This has been an incredible year for tech companies that have some kind of Chinese ownership going public in the United States. Baidu’s iQiyi service, Xiaomi-backed Huami and Viomi are a few examples, and now Tencent Music. The music division at Tencent is making quite the run after plenty of speculation. TME – Tencent Music Entertainment, initially filed the paperwork to go public in the U.S. Tuesday night and the initial target is $1 billion. Although that might change. We know that Tencent Music is valued at somewhere around $12 billion, which is based on data from Spotify’s IPO earlier this year. Which makes this whole scenario incredibly interesting to see what happens in terms of its valuation.
Tencent Music, for those of you who don’t know, is a subsidiary that houses for music streaming services – Q Music, Kugou Music, Kuwo Music, and WeSing. These include orthodox streaming services, karaoke apps, and live streaming services. They are also generally recognized to be China’s top four music apps and together they have over 800 million monthly users. While this IPO is great, does the U.S. really need another music streaming option? In fact, I would argue against it as music streaming apps aren’t doing all that well right now.
That said, and unlike Apple Music or Spotify, TME is actually a profitable business. The way it makes money and its gross revenue are completely different from the ways of the western world. Spotify and Apple Music rely on subscriptions and ad-supported free tiers. TME draws the majority of its revenue from social activities, advertising, and song sales. Tencent Music’s 2017 revenue was $1.7 billion (RMB 11 billion) with a $199 million (RMB 1.3 billion) profit. Already the first half of 2018 has seen it clock $1.3 billion (RMB 8.6 billion) in revenue with a $263 million (RMB 1.7 billion) profit. Subscriptions accounted for just 30 percent of those sales, with the remainder gathered from virtual gifts that are sent to live streamers and premium memberships.
But how and why does this work? A large part of their success is because of their connection to WeChat, which houses one billion users. In addition, they rely on QQ (Tencent Video). Both of these give Tencent Music’s services an avenue to reach users and spread across friend graphs and networks. This has helped to keep marketing expenses down, which ultimately aids in making the company profitable. Tencent Music’s cost of revenue is 60 percent, versus nearly 75-85 percent for Spotify which has to do a lot more work to bring users in.
But that doesn’t mean they know how to apply this to the U.S. Spotify holds a 9.1 percent stake in the business courtesy of a share swap last year — Tencent owns 7.5 percent of Spotify — which could yet lead to synergies between both sides, although Spotify competes with Tencent-owned Joox (not part of TME) in markets like Southeast Asia.