by Cam Cassels
There's a music streaming company that has attracted more users than Spotify and Apple Music combined. This same company is filing for an October IPO on a US Stock Exchange. Here's what you need to know:
Consumers can easily underestimate the presence of foreign counterparts to the most popular services in the United States. In music, Spotify and Apple Music remain at the forefront of the minds of US streamers. However, one of the largest music companies in the world is one that most Americans have never even heard of: Tencent Music.
China’s version of Spotify, Tencent Music has set a date for their Initial Public Offering (IPO) on Wall Street in October. On September 7th, the Chinese music streaming power will submit their IPO filing to the US Securities and Exchange Commission, and plans to launch their offering on October 18th. The launch will be valued at a staggering $30 billion, one of the largest tech IPOs in US history.
Tencent Music is a conglomerate consisting of three Chinese Streaming services; QQ Music, Kugou, and Kuwo. These three services have a combined audience of more than 700 million monthly active users. In comparison, Spotify has 180 million monthly active users. While Tencent boasts almost four times as many users as Spotify, their business model strays vastly from the traditional US streaming model. The differences in makeup can be attributed to the Chinese attitude towards paying for music streaming.
Of Tencent’s 700 million users, only 2-3% (14-21 million) are paying subscribers. On the other hand, over 46% of Spotify users (83 million) are paying subscribers. While Tencent has almost four times as many users as Spotify, Spotify has over four times as many paying subscribers as Tencent. Tencent must begin to address the gaping discrepancy as they prepare to enter the US Stock Market.
The reason for Tencent's lack of paying subscribers is that the Chinese public does not feel that they should be paying for music streaming. Alex Taggart, the General Manager of the Beijing music firm Outdustry, says “Right now, the vast majority of (Chinese) users absolutely expect free, frictionless consumption of music.” This contrasts starkly with the United States, where people are willing to pay a monthly subscription fee to avoid advertisements.
If Tencent is offering their services for free to 97% of their users, how is the company valued at $30 BILLION? The high valuation stems from the vice grip that Tencent has on the Chinese streaming market. Tencent controls approximately 78% of all music streaming, while benefiting from powerful licensing deals with Sony Music, Warner Music Group, and Universal Music Group.
Under the agreement, Tencent can direct which songs their rivals are allowed to stream. This allows Tencent to put the best music on their own platforms and withhold that same music from competitors.
This market dominance has resulted in rapid growth and large profits for Tencent. Last year, the company posted 40% annual growth in revenue and profited $290 million. As for Spotify, they posted a loss of around $1.5 billion in 2017.
While Spotify and Tencent may seem like global competitors, they are actually the opposite. In December 2017, both Tencent and Spotify agreed to a 10% equity swap to encourage collaboration on licensing agreements and partnerships. In Tencent’s coming IPO, Spotify stands to earn almost $3 billion from their stake in Tencent, money that Spotify could use to offset last year’s losses.
What do Tencent’s IPO, their partnership with Spotify, and their exclusive licensing deals mean for the global music market? In all, the IPO will corral more dollars, more investors, and more negotiating power for streaming services. With two of the largest streaming services joining forces and going public in the same year, the music streaming industry is finding its financial footing. Since opening at $160 per share back in April, Spotify has surged to nearly $190 in less than six months.
Nobody knows how the future market will react to streaming, but investors, consumers, and competitors will learn a lot about the viability and value of this technology. With a $30 billion valuation, Tencent Music will aim to bring consumers value that matches the hype.