Tencent’s United States Music IPO Reflects More Upbeat Recording Industry

Tencent Holdings Ltd. plans to spin off its online-music business and list shares in the United States. This will help to demonstrate that the recording industry is staging a comeback.

The move lets American investors bet on the Chinese music-streaming services market. Previously, music streaming has been plagued by piracy. Tencent’s growth in China also mirrors inroads by partner Spotify Technology SA in the United States. Music streaming from Spotify helped music sales to grow at their fastest rate since the 1990s.

For record labels, the resurgence has helped them rebuild after years of decline. Between the demise of physical media and the rise of free-downloading sites, the industry was ravaged. Additionally,  the arrival of iTunes and legal downloading options in the early 2000s did little to stem the slide. However, now, streaming appears to have given music sellers a formula they can live with.

Tencent is China’s largest social media and gaming company. They are still working on terms of a spinoff proposal, which it announced in a filing to the Hong Kong stock exchange Sunday.

The announcement follows a similar move by Tencent last year in Hong Kong with its online reading business, China Literature Ltd. Tencent’s music platforms: QQ Music, KuGou, and Kuwo are becoming important vehicles for pop stars such as Katy Perry and Rihanna to reach a Chinese audience, alongside native Chinese artists like Jason Zhang and Joker Xue.

He Saiyi, an analyst with Huatai Securities, wrote the following in a research report on Monday:

The payment ratio will increase for digital music consumption in China in the long run. Tencent Music dominates the China market: it owns the most digital music copyrights in China and, in our view, has the most vibrant online music communities.

Tencent Content Empire

Already, Tencent Music Entertainment Group has picked banks to advise on their planned initial public offering in the United States. It is possible that the company could raise at least $1 billion.

Additionally, Tencent has the advantage of a fully developed entertainment and content empire. This includes the ubiquitous WeChat messaging app, games, video-streaming, a karaoke app and content-licensing deals with more than 200 international and domestic record companies. However, similar to their rivals Alibaba, Baidu,  and Netease, Tencent also has to contend with the rampant piracy that’s eroding the industry’s profits.

Tencent also counts Stockholm-based Spotify as an investor, but the two companies may increasingly become rivals. While the two companies do not compete directly in China, Spotify challenges Tencent in other regions within Asia.

Spotify went public earlier this year and currently has a market value of $31 billion. In May, the Financial Times said Tencent Music Entertainment’s listing could value the company in excess of $30 billion. Valuation could partly depend on where Spotify was trading at the time, the paper said.

In the United States, recorded music sales rose 17 percent to $8.5 billion last year. Streaming accounted for almost two-thirds of the total, according to the Recording Industry Association of America. It put the industry on its fastest pace since 23 years ago, when acts like Hootie & the Blowfish dominated the airwaves.

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