services. For online music services, first, we kept stepping up our efforts to promote video enrichment. We emphasized short videos through upgraded version of Kugou Music. This provides our users an additional dimension of entertainment while increasing the exposure of video content creators on our platform. It has also contributed to improved user engagement, leading to Kugou Music's increased DAU penetration rate and daily average user time spent on video content after the upgrade. Second, while music streaming used to be a less socially interactive experience, we continued to push boundaries by building and promoting an engaging user community through our fan-based programs. We invited many artists to personally interact with their fans on our platform.
Their engagement in online discussions and participation in song reviews, in turn, have contributed to better promotion results and increased stream volumes of certain songs on a daily basis. Thirdly, we kept sharpening our data analytics capability and refining our personalized recommendation. In particular, the personalized playlist continues to receive positive user response. In the first quarter, the DAU penetration rate and average daily streams of personalized playlists more than doubled on a year-over-year basis. Now, turning to social entertainment services. While its revenue growth moderated due to the impact from COVID-19, our mobile MAU and paying user growth remained robust, up 13% and 19% year-over-year respectively, benefiting from the growth initiatives we took to improve user engagement and positive impact from users spending more time on our online karaoke platform during COVID-19.
With respect to online karaoke services, first, we continue to strengthen WeSing's core karaoke features to make it more user-friendly for users to interact through singing. As such, both MAU penetration rate and average daily user time spent of the song recording function achieved healthy sequential growth in the first quarter. In addition, to meet the evolving and expanding user demand, we incubated Kugou Changge, an online karaoke app designed to better serve Kugou Music's users with deeper integration between music streaming and online singing across the two apps. Despite its relatively early stage, we are pleased to see Kugou Changge achieving initial success with MAU growing 800% year-over-year to reach 9 million. Second, we focused on strengthening WeSing's social attributes. We continue to grow the number of online singing rooms based on diversified music-centric themes.
In the first quarter of 2020, we are happy to see the unique real-time social attributes and interactive features built in the online singing rooms resulted in sequential increase in singing room MAU penetration rate and user time spent. Third, we further strengthened video enrichment within WeSing. With more types of video content now dynamically integrated and more video tools deployed to make sharing easier and more eye-catching. This has boosted the amount of video content and average daily video users on WeSing. Now for our live streaming services. Against the impact caused by the COVID-19 pandemic, we worked tirelessly on many fronts to pave the way for faster recovery in the second half of 2020. We continue to expand content categories such as games, ACG, and matchmaking.
In the first quarter of 2020, over 30,000 gaming hosts joined Kugou Live, and its DAU penetration rate of game live streaming has been increasing consistently. In particular, Kugou Live recently reached a cooperation agreement with Tencent Games obtaining the right to live broadcast the full range of Tencent's games. We'll also add more interactive activities and privileges to further incentivize user spending, and continue broadening our live streaming content categories to attract more new users. Finally, to boost our promotional capabilities offline, in April 2020, we acquired an equity stake in Radio Music Warehouse, Radio RMW, in short, a leading provider of licensed music streaming service to public venues in China. From system design and integration to content curation and support, RMW is an integrated solution provider of licensed music in public venues, including hotels, restaurants, supermarkets, convenience stores, and more.
Compared with Europe and the U.S., this market in China is still at a nascent stage, with promising long-term prospects. For TME, this investment serves as another important step to expand our comprehensive music entertainment platform from online to offline. With that, I would like to turn it over to our CFO, Shirley Hu, for a closer review of our financials.
Thank you, Tony. Hello, everyone. In the first quarter of 2020, our revenues were RMB 6.3 billion, up 10% year-over-year, driven by 27% growth in online music service revenues, and 3% growth in social entertainment service revenues. Online music service revenues were RMB 2 billion, up 27% year-over-year. The increase was mainly driven by sustained outstanding performance from music subscriptions, supplemented by strong growth in advertising services, despite impact from COVID-19, partially offset by decrease in sub license revenues. Music subscriptions revenues were RMB 1.2 billion, up 17% year-over-year, driven by continued growth of subscribers and improvement in ARPPU. Basically, number of subscribers increased 50%, and the subscriber ARPPU grew 13% year-over-year, reflecting continued success of paying users retention and the content paywall strategy.
Social entertainment service and other revenues were RMB 4.3 billion, up 3% year-over-year, primarily driven by growth in online karaoke and live streaming services, despite negative impacts from COVID-19, adjustments to interactive features in live streaming, and a change in timing of recent annual gala. On a year-over-year basis, paying users grew 19%, demonstrating the strength of our product. ARPPU decreased 13%, which was primarily due to impact from COVID-19 as users reduced spending to manage the uncertainties. Adjustments to interactive features also had a short-term impact on ARPPU in live streaming. Cost of revenue were RMB 4.3 billion, up 17% year-over-year, driven by higher revenue sharing fees and content expenses. Our gross margin was 31.3% in Q1 2020, and decreased 4.1% from 35.4% in Q1 2019.
This was mainly attributable to higher revenue sharing fees resulted from additional promotions to live streaming paying users to mitigate the impact from COVID-19 and adjustments to interactive features in live streaming, as well as increased revenue sharing ratio to online karaoke performers to strengthen our platform's competitiveness. Gross margin for online music business has improved in Q1 2020, and is expected to keep improving over time as our music subscription revenue grow. Total operating expenses were RMB 1.2 billion, up 12% year-over-year. Total operating expenses as a percentage of total revenue was 18.4% in Q1 2020, increased slightly from 18.1% in Q1 2019. The increase was mainly due to increase in R&D employees related costs as we continued to invest in R&D to expand our product competitiveness advantage and technology innovations.
Our sales and marketing expenses as a % of total revenues remain relatively unchanged from Q1 2019 as a result of our ongoing focus on operating efficiency. Our effective tax rate was 12.8% in Q1 2020. Our net profit attributable to equity holders of the company was RMB 0.9 billion. Non-GAAP net profit attributable to equity holders of the company was RMB 1.1 billion, and the Non-GAAP net profit margin was 17.5%.
As of March 31st, 2020, our combined balances of cash and cash equivalents term deposits were RMB 21.9 billion, representing a decrease of RMB 1 billion from RMB 22.9 billion as of December 31st, 2019. The decrease in the balances was primarily due to investment in consortium to purchase an equity interest of Universal Music Group during the quarter.
Overall, despite the impact from COVID-19, we achieved strong growth in online music services, partially in music subscriptions, as well as healthy growth in social entertainment business in the first quarter of 2020. We expect to see accelerating year-over-year growth in the next few quarters as the COVID-19 pandemic is under control and the business started getting back to normal in China. From long-term perspective, we continue to be optimistic about the future of the broader music industry, and are confident in the overall ecosystem and product pipeline that we are building.
We'll continue to focus on enhancing and expanding our product and service offerings, including long-form audio, while maintaining core content investments. This concludes our prepared remarks. Operator, we are ready to open the call for questions.
Thank you. We will now begin the question- and- answer session. To ask a question, please press star and then one on your touch tone phone. If you are using a handset, please pick up your handset before pressing the keys if you are using a speakerphone. To withdraw your question, please press star then two. For the benefit of all participants on today's call, please limit yourself to one question. If you have additional questions, you can reenter the queue. Once again, it is star then one to ask a question. Our first question today is from Eddie Leung of Bank of America. Please go ahead.
Good morning, guys. Thank you for taking our questions. Can we ask two questions? The first one is about the progress in moving more songs over the paywall. Could you talk a little bit about the recent progress as well as the outlook for that? Secondly, any more detail on the potential launch of live streaming within QQ Music in terms of expanding the coverage of users? Thank you.
Sure. Thanks for your question. In terms of paywall, we have said that as of the end of 2019, our content behind the paywall is approximately 10% of the streaming volume on our platform. Internally, we estimate that by the end of this year, the paywall should account for approximately 20% of our streaming volume. As of the end of Q1, we are on track to hit that 20% target. However, I think we want to highlight that, number one, we're obviously very pleased with the online music subscription revenue growth, growing 17% year-over-year, which is actually the fastest reported growth ever in our reported history. We had suffered from a little bit of COVID-19 impact during the first quarter.
Without the impact from COVID-19 we would have grown even faster, because music, from an MAU perspective as well as from a resulting paying user perspective, saw some users tend to consume more karaoke or games or video when they spend an unusually long time at home. Right? On the other hand, if we were to include music MAU from in-home IoT devices, such as smart speakers and smart TV, which is not currently included in our reported MAU data. If we were to include those, our MAU would actually have grown 3.5% on a year-over-year basis. We saw those in-home device consumption on our platform actually mitigated some of the weaker mobile MAU. Like we said before, I think, given we already have a very large user base in terms of Music MAU, our focus continues to be driving user conversion from free to pay.
We continue, as you could see, to make excellent progress in the current quarter's results.
The second question is about when are we going to launch the QQ Music Live business. In our plan, we are going to launch it in the second half of this year, which is targeting to be in June to July. All the team is working so hard and getting it ready for the launch. We are positive in this area. This year, we are going to test water. After we have prepared everything, I think that will provide further contribution on the social entertainment revenue from the year to come. One more point that I would like to add is, even though the pandemic situation do bring some of the negative impact on the online music's MAU, but we are still seeing that in this quarter, we are still having a 2% quarter-to-quarter growth in our online mobile music MAU.
We are doing pretty good. We are also expecting a better recovery after the pandemic situation was under control in China.
Understood. Thank you.
Thank you.
Our next question will come from John Egbert of Stifel. Please go ahead.
Great. Thanks for taking the question. On the social entertainment side, obviously, the MAU growth is very strong despite the COVID-19 impact, and paid user growth as well. I wonder if you're seeing any signs of ARPU stabilizing at all through May as things have gotten a little bit more normal. On the Kugou Changge, curious what the strategy is there, separate apps versus an integrated app approach, and how you think subscription and overall monetization for the long-form content on the spoken word side might differ from music as you take the strategy of separating an app?
Okay. Thanks for your questions. When we're talking about the social entertainment MAU, yes, we are having a really good result this year, especially during the pandemic situations. More people spending more time at home, and they need certain forms of entertainment. We are seeing a very positive result that our active users being more active. Even some of the less active users, we activate their accounts and started using karaoke and do social networking with their friends at home. We are seeing that the overall user behaviors is actually changing. Even though after the pandemic situations, people start getting back to their normal life, we still want to hope that the activeness of our users will remain in a relatively good level and can persist in the coming months.
What we are thinking about is, right now, since during the pandemic situations, even though it helps our total active users, we are seeing that it do have some impact on the revenue side. It impact the growth of the revenue because, first of all, some of our live broadcasters, they are maybe being quarantined or staying at home, so it impact the total number of on-air time during the pandemic period. Also, the pandemic period also bring some negative impact to the overall economy. Maybe our number of users intention for spending on the live broadcasting services will be impacted as well. After the pandemic area, the period, we are seeing that we are actually experience a recovering right now.
We are expecting to seeing that the total revenue will continue in a healthy growth, and also the ARPU that you mentioned will also be improved as well.
In terms of Kugou Changge, starting from this quarter, we have started to include the Kugou Changge data into our MAU. The data that you see in our reported following have been adjusted retrospectively so that they are apples-to-apples comparison. As you could see, Kugou Changge, despite the very early stage, saw phenomenal growth growing from 1 million MAU last year by over 800% to about 9 million MAU this quarter. The strategy there is that TME has a very good track record of executing on multi-brand product strategy to more effectively cover different user segments. Kugou Changge is another perfect example, similar to a multi-brand product strategy that we follow on online music. That's because Kugou Changge allow us to better serve specifically the user demographics that are more closely aligned with Kugou Music than WeSing and QQ Music.
Overall, social MAU grew very strongly this quarter. I like to add that during the COVID-19 pandemic, as people tend to stay home and spend time more on karaoke during that period, our MAUs and paying users did enjoy a little bit of a boost during Q1. It would be very normal and reasonable that in Q2, as users return to work and they have less time to spend, it will be healthy to see our MAU in Q2 normalize back down to a level that is slightly below Q1. Paying users would probably be around a similar level in Q2 as in Q1. Overall, from a revenue perspective, as Cussion mentioned, we do expect our Q2 year-over-year revenue growth for our social entertainment revenue to be stronger than Q1.
You also mentioned about the long-form audio strategies, the Kugou Changge apps that we have just launched. I would like to add a little bit more comment on it is because, first of all, we are seeing that long-form audio is a strategic area that we want to really focusing on. First of all, because our users, we have a strong user base. They get used to listening to music and enjoy all other related content on our platform. It will be very natural for them to spend more time to listen to some long-form audio formats. We have done a trial six months ago, and we have achieved a very good result.
It also laid a good foundation for us to be more encouraged and started to roll out not just new features or functions on our music platform, but we try to launch our independent long-form audio apps as well, which is Kuwo Changting . The reason is, even though we just launched it at the end of April, less than a month, but we have already received very good feedback from the users. We are fine-tuning our product. At the same time, besides launching all the new applications, we're also rolling out some of our new monthly subscription plans with marketing promotions and really good price tags. I think it also encouraged the market, and we are receiving very positive feedback. We would like to share with you more in the future once we got any more updates regarding long-form audio strategies.
Great. Thank you.
Our next question today will come from Binnie Wong of HSBC. Please go ahead.
Hi, good morning, management. Thank you for taking my questions. My first question is that I understand the company is exploring many new initiatives, new opportunities, and then also the Changge and also the TME Live targeting the UGC content, the PGC content. How do you see this have impact our monetization plans in terms of how you plan to monetize these new opportunities and whether you see any cannibalization to our existing app users? Following up on this question is, whether you think that because we'll be stepping up our sales and marketing or maybe product development expense this year with all these new initiatives we are launching, how will that impact our margin trend this year, please? Thank you.
Okay. Very good questions. We are always focusing on trying to encourage, besides the professional content, we are also encouraging our users to create more user-generated content and share with their friends on our platform. Let me give you an example. We just launched all the new version of WeSing, which is version 7.0, just a couple of weeks ago. The major focus of this version is we are more focusing on the visualizations of the apps. Which means that in the past, when people is using the WeSing app, we'd sing a song, record it, which is in audio format, and then we share it out to our friend. Right now, besides this, we are also encouraging our users to create video-based content.
By very wonderful, powerful tool that we created, lower the entry barrier of our users to create content, and it's very easy for them to make up their own short-form music videos. This is what we are doing, and we have received a very good result, and we are seeing that many people started to create this kind of content. Once this kind of content was being displayed to the users, especially if they are from your friend, you will be giving a like, or you'll be watching it, consuming the content, and it will encourage the interaction among our users, which have the social networking effect. This is very important direction that we are working on.
That's the reason why I'm talking about we are working on the visualizations of our applications. Through this kind of product design.
We will encourage the interaction among the users can also send in virtual gift, or maybe if it's going to be a KOL sending out the short-form videos, you can also follow the live broadcast of these KOLs. We can have monetization methods in order to create a virtual cycle. This is something that we are working on. In terms of the questions, I think that we are not going to jeopardize our professional content because we are understanding that our users do have different needs.
People need professional content, but at the same time, they also need the content from their friends. This is also the beauty of TME. We are a social network, not just a platform-based distributing professional content.
Okay. Thank you. Thank you, Cussion.
Sorry, go ahead.
About the margin. Yeah, I will answer the question, too. Yeah. About the margin. At the gross margin level, we think we expect the gross margin will be stable in this year around that in the Q1. Yeah. Even with the COVID-19 pandemic recovery, our gross margin about our old business will be increased. We need to invest in long-form audio. Next product strategy is to focus on VIP. The content is needed to invest. We expect the gross margin will be stable this year. About operational net margin, we think we will manage our promotion fees, manage our marketing expenses. We think the ratio of this expense to revenue will be around the same rate as the Q1.
About the administrative expenses, because we need to invest more new product and the new technology, we will invest more on R&D expenses and employee costs. The operation, the G&A expenses will increase.
We expect that the net margin level, our net margin will be a little decreased compared to the Q1 and around the reasonable level in this year.
Okay. Thank you. Thank you, Cussion and Shirley. Very helpful here. Thank you.
Thank you.
Our next question will come from Alex Yao of JPMorgan. Please go ahead.
Thank you, management, for taking my question. I have two questions. One is regarding the introduction of an audiobook function into the product portfolio. Usually, the industry peers use audiobook as an engagement driver and then monetize the engagement and the usage from audiobook of their live streaming business. Does audiobook serve the same role in your portfolio, i.e., it's more of an engagement driver and less of a monetization driver? Secondly, regarding the social entertainment, the revenue growth rate slowed down to 3%, which you guys attributed to the outbreak of COVID-19. My question is, what does it take for the revenue growth rate to recover to teens, if not 20s, into the next couple of quarters?
Just because of the COVID-19, does it mean you guys don't need to do anything once the impact from the COVID-19 is over, the business will go back to the normal growth trend? Do you need to do something to maybe change the way the consumer behaves post the COVID-19 outbreak? The relevant question is, can you share with us the user behavior trends of the social entertainment business in April versus February and March? Thank you.
I'll address the second part of the question on social entertainment. Perhaps Shirley can talk a little bit more about the audiobooks segment afterwards. While social entertainment revenue grew only 3% year-over-year, primarily as a result of COVID-19, we strongly believe the worst is behind us, and we do expect growth rate will recover in Q2. We expect the Q2 year-over-year growth rate for revenues to be stronger than Q1. Most of that is driven by just organic growth of paying users being more willing to send a virtual gift with the economy reopening back up and the content supply reopening back up, given what Cussion mentioned earlier, having some of our live streaming performers being back to work on a more normal level in Q2.
Most of the growth is just going to be driven by organically from our Kugou Live, Kuwo Live, and to some extent, WeSing as well. Like we mentioned, we do think our social entertainment business remain healthy and solid. It doesn't stop us from continuing to broaden and expand our social entertainment business beyond that to include the launch of QQ Music live streaming. I just want to be clear that we plan to launch the QQ Music live streaming service in June. Right? In June. We'll continue to expand the live streaming content category that I talked a little bit about into gaming and the likes of ACG or other categories such as matchmaking. In fact, we've made tremendous progress in April by announcing the strategic cooperation with Tencent Games, allowing Kugou Live to live stream all of Tencent's popular games.
All these are initiatives, growth initiatives, that would help us drive further growth beyond our organic growth. More of that would probably shine through in the numbers towards the second half of next year rather than second quarter.
Mm-hmm. Alex, thanks for your questions. Let me address the first question that you mentioned about the audiobooks functions. You're absolutely right that the audiobooks function, or maybe I call it the long-form audios, is really an engagement driver to us because I think, as I mentioned before, it's very natural for our users because they listen to music, they get used to it on our platform, and it's very easy for them to listen to more other format of content, like a long-form audio. It's very natural for them when we are going to offering this kind of content, and will help us to increase the time spent of our users, which has been proven during the past six months that we soft launched the service already.
I think that this is very healthy to our platform because even though we have already got a huge amount of MAU, we are not relying on this long-form audio features to get additional new users. Definitely, we will get some, but if we can use them to let our users to get more engagement and increase their time spent, it's going to be the number one objective that we would like to achieve. Once we got our users to be more active, there's many way for us to do the monetizations. Like I mentioned before, we have the monthly subscription VIP plan which is we offer a very attractive price tag for the moment to encourage people to spend more besides the normal music monthly subscription. We also have the a la carte model that they can also spend on a particular long-form audio content.
We can also drive more advertising revenue in the future as well, because as every one of you knowing that on the TME platform, there's a lot of potential for us to drive for the advertising dollars. Besides this, we are also seeing that, just like you mentioned, we can also let the KOL who provide the long-form audio content to us to even have some live broadcast. We are also showing this very good result and feedback by the audio-based live broadcast as well. It's on the QQ Music platform, it's on the Kuwo platform. We are seeing that the trend is coming. This is also another potential area that we can even drive further business development. There's many way for us to do the monetization in the long-form audio space.
I think that this is the reason why we are so emphasizing it, and we will continue to pull in more resources in this area.
This new monetization ways, we think we need time to training the users. We expect the meaningful revenue will be come from next year. That's all.
As a reminder, we ask questioners to please limit themselves to one question, and if they have additional questions, please reenter the queue. Our next question is from Alex Poon of Morgan Stanley. Please go ahead.
Hi, management. Thank you for taking my questions. You touched on overall gross margin of the company going to be stable. If I want to split between the music services and the social entertainment margin, how would the trend be look like? For music margin, understand that the master agreement with one of the top three labels is expiring. Can you give us some update about that? What are you hoping to achieve from that negotiation, and how would that impact your cost structure? Also, will that new agreement have any implication on other domestic labels, other music labels' cost structure in future? Thank you very much.
Sure. Perhaps I'll address the question about the licensing, and then Shirley can address the question about the margin going forward. Look, we are in the middle of the negotiation with one of the three major. Like we said in the past, our focus is on getting to an outcome where it's no longer going to be a master license. It will be a non-exclusive arrangement. In terms of the cost structure, in the past, obviously, there's primarily a fixed cost, minimum guarantee-driven cost structure. What we're striving towards is ensuring that the components of the cost that are revenue shared base are more than in the previous contract, and the components of the contract that are fixed cost based in terms of the MG are less compared to the last contract. Overall, that would be an improvement compared to where we were previously.
In the long run, we believe that obviously, from an absolute dollar perspective, if you look at the licensing cost, it is fair that it should go up over time. Relative to the growth rate of our music revenue growth or music subscription revenue growth, we're confident that we'll be able to see operating leverage kicking in our music business, despite the growth in the licensing costs. I also want to remind everybody that I know there's a lot of focus on our three majors, but the biggest five labels account for only less than 30% of our streaming volume on our platform. It's actually even less than that now. We have a very diversified set of content supplies, which is very different than in the West. Importantly, we are investing and are very committed to building independent musician ecosystem, the Tencent Musician Program.
Because you could see the results coming through, as Cussion mentioned, with the number of songs being uploaded or the number of people that are signing up to the platform doubling. Increasingly, even some of those content are being licensed to us through the Tencent Musician Program on an exclusive basis to us. That's growing even faster. Overall, we're helping many of these independent musicians grow very fast and promote their song very successfully, as the examples that Cussion talked about. Overall, I think our content portfolio will be very broad and comprehensive. It will have the top labels such as the three major, and we'll continue to be the partner of choice there, and we're confident that we'll be able to get to an outcome that is reasonable and profitable for both parties. At the same time, we're also working very
closely and investing heavily on broadening our content ecosystem to include all these indie musicians as well, which is very good for us in the long run.
About the gross margin on online music. We expect the gross margin will be improving in long run better and better. There are two reasons. One, at this moment, the monetization with the music side is at the very early stage. We expect our revenue on music will be increased rapidly, including subscriber revenues, digital sales, and advertising revenues. This is one reason. The second, we will manage the cost of license. We hope more part of the cost will be revenue sharing sales and reduce the minimum guarantee. I think this needs time. It's a long strategy. It needs time to get the goal. We believe that the gross margin on online music will be increased in the long run. About the social entertainment gross margin. We believe, in the next quarters, this part will be recovery because the epidemic will be over.
The revenue sharing ratio will be a little increased on online music. No, sorry. On the karaoke. That will be a little increase in gross margin in social entertainment. Overall, compared to the Q1, the gross margin will be increased. Yeah.
Our next question will come from Wendy Chen of Goldman Sachs. Please go ahead.
Hello. Hi. Thanks management for taking my question. My question is about the change on the music industry amid the COVID-19 and the subsequent work from home trend. As we've seen, the way of user consuming music might change and some upstream player might suffer amid the lockdown. I'm just wondering what's the management strategy to further drive music monetization post the pandemic world. For instance, are we looking at to monetize those live concert streaming product or the IoT product? Thanks very much.
Okay. Thanks for your questions. Actually, you're absolutely right that during the COVID-19 pandemic period, more people are staying home and the pattern of consuming music is also different than in the past. I think that we are seeing positive impact, frankly speaking, because it's not just doing it right now, but around a year or two year before, we started to extend our footprint in providing music service through IoTs and other home appearances like the smart TVs, et cetera. This really help us to lay a good foundation for us to help our users to enjoy music at any time, at anywhere in their convenience. I think that we have already laid a good foundation.
During the COVID-19, even though the patterns of the daily life of our users has changed, which will have some negative impact to the overall activeness of our users, but we are still doing a pretty good job in this quarter, the Q1 of 2020, which we still have a quarter-to-quarter improvement in the total MAUs. I think that in the future, I think that since that people have started to get tried on using music through the IoTs or other platforms, I think that you also help this kind of user activeness to be persist in the future. I think this is going to be another potential growing area of us. We will continue to have a strong partnership, not just by ourselves, but also with other IoTs manufacturers and also other platform as well. We will continue to strengthen our business in this area.
In terms of the monetizations, I think that there's two ways. In terms of the music, I think that we have been continual showing very good, encouraging feedback in our growing of our subscription base, which is a 17% growth, which is a record high. I think that this is very important for us to be proven that the way that we are doing is the correct way to go. Right now we have the paying ratio at just 6.5%. We are seeing that it's going to continue to grow in a healthy manner, and the inflection will be reached in the future. We are going to, maybe one day, we can achieve a even a lot higher paying ratio, which is going on the time will be coming.
The second part is we are also seeing that we started to have some kind of online entertainment format, new form of online entertainment for our users when they are staying at home. There's a reason why we roll out the TME Live program during the pandemic era. We have successfully launched five online concerts with top-tier artists. Frankly speaking, it's not an easy work because we are not just letting the top-tier artists to record a song at their home and then just simply broadcast it, but we are arranging online concerts, which is around one and a half hour full-length concerts. This is really not that easy to arrange, but we have already tried it out. We're getting a lot of really good feedback from the users and also the top tiers like J.J. Lin and also like Rene Liu.
They're also thinking that it's very positive, not just the format of it, but also sending out really positive messages to the society that we are staying together during the pandemic situations. I think that after gathering this kind of experience, we will continue to fine-tune our TME Live online concerts. It's not just simply broadcast online event and let them to become an offline event. We need to have new format, something that is more suitable to the younger generation, something that is more suitable for the behavior of our online users. We are working on that. In the future, we will be adding more and more monetization method for this online concerts as well. It's not just for online ticketing, but we can encourage more virtual gifting. We can encourage more real-time interaction among the artists and also the audience.
We can arrange a fan space event. We can arrange a lot of fan space activities during the online concert period as well. There's many ways to come. I'm so encouraged by, even though the COVID-19 is not a good situations for the entire world, many people have suffered, but we are also seeing that we can use all these kind of innovative ways to provide some of the new services which can help our users to be positive and also having many ways of entertainment, even if they are staying at home. I'm seeing that there are a lot of new business opportunity out there.
Our next question will come from Thomas Chong of Jefferies. Please go ahead.
Hi. Good morning. Thanks, management, for taking my questions. I have a question relating to competition and revenue sharing with broadcasters. Given the fact that we are having more content in our social ecosystem, can you comment about how we think on short-form video and game broadcasting competition with other peers in the future? With that, how should we think about our revenue sharing ratio with the broadcasters, given that we are thinking about the GP margin to be relatively stable on a year-on-year basis for the full year? Thank you.
Okay, I'll take the competition question. Look, I talked a lot about video enrichment across a number of our apps, on music as well as on WeSing. We are not trying to become a short video platform. Let me just be clear. What we are trying to do is enrich the video content format so that we can better serve the user needs. Users, they want to consume music, but they also have desire to consume video content that are related to music. In the past, we haven't been able to fulfill that need. Going forward, we want to enrich the video content category so that we could actually fulfill their needs and thereby increase engagement and time spent on the platform. In addition to that, I would say that in terms of video, it's not just short video.
For example, we have a show, like a mini variety show called Mr. Radio on QQ Music. We just finished the second season. A highly successful show. Since the total stream for the two seasons combined is almost 600 million streams, and that's on our platform, right? This is not streamed externally by video-based platform. That's basically a radio talk show type show, but it's a video content. Those two seasons attracted over 100 groups of artists, right? Actually, that's on season two alone, which is 17% higher than season one. We promoted 100s and 100s of songs through that. There's a lot of very good positive user feedback on that. That's another form of video enrichment on our platform. That is not just short video, but those are sort of 20 minutes in length. At the same time, we are also broadening.
We are talking a little bit about PGC. We are also broadening our UGC. In Kugou Music app, for example, in the music streaming page, increasingly, you'll be able to see while you're listening to a song, the system will automatically recommend a background video, a background short video for you to consume. Those videos, some of that are part of the whole slate of variety shows that we have either invested in or we participated. We have some of the partner labels participated in, so we have access to those content. Some are purely UGC provided. All of that are music-centric. Again, it all comes back to enriching our engagement and time spent by allowing users to consume music-centric video on the platform. They don't have to leave our platform to go to an external platform for this regard.
Outside of music-centric content, that's something for an external platform to do.
Our next question will come from Ellie Jiang of Macquarie. Please go ahead.
Thank you, management, for taking my question. How do we think about the balance between user growth and ARPU under the current social segment, if we look beyond second half? Since we're gradually recovering from COVID-19 and normalizing all the metrics, how the new features like games and QQ live streaming would impact ARPU in longer term? Thank you.
Sure. I think it's important to recap the Q1 metrics, because it's important to understand that to understand the future. We saw the paying user increase, and the ARPU slightly decrease on a year-over-year basis, and that's primarily because of the COVID-19 impact. We saw an increase in time spent on online karaoke, which drove the MAU and drove the paying users. However, many of these paying users tends to be lower ARPU compared to the live streaming paying user, and as a result, obviously dragged down the overall ARPU. At the same time, the live streaming paying users, who are economically impacted by COVID-19, also has a less willingness to spend. We have those two impacts. Going into next quarter and beyond, obviously with the economy reopening and people returning to work.
From an online karaoke perspective, the paying user growth won't be obviously as high in Q2 as it is in Q1. From a total paying user perspective, it'll probably be at a similar absolute level, maybe just a little bit of growth compared to Q1, but that's completely normal. If we talk about one quarter, obviously we'll grow beyond that from Q3 and into Q4. From an ARPU perspective, with the reopening of the economy and the live streaming paying users returning, the ARPU would obviously increase sequentially compared to Q1. I think we see that trend continuing, which is a very healthy trend. Also, I want to stress that the MAU would also normalize a little bit in Q2. That would be at a level that would be slightly below Q1.
Again, that would be completely normal because of the COVID impact that boosted the karaoke MAU in Q1. It will still be at a very healthy and strong level.
Our next question will come from Zhijing Liu of UBS. Please go ahead.
Thanks, management, for taking my question. I have just one question. It was great to see continued acceleration of music subs revenue in past two quarters. How sustainable is this round of strong traction, especially considering that subs addition had a slight deceleration in 1Q? Thank you.
Yeah. I'll take that. I think in Q1, obviously, I talked about the impact of COVID on music MAU, as a result, paying users as well. When users spend an unusually long amount of time at home, they tend to consume more in terms of karaoke or online games or online videos. Right? Despite that, we were able to grow subscription revenue at 17% year-over-year basis, which is actually our fastest reported growth. Going forward into Q2 with the reopening kicking in, we actually expect our Q2 year-over-year growth rate for our overall online music revenue to be even stronger than Q1. Right? That's again, going to be driven by subscription revenue continuing to grow at a very rapid pace. In terms of net adds, you talked a little bit about net adds.
We expect the net adds of music paying users in Q2 to be higher than Q1, obviously. Hence, the music paying user year-over-year growth rate would also be at a very high level similar to that of Q1. From an ARPU perspective, let me touch a little bit on music ARPU, because what we're seeing is a very strong growth on a year-over-year basis in terms of ARPU is a result of many previous quarters of investment that we've made, like last year. Right? In the form of, for example, promotional efforts around auto-renewal subscription plans. Now, the impact of those auto-renewal subscription plan is that we provide a first-month discount if a user sign up, so that they check the auto-renewal option. Then after the first month discount, it actually goes back to the normal pricing.
It has an impact of slightly decreasing the near-term ARPU, but increasing the long-term ARPU. We're enjoying the benefit of those promotional efforts a few quarters ago now. Like we said, in the past, we are still at a very early stage of monetization with only 6.5% of our paying users. If we could grow our subscribers more by keeping our ARPU flat, we would prioritize on our subscriber growth over ARPU. I wouldn't be surprised if in the next quarter or two we see a more flattish, a sequential ARPU, but still growing on a year-over-year basis. If that happens, that's basically us spending again promotional efforts to invest in growing long-term ARPU. That's actually a very good thing for us that we see.
Yeah. One more point that I would like to add, which is the retention rate of our monthly subscription. It has been continue growing. We are still seeing that we are in a really healthy manner. Once the retention rate continues to improve, it will further help us to drive up our paying ratio as well.
Thank you.
Our next question. Thank you. Our next question will come from Tian Hou of TH Capital. Please go ahead.
Morning, management. Thanks for picking me up for the question. I have a question regarding to a TME broadcast, the TME Live. After I seen the concert, actually my team watched all five concerts. I feel pretty excited about your business since you are actually step out what's existing like live broadcasting or music services and enter into a new territory of a music area. I wonder if that is your ongoing plan, if you have an ongoing pipeline for that, and also how to monetize it. Each concert you can have hundreds of thousands of audience or millions of audience. I think if you don't monetize it's really waste of resources. I can imagine Tencent will have a lot of those kind of advertisement requirements or resources if they can actually put some in it, you can actually monetize in a great deal.
I wonder, what's the strategy going forward? If there's a pipeline, how do you monetize it? Thank you.
Okay. Yeah, thank you so much for your questions. We also feel exciting about the TME Live activities that we are organizing for the moment. Yeah, you're absolutely right that we are not just providing a music service through the mobile apps, but we have already extended our footprint and really aim to build a total music entertainment ecosystem, which means that we need to go upstream and also downstream as well. I think the TME Live event really demonstrating that we are putting in a lot of efforts and also creating a wonderful new experience for our users from the performance area. I think that for the TME Live events that we are organizing, first of all, there's many things for us to learn. It's not simply making an offline concert and directly broadcast it and name it an online concert.
I think that we can have many new formats, which is also some of the strength of TME, like the socializing. Okay, how we can let our users when they are enjoying the online concert, and they can also socializing with each other. The fans-based economy can actually kick in. We can do a lot of things. For example, if you're the fans of J.J. Lin, okay, maybe before the concert is going to start, you can get involved in some voting on which songs that J.J. Lin is going to perform for that online concert. Also during the online concert, you can also have a lot of interactions as well. You can have many kind of chatting or sending virtual gifting to your beloved idols. Maybe we can arrange some gamifying ways for our users to enjoy the online concerts as well.
All these kind of things will be the monetization methods that we can putting in. I think that as I mentioned, the five top-tier artist online concert that we arranged during the pandemic situations is really a good start for us. We learned a lot of experience, we're accumulating more experience, and we are fine-tuning our business model. The most encouraging result is not just our users really like this concept, but also the artists also feel that there's a lot of potential. They also want to go with TME and arrange more online concert in new format online concert together in the future. I think as I mentioned before, we are truly the preferred partners, not just by the music label, but also the preferred partners by our artists because we are growing up together.
We work for better industries and we work out better music and better music experience for our users. Just wait for us to go and we'll continue to explore. I'm definitely seeing that TME Live and this kind of performance-based activities, we will have in a good hand to work on more positive results in the future.
Thank you.
Thank you, Tian Hou .
Our next question. Thank you. Our next question is from Alex Liu of China Renaissance. Please go ahead.
Thanks for taking the question. I have one question. Given the user demographic is different between QQ Music and Kugou, how does the management envision QQ Music live streaming to differ from the current Kugou live streaming, in terms of product design, content vertical, and user paying pattern? Thank you.
Sure. I think we'll be able to talk a lot more about it, without giving too much away until we've launched the service. Broadly speaking, what we try to achieve, like we said, is continuation of the multi-brand product strategy across music that you saw we have multi-brand. Across karaoke, that you see that we have embarked upon the incubation of Kugou Changge, and also in live streaming, multi-brand. I think each brand and each product will have slightly different targets of user segments. Needless to say, I think our live streaming business within QQ Music will be more complementary to the user segment for QQ Music. It will have more focus on independent musicians, which QQ Music is working very closely with. It will have more features to work with these musicians to promote their music in a more live and interactive manner.
All of this is very complementary. Like we saw in music, multi-product doesn't cannibalize. It actually help us broaden our reach, and help us better cover the entire population in China. China is very big with different segments. Through this multi-brand and multi-product strategy, we can actually extend our existing business into more and more user segment and thereby broadening our revenue growth potential.
Wonderful. Also the user overlapping among QQ Music and Kugou Music is also very minimal. Okay? There's a reason why I think that when we are going to roll out the live broadcast service on QQ Music platform, which will help us to serve our users better, to serve the QQ Music users better, and it's not going to cannibalizing the Kugou Music live business as well.
Thank you.
Thanks.
All right. Our next question will come from Hans Chung of KeyBa nc. Please go ahead.
Hi, good morning. Thank you for taking my question. I have a quick couple question. The first one, just following up the QQ Music live streaming question above. Just wonder, what's our initial thought on the potential, like will addressable user, the scale and the paying user potentially. Is that going to be similar to what we have now for the Kugou Music live streaming? Could be even bigger or less? Second question would be, still regarding the social entertainment business. Just wonder, can management team just elaborate more the progress of a recovery? I think you guys mentioned there's some recovery, I mean, in this quarter. What's the trajectory, like, say, in the end of March, in April, into the early May? What do we see the year-over-year growth trajectory, I mean, over time here?
What do we expect the revenue run rate level to be, at what level compared to the pre-COVID-19 level? Thank you.
Okay. Look, I think obviously, subject to all the disclaimer related to forward-looking statement. By virtue of us saying that we expect the second quarter revenue growth for social entertainment to be stronger than Q1, we're saying this because we are already seeing a recovery in the numbers in April and parts of May that we are in. It's in line. The reality of what we're seeing happening is in line with what we're saying. Then in terms of the addressable market, look, I think live streaming is a multi-100s of billions in RMB terms in market size, right? I mean, live streaming business is huge. I think we have obviously a very strong foothold in the music-centric live streaming, that we're already in. Nobody is in this space. This is still just a small percentage of the overall live streaming pie.
We actually think we could continue to grow that pie of music-centric live streaming, alongside the growth of the overall live streaming, which is an enormous market. As to whether it could one day reach the size of Kugou Live, I think it will be not in the near term. I think it is fair to say, given Kugou Live has done this for many, many years. It would take many years for us to reach that level. I think the potential is definitely there. I think that is the last question. Overall, just to close things out. Like we said, I think in terms of online music, we are seeing very positive momentum continuing. We expect the second quarter revenue growth to be stronger than Q1, driven by continuous rapid growth in subscription revenue.
In terms of social entertainment revenue, we again also expect Q2 to be growing faster than Q1. Combining all of the above, we expect our total revenue growth next quarter to be stronger than Q1. Let's put the COVID impact behind us, and we think the worst is over, and we have better results ahead of us starting Q2 and into second half.
Okay.
We'll wrap up.
Okay. Thank you, everyone.
Okay.
Thank you so much for your time.
Ladies and gentlemen.
Yeah.
Okay. Thank you.
Ladies and gentlemen, this will conclude today's conference. We thank you for attending. If you have any further questions, please feel free to contact TME's investor relations team. We look forward to speaking with you again next quarter. Thank you and goodbye.