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Tencent Music Changes Focus After Regulatory Slap, Profits Drop

Tencent Music Entertainment
Courtesy of Tencent Music Entertainment

China’s Tencent Music Entertainment is to adjust its business model after being hit with regulatory penalties and seeing its share tumble to record lows. It will downplay music streaming and control of exclusive content and instead emphasize related services such as karaoke and social entertainment.

The company, which is listed on the New York Stock Exchange, but remains controlled by China’s Tencent, released its quarterly results for the three months to June on Tuesday (Monday evening in New York). They showed a 16% increase in revenue to RMB8.01 billion ($1.24 billion) and profits reduced from RMB943 million to RMB871 million.

In a filing, the company prioritized apologies for its recent regulatory troubles over commentary on the drop in profitability.

“We would like to reiterate that TME sincerely accepts the decision issued in July by the regulator pertaining to exclusive music licensing arrangements. We are committed to fully complying with all requirements in a timely manner,” said Cussion Pang, executive chairman. He also warned that compliance will have “some impact to our business operations.” These were not quantified.

There was no mention in the filing of a possible secondary share listing in Hong Kong. Asian business media have recently reported that Tencent Music has scrapped such plans.

China’s regulators have embarked on a campaign to manage the business, data handling, and market positions of leading tech and media companies. Tencent Music, which had been accused of monopolizing content and engaging in predatory pricing towards its competitors, was ordered to end its exclusive supply relationships with the global music majors and given a small fine.

Regulators have also seemed to discourage Chinese firms from listing overseas, part of a wider move that would bring companies further into Chinese regulatory orbit and simultaneously make them less dependent on foreign capital.

While the ending of exclusive content licensing is understood to mean that music streaming rivals will become more competitive and potentially more numerous, Tencent Music says it has multiple responses. These include development of more unique content, a greater emphasis on the already predominant social activities, and by leaning further into the Tencent ecosystem.

“We will operationally focus on the dual flywheels of content and platform, and have taken several important steps to expand our ecosystem to empower artists and provide users with one-stop music and audio services,” said Pang.

“With respect to content, we will continue to broaden partnerships with music labels, and work with artists and content partners to develop more differentiated content while further strengthening our self-production capability. We also made strategic upgrades to the business model of TME Live, integrating online concerts with offline events to offer differentiated services and solutions for artists ranging from notable superstars to up-and-coming and indie musicians,” Pang said.

The new strategy also means working more with (WeChat) Weixin Video to increase visibility for artists, creation of online music events, and AI translation to turn English-language songs into Chinese.
For the quarter, monthly active users for music streaming dropped by 4% to 623 million, but the number of paying subscribers grew 40% to 66 million. Average revenue per streaming user remains weak, however, and shaded down 3% to a monthly average of RMB9 per user.

The social entertainment side saw MAUs drop 13% to 209 million. Paying subscribers dropped a similar figure to 11 million. But average revenue bounced by 23% to RMB153 per user.

Stock trading on Monday, before the results announcement, saw the ADRs fall a further 9% to $8.92 apiece, following recent erosion. At that price, the stock is 31% below its December 2018 IPO price of $13. The group is currently valued at $15.1 billion.