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Tencent Music Ready to Issue IPO

Jul 11, 2018 by A. Alfaro
Tencent Music Ready to Issue IPO

Tencent Music and Entertainment (TME), the music division of Chinese Internet conglomerate Tencent Inc., will join the bandwagon of a string of the country’s companies that are going public this year.

However, unlike Xiaomi or Meithuan that chose the Hong Kong Stock Exchange, TME will issue its IPO at “a recognized US stock exchange,” a Tencent communique revealed on July 8.

Investment bankers, Morgan Stanley and Goldman Sachs, which will act as intermediaries between the company and the investors have set a conservative valuation between USD 29 and 31 billion for the company.

Market watchers are however curious as to why TME, which is backed by the cash-rich Tencent, needs an IPO.

One explanation is that not too many investors are keen to invest in the music industry due to expensive music copyrights and the relatively slim number of paying customers.

If a recent report by the Chinese portal, 36kr, is anything to go by, there are 600 million users of online music services in China, a marginal growth since the previous year.

This clearly indicates that the market is headed towards saturation.

But despite the approaching gloom, TME has managed to keep its head above the water, thanks to QQ Music, Kugou Music, Kuwo Music, Quanmin Kge and several similar apps that together make up its ecosystem.

These cluster of apps satisfy different needs related to music: Karaoke, MV, listening and games, an exclusive range of options that keeps Tencent ahead of others. QQ Music, Kugou Music and Kuwo Music surpass 100 million monthly average users.

One of TME’s major rivals at home is NetEase Music. However NetEase’s famed marketing and community-building prowess seems to have fallen belly first in the online music industry. The portal 36kr reports that the company has not reached 100 million users yet.

Interestingly, TME has even forced the Alibaba-backed Xiami Music (not to be confused with Xiaomi) and Baidu Music, to eat humble pie as well.

Baidu Music did lord over 90% of the market in the pre-smartphone days when PCs were the mainstay for accessing online music and Baidu’s own search engine helped capture traffic.

However things began to change swiftly in Tencent’s favour as it was quick to adapt to new areas such as digital production of albums, online KTV, sound edition and other services.

The first news about TME’s intentions to go public started doing the rounds in December 2017.

The group’s valuation was estimated at USD 10 billion at that time, according to ThePaper, a Chinese portal.

Three months later, the finance portal Caijing reported the online music maker’s financing rounds and pegged it at USD 23 billion. According to Morgan Stanley and Goldman Sachs, its current valuation is around USD 30 billion.

The reason for this slow but constant growth might be the growing copyright awareness among the Chinese government and the society. Although domestic users are still reluctant to pay for online music, things are slowly changing, which gives content creators new development opportunities.

This might be creating a sustainable business model. However, the battle for copyright among online music platforms has caused the price of royalties to surge, which has shrunk the profit margin.

Meanwhile, TME’s plans to get listed in the US pits it against Swedish entertainment major, Spotify.

The Stockholm-based company has 70 million paying users, 30 million fewer than TME.

Interestingly, a closer look at their share structure reveals that the would-be rivals are intertwined. While TME controls 7.5 percent of Spotify’s shares, Spotify owns 9 percent of TME’s.

While TME prepares to venture overseas, it can take a leaf from Spotify’s book.

The Swedish company also left its own country to try its luck in the international market. At the beginning of its expansion, Spotify teamed up with Facebook, whose users were allowed to easily create a Spotify account using their Facebook profile, a move that attracted a lot of customers to for the music vendor.

Although Spotify had signed some copyright agreements with producers like Sony Music before, but when it went fully international the company had not yet signed any agreement with any of the largest companies: Universal Music Group and Warner Music.

Instead the company tried to directly negotiate royalties with the artists, who could also make more money by cutting out the middle man.

Non-paying Spotify users are allowed to access their content but with a number of ads interspersed.

The company hopes that once they get used to the Spotify experience, some of them will be willing to pay USD 10 per month for a full membership. Some online music and video services in China follow a similar approach. In the end, royalties and paying memberships are directly related.

Companies dare to offer free memberships to attract customers only if the cost of royalties remains low.

Although Spotify is yet to taste profits, there are reasons for the company to be optimistic as the number of its paying customers keeps growing.

Meanwhile Tencent’s music division’s performance at the bourse will be keenly watched by the Chinese online content industry.

Its market debut is expected to trigger what is known as the “catfish effect” whereby the stronger competitor causes the weaker ones to better themselves.

Tencent Music sure will be the big fish every aspiring smaller fish will keenly watch out for.

A. Alfaro

A. Alfaro is a Beijing-based freelance reporter. He focuses on China's politics, culture and society. He can be reached at varofaro@gmail.com. 

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