December 13, 2018

Breakingviews: Tencent and Spotify are streaming’s dueling banjos

by Breakingviews.

Tencent Music Entertainment and rival Spotify are now officially engaged in a duet, or maybe a duel. The Chinese streaming music service’s initial public offering valued it at the same $23 billion as its Swedish peer. Their business models are worlds apart, but from here on in they are likely to get much more alike.

Having priced its shares at the bottom of its indicated range, Tencent Music did better than might have been expected given the recent whipsawing of tech stocks. The shares managed roughly a 10 percent pop on their Wednesday debut. The resulting valuation of around eight times this year’s sales, assuming Tencent Music keeps up its current growth rate until the year end, is more than twice what Spotify commands.

While they both stream music, and even hold stakes in each other, the two companies are dramatically different. Tencent Music is profitable, for one. The Chinese firm makes its money not just from subscriptions, as Spotify does, but from ephemeral things like virtual gifts. Fewer than one in 25 users pay for music at all. Spotify is nowhere in China; Tencent Music is nowhere outside it. For investors, there’s room for both.

That’s likely to change as their models evolve. Tencent Music would do well to lessen its reliance on things like virtual gifts given to online karaoke stars. It cites estimates that the industry can increase its “paying ratio” sevenfold by 2023, which would help monetize its 800 million users. Meanwhile Spotify is trying to expand beyond tunes into video. What started as harmony could become a clash – or maybe even a corporate unison.

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