Tencent Music, bound for U.S. IPO, profits from social
savvy
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[September 27, 2018]
By Sijia Jiang
HONG KONG (Reuters) - Tencent Music, which
owns China's most popular music streaming apps, is often compared to
Sweden's Spotify Technology <SPOT.N> but it offers more in the way of
socially interactive services that is helping it hit bigger notes in
money making.
The company, majority owned by Chinese tech powerhouse Tencent Holdings
<0700.HK> and slated for a U.S. IPO next month, made almost $400 million
in earnings before interest and taxes in 2017, according to an investor
document circulated in August that was seen by Reuters.
Those profits are expected to nearly double to $764 million this year
while revenue is seen climbing 72 percent to $3.1 billion, the document
said.
By comparison, Spotify, with which it has a cross shareholding deal,
lost 90 million euros ($105 million) in the second quarter of this year
on revenue of 1.3 billion euros.
Tencent declined to comment on the earnings numbers for Tencent Music or
the IPO plans. Reuters could not independently verify the figures.
In a market that until a few years ago was dominated by pirated music,
Tencent Music's strong financials are due to a business model that does
not rely primarily on the monthly subscription payments that sustain
Spotify and other Western music streaming companies.
Instead, analysts say much of its revenue comes from services such as
karaoke live broadcasting where admirers tip performers.
"China music apps are more advanced in their integration of music
streaming with live broadcasting, karaoke as well as social community,"
said Elinor Leung, managing director of Asia telecom and internet
research at CLSA.
"Social interaction is the main difference between Chinese music apps
and Western music apps."
Tencent Music also benefits from differences in music copyright payment
in China and the West, according to BOCOM International analyst Connie
Gu.
"Some popular musicians in Europe or the U.S. may require royalty
payment per play count, while the current practice in China is for
companies to sign three-year contracts regardless of play count, so the
economy of scale helps the platform's profit," she said.
Tencent Music is seeking to raise $2 billion in its IPO, three people
close to the deal told Reuters last week, in what will be one of the
biggest U.S. listings by a Chinese company this year.
It made a confidential filing with U.S. Securities and Exchange
Commission this month, the sources said and likely valuations for
Tencent Music were not immediately clear. Spotify, which went public in
April, is now worth more than $30 billion.
Tencent Holdings and Spotify announced a share swap in December that
gave the Chinese company a 7.5 percent stake in Spotify including shares
held by Tencent Music. Spotify held 9 percent of Tencent Music,
according to the Swedish firm's IPO prospectus.
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Visitors use their
smartphones underneath the logo of Tencent at the Global Mobile
Internet Conference in Beijing May 6, 2014. REUTERS/Kim Kyung-Hoon/File
Photo
BIG TIPS, BIG BUCKS
For Tencent Music, there's much money to be made from people like Zhou Nan who
performs on WeSing - a karaoke app that has some 50 million daily active users.
Zhou, 22, a music student in the city of Nanjing, conducts live performances on
WeSing several times a month, with her band Flanger's account boasting nearly
270,000 followers.
Tipping from fans gives her 30,000 yuan to 50,000 yuan ($4,400-$7,300) a month,
she said, and that's even after Tencent Music takes 70 percent according to
their revenue-sharing contract.
"The biggest tip I received from a single performance once was 20,000 yuan,"
Zhou said, adding that while she had a wide fan base, most tips came from those
aged 40 or above.
Ordinary users of WeSing can also receive virtual gifts, with the purchase money
all going to Tencent Music.
Tencent Music is also seeking revenue offline by selling goods such as
microphones and headphones, and opening mini karaoke boxes that can be put in
shopping malls. WeSing outlined plans to open 300 such karaoke boxes across
China this year, local media reports have said.
All told, Tencent Music has more than 600 million active monthly users and about
80 percent of the online music market, according to the investor document. That
includes its QQ Music streaming platform as well as the apps Kuwo and Kugou
which it acquired in 2016.
Customers can buy songs or albums on Tencent's apps, or sign up for monthly
subscriptions that cost between 8 yuan to 18 yuan, compared with $9.99 at
Spotify.
Those low fees and a relatively small proportion of monthly subscribers for
those services could ultimately be a weakness, said Gu.
"Compared with video, payment for music is going to grow at a slower pace," she
said, adding that Tencent will need to work hard to convert more users into
paying customers.
Tencent Music declined to comment on its ratio of paying customers.
It owns the most music copyright in China with some 17 million songs, though it
shares or sublicenses content with rival apps owned by NetEase Inc <NTES.O> and
Alibaba <BABA.N>, so those users have access to similarly large libraries.
(Reporting by Sijia Jiang; Editing by Jonathan Weber and Edwina Gibbs)
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