One of China’s most-anticipated initial public offerings next year may be music to the ears of Tencent Holdings Ltd. investors because of its potential to drown out any noise Spotify and Apple Music want to make in the biggest market.
Tencent Music, a streaming and downloading service, is expected to raise at least $1 billion and is valued at $10 billion, people familiar with the matter have said, with no decision yet on which exchange it would list on. Underpinned by three separate platforms, Tencent Music already has twice as many paying customers as Spotify Ltd.
Asia’s biggest internet company wants to capitalize on digital-music sales in mainland China that are expected to surge 88 percent within four years, according to PricewaterhouseCoopers. Apple Music debuted in 2015, yet most smartphones bought in China use the Android operating system, and Spotify hasn’t announced plans to expand there.
Tencent also has the advantage of an octopus-like business where one arm — music sales and streaming — can benefit from others such as the WeChat messaging app, a video-streaming site, a karaoke app and content-licensing deals with more than 200 international and domestic record companies.
“Tencent Music has a dominant status in China,” said Li Yujie, an analyst with RHB Research Institute Sdn in Hong Kong. “It would make sense to spin off the unit, allowing it to create strategic alliances and unlock value for investors. It could be one of the most-anticipated IPOs next year.”
The service offers more than 17 million songs to 700 million monthly active users, said Andy Ng, vice president for Tencent Music. About 120 million people have paid to stream or buy music, compared with Spotify’s 60 million paid users.
Tencent’s three platforms — QQ Music, KuGou and Kuwo — are becoming important vehicles for Western pop stars such as Katy Perry and Rihanna to sell music in China alongside homegrown artists like Jason Zhang and Joker Xue.
“Tencent’s understanding of how to make money from traffic is far better than Spotify,” said Alex Yao, a Hong Kong-based analyst at JPMorgan Chase & Co. “If you want to make a singer not only sell copies but also have a great way to interact with fans, which company in the world can compete with Tencent?”
Still, the rivals are formidable. Even without a beachhead in China, Spotify will list on the New York Stock Exchange and is expected to get a market value of about $15 billion, a Swedish newspaper reported Nov. 20. Spotify declined to comment on a possible IPO.
The companies said Dec. 8 that they had forged an alliance. Tencent and its music division will acquire a minority stake in Spotify from current investors, while Spotify will get a piece of Tencent Music.
Apple Music is a key part of the U.S. company’s push to double services revenue to about $50 billion by 2020. In China, the music business is considered a way to boost iPhone sales amid a flood of cheaper devices from domestic vendors including Huawei Technologies Co. and Xiaomi Corp. Greater China, a region that includes Hong Kong and Taiwan, is Apple’s biggest market after North America.
“The legitimate market has until now been tagged as a sleeping giant,” PricewaterhouseCoopers said in its entertainment outlook for 2017-2021. “Not for long: China’s music market is sprinting.”
Tencent currently has the upper hand against domestic competitors Alibaba Group Holding Ltd. and NetEase Inc., accounting for more than 70 percent of traffic for music streaming in China, according to the International Federation of the Phonographic Industry.
The momentum toward an IPO is rewarding Shenzhen-based Tencent for achieving what once was unheard of: making people pay for music in a nation criticized as a haven for piracy. Its Hong Kong-listed shares have doubled this year.
Several years ago, billionaire Chairman Ma Huateng decided he wanted music to be a pillar of his empire with gaming, video and online books. To make that business viable, Tencent had to buy intellectual-property rights in a nation where piracy is rampant.
That chronic ripping off of music is part of the reason why even with PricewaterhouseCooper’s prediction for rapid revenue growth, it only expects the market to reach $557 million in 2021.
“Almost everyone was infringing music content,” Ng said. “There was no business model. Even we were breaching a lot of content.”
In the immediate aftermath, Tencent scooped up 20 exclusive licenses with the world’s biggest music labels, and at bargain prices, Ng said. That collection has grown to about 200 labels, mostly Chinese but also including heavyweights Universal Music Group and Sony Music — a roster helping keep Spotify at bay.
In 2015, the government made music services sweep their playlists of copyright-infringing works for its “Sword Net” initiative. More than 2.2 million unlicensed songs were deleted by Tencent, Alibaba and Baidu Inc.
The ensuing battle for bands triggered lawsuits and price wars. Those bruising spats prompted regulators, who prioritize market stability, to encourage the services to share content with each other, effectively capping prices.
“China is finally moving towards a legitimate, paid model for music as a plethora of music brands jostle for position,” PricewaterhouseCoopers said in its report.
Alibaba will continue investing in licensed music and streaming sites such as Xiami and will capitalize on advantages offered by its data, cloud-computing and artificial-intelligence units, the company said.
NetEase is working on providing more original content and acquiring IPs to boost its database of more than 10 million licensed songs, the company said in an email.
Yet that may not matter, JPMorgan’s Yao said.
“Others cannot compete with the breadth and depth of Tencent’s content,” he said.
Tencent’s main app — QQ Music — is a pretty good deal for listeners. Prices for different levels of access range from about $1.21 to $1.81 a month, compared with Spotify Premium’s charge of as much as $9.99 in the U.S.
Tencent also has a karaoke app called WeSing that lets its 460 million users livestream their own renditions of the hits. Performers receive digital gifts and tips from their fans, and Tencent earns a percentage. The company declined to comment on that revenue.
“In China, we are still in the early stages of paying for content,” Ng said. “We want to grow the pie as big as possible.”