Knight Bridge Investment Consultants Limited – How TME Is Profitable but Spotify Isnt

HONG KONG - Oct. 7, 2018 - PRLog -- When it comes to paying subscribers, though, Spotify has Tencent Music beat. The Chinese company has just 23.3 million paying customers compared to 83 million paying Spotify on a monthly basis. And while paying subscribers are key to Spotify eventually turning a profit, Tencent Music is profitable already, and has been for the last two years. Here's how.

All about social
Just 29% of Tencent Music's revenue comes from music services, which includes subscription packages, advertising, and digital music downloads. Historically, it's very difficult to convince Chinese consumers to pay for music due to a culture of piracy. Nonetheless, Tencent Music has managed to get 23 million people to pay for music, though the average customer pays just 8.7 RMB (about $1.27) per month. The basic subscription package is priced at 8 yuan per month.

But a few years ago, Tencent Music hit on a major cultural movement with WeSing, its virtual karaoke app. The company started offering karaoke via WeSing in September 2014, and it quickly expanded to the Kugou and Kuwo apps.

While users can sing karaoke and share videos and live streams with friends via Weixin (WeChat) for free, there are some paid features in WeSing that have been big revenue generators for Tencent Music. The primary source of revenue are virtual gifts users can send to live streamers and karaoke singers. Some of the revenue is shared with performers while Tencent Music keeps the rest.

Tencent Music's social entertainment services revenue grew from 2.2 billion RMB in 2016 to 7.8 billion RMB in 2017. Through the first six months of 2018, the company brought in 6.1 billion RMB, up 94% from the same period last year.

In the meantime, Tencent Music saw its overall gross margin climb from 28.3% in 2016 to 40.4% in the first half of 2018. By comparison, Spotify just posted a gross margin of 25.8% in the second quarter, and that's actually very encouraging for the company. But the higher gross margin at Tencent Music combined with relatively stable operating expenses as a percentage of revenue have enabled significant profit growth for the Chinese company. Tencent Music grew from just over break-even in 2016 to over 1.7 billion RMB ($263 million) in profits for the first half of 2018.

Can Spotify copy Tencent Music?
It's unlikely Spotify will be able to provide a karaoke service and suddenly turn a profit like Tencent Music. Tencent Music has quite a few advantages. First, it operates primarily in China, where karaoke is already very popular. Moreover, its relationship with Tencent, its controlling shareholder, provides unique access to its massive social networks, Weixin (WeChat) and QQ.

WeSing requires users to sign in using their Weixin credentials. That allows the app to tap into users' social graphs and find friends and performers they might be interested in. It also allows WeSing to post videos of performances to the Weixin feed, enabling greater discovery of the app. As a result, WeSing's user base has grown extremely quickly over the last four years.

Spotify doesn't have that kind of relationship with a global social network. And it's unlikely to form one anytime soon, especially considering the increased focus on data privacy following this year's events.

TENCENT Music Entertainment, which owns China's most popular music apps, has filed for a US IPO seeking funds to develop content and new services, in what is expected to be one of the biggest US listings by a Chinese company this year.

It has been just 3 months since official news started to break on Tencent Music Entertainments much anticipated US IPO.

The music arm of tech giant Tencent Holdings, which plans to list either on the Nasdaq or the New York Stock Exchange, set a placeholder amount of US$1 billion for registration purposes. Sources said last month it was hoping to raise US$2 billion.

With streaming apps QQ Music, Kugou, Kuwo as well as karaoke app WeSing, Tencent Music is China's largest online music platform boasting more than 800 million monthly active users. It is often compared to Spotify Technology SA, but the Chinese firm offers more in the way of socially interactive services that makes it profitable while its Swedish counterpart is not.

Music-centric social entertainment services, which include virtual gifts and premium memberships, accounted for just over 70 per cent of the US$1.65 billion in revenue it made in 2017, its filing with the US Securities and Exchange Commission said.

Profit after tax came in at US$199 million.

For the first half of this year, revenue jumped 92 per cent to US$1.3 billion while profits after tax climbed roughly fourfold to US$263 million.

Chinese companies have raised US$7.5 billion in US markets so far this year, the biggest amount since 2014.

Tencent Music's IPO comes as the global music industry gets back on track with more listeners streaming music through smartphone apps compared to a few years ago when the market was dominated by pirated music.

Its apps have over 20 million tracks from both international and domestic music labels, the filing said, while millions of users go to the karaoke app WeSing daily.

WeSing allows people to have karaoke parties in virtual singing rooms, challenge each other in sing-offs and sing duets with celebrities or other users.

To find out more information on the opportunities Knight Bridge Investment Consultants see's within the US markets, specifically with Tencent's IPO visit www.knightbridgeinvestment.com or contact us at info@knightbridgeinvestment.com for further information.