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Profits Drop at Tencent Music as Regulatory Pinch is Felt

Tencent Music Entertainment
Courtesy of Tencent Music Entertainment

Profits at Tencent Music Entertainment, China’s largest digital music company, dropped in the third quarter of its financial year as the company felt the impact of the Chinese government’s multiple crackdowns on the tech sector.

Net profits in the three months from July to September 2021 fell to RMB788 million ($122 million). That compares with net profit of RMB1.13 billion in the equivalent quarter last year, and with an RMB871 figure in the April-June second quarter of 2020.

Revenues at RMB7.81 billion ($1.21 billion), were up 3% year-on-year, but down 2% quarter-on-quarter.

The company’s operations include online music, online audio, online karaoke, music-centric live streaming and online concert services. It operates under brand names including QQ Music, Kugou Music, Kuwo Music and WeSing.

The company said that it managed to increase the number of paying users by 37% year on year to 71.2 million and that it had increased the proportion of users that take subscriptions. But monthly active user numbers (MAU), a key metric for tech companies, dropped in both its music and social entertainment segments.

The company explained its turbulent performance by pointing to the impact of regulation and increased competition. But it did not quantify either. And, in practice, it may be difficult to separate the two effects, given that one thrust of the regulators has been to loosen Tencent Music’s dominance and to strengthen industry competitors.

“Revenues from social entertainment services and others in the third quarter of 2021 decreased by 6.4% to RMB4.92 billion ($763 million) from RMB5.25 billion in the same period of 2020. The decrease was mainly due to the impact from new regulations as well as increased competition from other pan-entertainment platforms, despite a strong revenue growth in audio live streaming,” the company said.

China’s crackdowns have curbed collection and usage of user data, mergers and acquisitions, overseas share listings (Tencent Music is listed on the New York Stock Exchange) and game addiction among young users.

In the music sector, regulators in July ordered Tencent Music to unwind its exclusive content deals with major music labels and to loosen the terms and conditions of its local supply deals with other Chinese platforms.

The State Administration for Market Regulation gave the company just 30 days to comply. The company’s general and administrative expenses in the third quarter may give an indication of the compliance costs. Expenses soared by 33 to RMB1.05 billion ($163 million) though the company pointed instead to increased investment in R&D and various post-acquisition costs.

For the future, CEO Ross Liang, plans to “continue to embrace and collaborate with the broader Tencent ecosystem through multiple cross-platform partnerships with Weixin, Tencent Games and Tencent Video.”

Parent company, Tencent is scheduled to release its quarterly figures on Wednesday.