×

Tencent Music Shares Drop Despite Solid First Earnings Report

Proving that good is not always good enough, Tencent Music Entertainment shares fell 9 percent after the Chinese company released its 2018 earnings, wiping out $2.7 billion in market capitalization of what is arguably the biggest audio music service in the world.

Chalk it up to big expectations and a short track record: Wednesday’s earnings release was its first since debuting on the New York Stock Exchange in December. Greater expectations were clearly baked into the stock price: shares of Tencent Music had risen from a $13 opening price on December 12, 2018 to a high of $19.97 on Tuesday, March 19 (the day before earnings).

The results may have missed some people’s expectations, but they were hardly bad: Annual revenues grew 72.9 percent to $2.76 billion. Net income was $267 million and would have been $488 million if not for a $211 million charge related to equity given to Sony Music Entertainment and Warner Music Group (who were referred to as “strategic investors” in the company’s IPO filing). In addition to the two majors, Tencent Music has also licensed the music of Universal Music Group, Emperor Entertainment Group, and China Recording Group, none of which have been mentioned as equity holders.

Tencent Music was spun off from Chinese tech giant Tencent Holdings in December and debuted on the New York Stock Exchange, albeit much lower than initially expected. The parent company has a unique business model that only partly mirrors what’s become the industry standard. While the company operates a music streaming service with licensed music, its social elements end up generating most of the profits. The company has the four most popular mobile music apps in China. Three services are primarily music services: QQ Music, Kugou Music, and Kuwo Music, while WeSing is an online karaoke service with social features that allow people to interact with friends. Tencent Music claimed WeSing is “one of the largest social networks in China with over 40 billion connections between friends” back in June 2018.

Recent news involving Tencent Music’s grand ambitions served as an interesting backdrop to the earnings release. Apparently, the company is interested in buying the 50 percent of Universal Music Group that parent company Vivendi wants to sell. It has only $2.5 billion of cash on its balance sheet, and half of Universal could fetch as much as $23 billion — but the company’s operations generate cash, and combining content and distribution platform would certainly set the Tencent Music apart from its peers.

The way Tencent Music makes money is unique. At the end of 2018, average revenue per user (ARPU) was $1.28. That’s less than the $1.67 Spotify and other streaming services charge in India and far less than the two other BRIC countries; services cost about $4.50 per month in Brazil and from $2.80 to $3.80 in Russia; in the U.S the standard price is $9.99.

But Tencent has the advantage of playing in the world’s largest market. The company boasts 644 million monthly users of its online music service, about 45 percent of the country’s population and double the United States’ head count. As a point of comparison, at the end of 2018, Spotify had 207 million users and the highest number of paying customers of any audio music service, 96 million.

More impressive is Tencent Music’s ARPU from its social services of $18.93. Of the 228 million Tencent users who engage with social features, 10.2 million paid an average of $18.93, a staggering figure given China’s per-capita GDP of $16,624 ranks 78th out of 186 countries tracked by the International Monetary Fund. Put another way, $18.93 in China is like $68 in the United States—about the same as many home broadband or monthly cellular costs.

Tencent investors and observers might do well to recognize the one immutable law of digital music: High content costs create an inherent risk that should always be figured into the stock price. Things usually get worse before they can have a shot at getting better.

Fortunately for Tencent Music, social elements are its main breadwinner and can support the less-profitable music service.

 

Popular on Variety

More Digital

  • T.J. Dillashaw, right, kicks Cody Garbrandt

    Disney Plans UFC Broadcast for FX

    UFC matches will return to FX  – but not on a permanent basis. ESPN has been showing preliminary bouts to UFC pay-per-view events for the last while on ESPN and ESPN2, and then showing the main card on its ESPN+ subscription video service. In September, the early lineup will air on FX, which the UFC [...]

  • fundo logo

    Google‘s Area 120 Is Testing Fundo, a Crowdfunding Service for Creators (EXCLUSIVE)

    Google’s skunkworks lab Area 120 has been quietly testing an events-centric crowdfunding service for YouTubers, Variety has learned. Called Fundo, the service allows creators to invite their fans to virtual meet & greet sessions and other paid online events. A Google spokesperson confirmed the testing in a statement provided to Variety: “One of the many [...]

  • Telling Lies - Logan Marshall-Green

    Sam Barlow's 'Telling Lies' Government-Surveillance Thriller Game Sets Release Date

    After more than two years in the works, “Telling Lies” — the investigative thriller from acclaimed game creator Sam Barlow — is ready to take the stage. The game, produced with and released by Annapurna Interactive, will be available next Friday, Aug. 23, via Steam and Apple’s Mac and iOS app stores. “Telling Lies” will [...]

  • YouTube logo

    YouTube Will Stop Letting Copyright Holders Seize Revenue via Manual Claims on Very Short Music Clips

    YouTube is pushing back against overzealous copyright policing by music companies. Starting in mid-September, the video giant will forbid copyright holders from making manual claims to commandeer revenue generated by YouTube videos that include very short music clips (e.g., five seconds of a song) or “unintentional” music (like music from passing cars). “One concerning trend [...]

  • Chelsea Handler memoir book buy online

    Chelsea Handler Bonds With Alexa in iHeartRadio Smart Speaker Promo

    iHeartRadio has teamed up with Amazon to promote Chelsea Handler’s podcast “Life Will Be The Death Of Me.” Beginning this Thursday, users of Amazon’s Echo smart speaker and other devices with Alexa built-in can opt to get their mornings started with Handler cracking jokes and exchanging banter with the smart assistant. Users simply have to [...]

  • David Messinger, Activision Blizzard

    Activision Blizzard Hires CAA Veteran David Messinger as CMO

    Activision Blizzard tapped David Messinger, a former 15-plus-year veteran of CAA, as its first corporate-wide chief marketing officer. Messinger, based in Santa Monica, reports to Coddy Johnson, Activision Blizzard’s president and COO. It’s the first time the video-game company has appointed a CMO who will oversee the global marketing operations across all of Activision Blizzard [...]

More From Our Brands

Access exclusive content