29 February 2020
Strengthened partnership with Universal Music Group will put Tencent in a stronger position to expand its music business overseas through the JOOX brand. Photo: Bloomberg
Strengthened partnership with Universal Music Group will put Tencent in a stronger position to expand its music business overseas through the JOOX brand. Photo: Bloomberg

How Tencent is upping its music business

Internet giant Tencent Holdings, which operates the WeChat super-app among various online offerings, has signaled its aim to further consolidate its position in China’s music-streaming market and fend off rivals.

The tech behemoth, which took its Tencent Music unit public via a US listing in December last year, is set to buy 10 percent stake in Universal Music Group (UMG), the world’s biggest music firm that counts superstars such as Lady Gaga, Taylor Swift, Drake and Kendrick Lamar among its artists.

UMG’s controlling shareholder, Vivendi, announced on Tuesday that it is in talks to offload 10 percent stake in the music company to Tencent in a deal that would value UMG at about US$33.6 billion. Also, the Chinese firm will have an option to pick up a further 10 percent of the music label within a year at the same valuation. 

That would mean Tencent could end up owning as much as 20 percent of UMG, with investment that would exceed US$6.7 billion.  

The transaction, which will represent one of Tencent’s biggest overseas deals, is seen as benefiting both parties, helping them grow their business.

UMG will be able to promote its artists better via Tencent platforms and capture more opportunities in the streaming segment, as well as be in a better position to tap into new markets and talents.

As for Tencent, it can strengthen its music library substantially and cement its leading position in the China online streaming market, and also gain new users overseas.

“Together with Tencent, Vivendi hopes to improve the promotion of UMG’s artists, with whom UMG has created the greatest catalogue of recordings and songs ever, as well as identify and promote new talents in new markets,” Vivendi said in its statement.

Known as the world’s biggest music company, UMG is also a leading label in quite a few overseas markets, including Hong Kong where it has artists such as Alan Tam, Kenny Bee, Shirley Kwan, Gin Lee and Tat Ming Pair on its roster.

By investing in UMG, Tencent will gain more firepower in music streaming business, a fast-growing segment as consumers are increasingly shedding their reluctance to pay for online music.

The past decade has seen a major shift to digital music, with fewer people opting for music in the old CD format. Online platforms have seen a surge in digital music subscriptions, with curated playlists becoming a selling point.

In early 2000s, pirated music in MP3 format was quite popular in the China market. Users just downloaded music files from the internet and saved them in their computers without paying a dime.

Until digital music subscription model was proven to be successful in the mid- to latter part of the last decade, by service providers such as Taiwan’s KKBox and Europe’s Spotify, traditional music companies focused more on boosting retail sales in physical stores.

But all that has changed in recent years as CDs were seen as a thing of the past and digital streaming became more popular. 

In China, Tencent has emerged as the leading digital music platform, aided by the vast user base for the group’s social media and gaming operations. Apart from the home base, Tencent Music has also built a substantial following in some overseas markets that have large Chinese populations.

Tencent Music operates several services in China, including QQ Music, Kugou Music, Kuwo Music and WeSing. The services have more than 28 million paying users for music subscription, with the average revenue per user said to be around 8 yuan per month.

Two years ago, Tencent and UMG sealed a multi-year partnership which allows Tencent Music to distribute UMG’s roster of record labels and global recording stars on its streaming platforms. 

In addition, the two firms said they will work together to design, build and develop a state-of-the-art recording and mastering facility in China.

The partnership helped Tencent to boost the music library for its online streaming service and paved way for Tencent Music to be spun off as a separate listed company through a US$1.1 billion IPO last December.

With the two firms now set to strengthen their tie-up further, Tencent will be in a position to protect its turf in the China market better against rivals such as ByteDance, and also aggressively expand overseas through its JOOX brand and compete with players such as Apple Music, Spotify and Amazon.

While Spotify is a global rival, it is also a shareholder in Tencent Music, which raises interesting possibilities.

It is likely that Tencent would collaborate with Spotify through the UMG transaction to take control at the upstream of the music supply chain — that is to control the library so that they can provide services through various platforms to generate stable income streams.

While we can only wait and watch, one thing, however, seems pretty certain: we’ll be hearing a lot more of Tencent’s music business in the years to come.

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EJ Insight writer