The Tencent initial-public-offering factory has another coming off the production line: Tencent Music, 58% owned by the social-media giant, is looking to go public in the U.S. in a listing that could value the online music company at more than $25 billion. Investors, though, may find there’s something discordant about this deal.
It is natural to compare Spotify—the Swedish company worth around $32 billion after its own listing in April—and Tencent Music: The two even hold roughly 9% stakes in each other following a share swap last year. But there are important differences.
Most of Tencent Music’s revenue doesn’t come from subscriptions to music-streaming services, Spotify’s bread and butter. Despite having more than 800 million monthly active users—more than four times Spotify’s—Tencent Music has only 23 million paying subscribers versus Spotify’s 83 million. The vast majority of users listen to music free on Tencent Music’s apps. Rampant piracy in China over the years has made customers less willing to pay for music.
Tencent Music generates more than 70% of its revenue from a uniquely Chinese model: selling virtual gifts to go with its online karaoke and live-streaming services. Photo: Reuters
Instead, Tencent Music generates more than 70% of its revenue from a uniquely Chinese model: selling virtual gifts to go with its online karaoke and live-streaming services. Customers who buy these virtual gifts—flowers, diamond rings, private jets, you name it—can use them to tip entertainers streaming their performances live on Tencent Music apps. Performers can convert those gifts into cash.
The hitch is that after years of explosive growth, live streaming is starting to slow in China. Tencent Music’s revenue from selling gifts has also seen a sharp slowdown in recent quarters. Competition is growing from other online entertainment options, including videogame streaming or apps such as Douyin. Douyin, a home for short videos owned by up-and-coming unicorn Bytedance Technology, has more than 500 million monthly active users globally.
Despite these challenges, Tencent Music’s valuation appears to price in plenty of growth ahead: At $25 billion, it would be worth 64 times earnings for the 12 months ended June. Its rivals, U.S.-listed YY Inc. and Momo Inc., are trading at high-teens multiples of their historic earnings.
On top of all this, the Tencent halo may not be shining as brightly as before. The tech giant’s own shares have slumped 22% this year, amid regulatory problems in China. Several IPOs of companies backed by Tencent have floated in the past year or so to plenty of initial excitement, before sliding below their listing price. Online auto-financing company Yixin has lost as much as two-thirds of its value since it went public last November.
Investors tuning in to Tencent’s latest market offering should avoid getting caught when the music stops.
From the invention of the phonograph in 1877 to the boom in streaming services today, the music industry has had to constantly adapt to emerging technology. In this video, we explore whether music can continue to reinvent itself to survive. Photo: Liliana Llamas/WSJ
Write to Jacky Wong at [email protected]