It may have been a slightly bumpy, delayed final stage of its journey, but Tencent Music is delivering its goal of going public in 2018. The final numbers for the company’s US IPO are $1.1bn raised, after setting the price at the lower end of its $13-$15 range, with a valuation of $21.3bn for the Chinese digital-music giant.
Note, that’s the valuation as Tencent Music goes public: it may ‘pop’ (spike up) in the hours following the IPO, while in the days and weeks ahead the share price may well bounce around a bit as the market reaches its initial verdict. As Spotify knows full well, quarterly results, new product features and wider industry, tech and political events will all be viewed through the lens of how they affect Tencent Music’s share price from now on.
The comparison to Spotify is one that you’ll read a lot in the media today, from comparison of their valuations (at the time of writing Spotify’s market cap is $23.25bn) to their profitability (a net profit of $394m for Tencent Music in the first nine months of 2018, and a net loss of €520m ($589m) for Spotify over the same period).
As we’ve explained before, though, what’s interesting about Tencent Music is how its business *isn’t* just ‘the Chinese Spotify’, with 70.4% of its revenues in the first three quarters of 2018 coming from its ‘social entertainment services’ (karaoke and live-streaming video) and just 29.6% from its ‘online music services’ (streaming platforms QQ Music, Kuwo Music and Kugou Music).
While the music industry naturally thinks a lot about the 24.9 million people who were paying Tencent Music for a streaming subscription at the end of September, the 9.9 million people paying for virtual gifts and premium memberships in its WeSing and livestreaming services are just as interesting – not least because the respective monthly ARPPU (average revenue per paying user) is RMB 8.5 ($1.23) for the online music services, and RMB 118.5 ($17.20) for the social entertainment services.
The question ‘why is Tencent Music profitable while Spotify is not?’ is thus easily answered: the economics of those social-entertainment services are the key. The more interesting question, then, is ‘could and should Spotify be exploring this line of business outside China?’ – and by that, we don’t just mean in the big, obvious western markets, but in Latin America, the Middle East and (when it rolls out there) in India and Africa too.
There may well be good reasons for the next WeSing, the next Kuwo Live or (looking to another Chinese company, Bytedance) the next TikTok *not* to be native Spotify features. But Tencent Music’s IPO at least poses the question – and Spotify’s answer will tell us a lot about how that company sees its future evolution.
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