Friday, December 1, 2017

Spotify, Tencent And The Laws Of Unintended Consequences | Music Industry Blog

spotify tencent midia

News has emerged that Spotify and Tencent Holdings could be swapping 10% holdings in each other’s companies ahead of Spotify’s public listing. There are some obvious implications for both enterprises, as well as some less immediately obvious, but even more interesting permutations:

  • Spotify gets a foothold in China: Tencent is the leading music subscription company in China with QQ Music, Kugou and Kuwo accounting for 14.7 million subscribers in 2016. Apple Music has got a strong head start over Spotify with 3.5 million Chinese music subscribers. Tencent, with its billing relationships, social reach (WeChat, QQ Messenger) and rights holders relationships (Tencent sub-licenses label rights) provides a potential China launch pad for Spotify. So, the obvious implication is that Spotify could use Tencent as an entry point into the market. But this is where things get complicated. Tencent is planning a $10 billion flotation of Tencent Music. How would this valuation be impacted by Tencent aiding the entry of a direct competitor – which is a leader in virtually every market it is currently in, into the market of? A joint venture could be the way to square the circle.
  • Spotify continues its narrative building: As I have long argued, Spotify needs to construct a compelling narrative for Wall Street. It needs to be able to show that it is making strong progress on many of its weak points. Getting better deals from the labels was one such move. Now it has ticked the ‘what about China’ box too.
  • Tencent gets a foothold in the US: Earlier this year the Chinese government put in place restrictions on Chinese companies investing in overseas companies, in order to slow the outflow of Chinese capital. (It slowed a potential investment by Alibaba in UMG). Swapping equity is a way to get round this restriction. It also builds on Tencent’s move extending its stake in Snap to 12%. Tencent is pushing the rules to the limit in order to become a key player in US digital consumer businesses (Spotify of course will become, in part at least, a US company when public). The intriguing question is whether Tencent will get any access to Spotify’s western billing relationships.
  • Valuation disparities: In November Tencent was valued at over $500 billion. Spotify will likely float at $22 billion. This means that on paper Tencent’s 10% is worth 22.7 times more than Spotify’s. So, what gives? Firstly, Tencent really wants a piece of the Spotify action. Secondly, it suggests that a Chinese public company valuation does not travel well. Retail investors drive the Chinese stock markets heavily and the valuations these less-savvy investors create are unlikely to translate into western, institution-dominated markets. If the 10% is indeed of Tencent’s parent company Tencent Holdings, rather than Tencent Music – and nothing is yet confirmed – Tencent would have unintentionally raised a red flag for all Chinese company valuations, setting a precedent for a Chinese-US company valuation ratio of 22.7:1. That would make a lot of Chinese companies and the Chinese authorities, uncomfortable to say the least.

If this deal pans out the way it has been slated, it will potentially save Spotify and Tencent from a resource-draining clash of Titans for when (not if) Spotify would enter the Chinese market. It also provides Spotify with a potential long-term insurance asset. When Yahoo acquired a stake in Alibaba it was very much the senior partner. But, as Yahoo’s business imploded its Alibaba stake became its core asset.

Spotify obviously won’t be thinking that way but history shows us to never say never.


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