×
You will be redirected back to your article in seconds

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

  • lenovo-mirage-camera_3

    Google’s VR180 Format Stalls After Camera Manufacturers Pull Back

    Google’s plan to establish a new immersive media format on YouTube and beyond has hit a roadblock: VR180, the stereoscopic video format that Google launched with big fanfare in 2017, has lost some of its key supporters, Variety has learned. Camera maker Yi has all but given up on launching its long-promised VR180 consumer camera, [...]

  • UMC-Marriage-Boot-Camp-Hip-Hop-Edition-WE-tv

    WE tv, UMC Reteam on Bonus Content for 'Marriage Boot Camp: Hip Hop Edition' Season 2

    AMC Networks is touting the benefits of cross-pollinating content and promos across its TV and streaming properties. In the latest bit of synergy, the programmer’s WE tv announced the continuation of its partnership with sister company UMC (Urban Movie Channel) to produce a second season of “confessional” episodes for WE tv reality series “Marriage Boot [...]

  • Google Play Pass

    Google Launches Play Pass, Its $4.99 Apple Arcade Competitor

    Google officially launched its Play Pass game and app subscription service Monday morning. Play Pass gives users access to more than 350 premium games and apps for $4.99 per month. The launch comes just a few days after Apple unveiled it own game subscription service Apple Arcade. Apps and games included in this subscription do [...]

  • ESPN - Always Late With Katie

    ESPN Inks Facebook Deal to Bring Exclusive Shows and Content to Watch Service

    Disney’s ESPN is looking to expand digital reach across Facebook, under a new deal to distribute exclusive digital shows and content on the social giant’s Facebook Watch video platform. At launch, ESPN’s Facebook Watch lineup includes additional segments from “Always Late With Katie Nolan,” the late-night sports/comedy show premiering this week on ESPN2; exclusive versions [...]

  • David Benioff, D. B. Weiss, Carolyn

    Emmys 2019: 'Game of Thrones,' Jharrel Jerome Lead Social-Media Buzz

    HBO’s “Game of Thrones” and Jharrel Jerome, star of Netflix’s “When They See Us,” were among the leaders of social conversation during Sunday’s 71st Primetime Emmy Awards on Facebook and Twitter. “GOT” picked up 12 Emmys in total for its final season, including outstanding drama series, while series star Peter Dinklage picked up his fourth [...]

  • Oprah Winfrey

    Oprah Sets First Book-Club Pick for New Apple TV Plus Series

    Oprah Winfrey’s interviews with authors of her book club selections will be featured exclusively on Apple’s forthcoming Apple TV Plus service, and she’s announced the first book selection for the project: “The Water Dancer” by Ta-Nehisi Coates. Apple teamed with Winfrey for Apple TV Plus series “Oprah’s Book Club,” premiering Nov. 1 when the service [...]

  • NBC LX - Valari Staab

    NBCU Launches Digital News Outlet LX to Reach People Who Don't Watch Local TV (EXCLUSIVE)

    NBCUniversal’s local TV division is taking a new tack to reach younger audiences that don’t tune in to its traditional newscasts. On Monday, NBCU’s 42-station local TV group is launching LX — a digital news brand that will produce original content for online distribution and, in 2020, via a live-streaming internet network and multicast over-the-air [...]

More From Our Brands

Access exclusive content