Internet & Tech

On song

Tencent Music joins IPO rush by Chinese tech unicorns


It has 700 million users

At first glance, Chinese consumers appear to love music – an estimated 72% of the population listens to it, and they do so for an average of 16 hours per week. What they don’t like is having to pay for the pleasure.

According to Peng Jiaxin, chief executive of Tencent Music Entertainment, China’s spending on music per capita was only $0.1 in 2016; compared with $21.7 in Japan and $16.4 in the US.

That hasn’t discouraged the music distribution unit of China’s dominant social media firm from seeking a public offering, as Tencent Music is reportedly looking to go public in New York later this year with a hefty valuation of $25 billion.

The price tag is nearly twice as much as in 2017 when Spotify bought a 9% stake as part of a share swap. Tencent, in return, received a 7.5% stake in the Swedish music streamer.

Spotify itself is now trading at a market capitalisation of around $30 billion, following a 40% rise in its valuation since its own New York listing in April.

Tencent Music will need to brave a tougher market to reach the lofty valuation of its sister firms. Last November, when Chinese stock markets were on a bull run, Tencent successfully spun off its online publishing and e-book unit China Literature, raising $1.1 billion in a Hong Kong listing (see WiC387).

Tencent Music is the leader in China’s online music streaming industry. It has more than 700 million monthly users, or as much as 78% of the local music streaming market. Its closest competitor NetEase Cloud Music has just 87 million monthly active users. That is followed by Xiami Music’s 15.6 million, while Baidu Music trails with a distant 7 million, according to Jiemian, a portal.

“Through the IPO, Tencent wants to make the music streaming market even bigger. While Tencent Music is the leader in China, listing in the US could promote its brand and visibility, helping it secure a spot globally,” commented Zhang Yi, chief executive of iiMedia.

According to 21CN Business Herald, Tencent Music’s revenue is expected to top Rmb17 billion ($2.5 billion) this year, up from Rmb9.4 billion in 2017. Net profit is also forecast to rise to Rmb3.7 billion from Rmb1.9 billion a year earlier.

Since the number of paying subscriber is so low – only 2.8% of the total user base – the company relies heavily on advertising revenue from audio and display ads on its platform.

Tencent Music has secured exclusive streaming rights with Sony Entertainment, Time Warner’s Warner Music and Universal Music. It has also signed deals with South Korean music firm YG Entertainment and Taiwanese labels JVR Music and LOEN Entertainment. Having secured more than 22 record labels for its music portfolio, Tencent Music has “the best coverage in the industry” according to Jiemian.

A firm grip over copyrighted content is also important because Tencent gets to decide which songs its rivals are allowed to play and at what paid rate. NetEase, for instance, is forced to sub-licence most of its music content from Tencent Music. On the other hand, Xiami, a service owned by Tencent’s archrival Alibaba, has lost a lot of ground largely because it has failed to strike a deal with Tencent.

“Of the three platforms [Tencent, NetEase and Xiami], Tencent’s copyright coverage is as high as 90%. That gives it a lot of leverage over its rivals in exclusive content and copyright transfer authorisation. Tencent’s financial strength is much stronger than NetEase’s. It has the ability to bear the exorbitant royalty fees that NetEase cannot. So to put it simply, whoever has the money gets the power,” Yuan Guobao, a media commentator, told Jiemian.

Still, that’s not to say Tencent Music has no challenges ahead. For a start only 15 million users are paying subscribers. That percentage is low compared with Spotify, where 43% of users pay to listen.

Meanwhile NetEase, which is most popular among users under 25 years old, has been adding social networking features to its app, which could help it compete against Tencent’s WeChat. The NetEase platform is also the market leader in electronic dance music, says iiMedia Research.

And if Tencent Music does try to broaden its international footprint it will be going head to head with Apple – never an easy task.

In May Apple’s CEO Tim Cook told Bloomberg TV that it had in excess of 50 million subscribers, mostly made up of paid subscriptions (at $9.99 a month, versus Rmb12 for Tencent) but also some customers on free trials. That’s a lot less than Tencent’s total user base in China. But significantly, a far bigger number of people are willing to pay for the Apple service.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.