How To Successfully Launch a $10 Billion IPO, by Tencent Music

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Fei Kuang (CC by 2.0)

Spotify can learn a thing or two from Tencent Music on how to successfully launch an IPO.

Last year, Tencent Music Group, a subsidiary of Chinese technology investment giant Tencent Holdings, was rumored to be seeking an IPO listing in the US.  They reportedly hoped to raise between $300 million and $600 million in the States.

Several weeks ago, rival NetEase Cloud Music, a radio and music platform, said it raised RMB750 million, or $180 million, in a Series A round.  Chinese media conglomerate Shangai Media Group led the round at a valuation of $1 billion.

Now, boosted by NetEase’s strong numbers, Tencent Music is reportedly pushing forward on their IPO plans.

Tencent Holdings said in a disclosure filing last week that it will hold a special shareholders meeting on May 17th.  The company will consider various proposals, including purchasing shares of Tencent Music.

According to company insiders, Tencent Music is actively pursuing an IPO listing of $10 billion.  In contrast, investors valued Spotify at over $8 billion last year.  Advisory firm GP Bullhound believes that the Swedish streamer could reach a valuation of $53 billion.

So, what makes Tencent Music different?  Let’s look at the basics.

A leading market position always helps

Spotify recently crossed the 50 million paid subscriptions milestone after 10 years on the market.  Apple Music remains at a distant second with 22 million and counting.  Yet, Apple Music reached that milestone in less than 2 years.

Tencent Music, on the other hand, currently owns over half of China’s online music streaming market.  An IPO would solidify the company’s strong position.  It would also allow the company to gain first-mover advantage in capital markets.

Valuations fly high and so do acquisitions

But what about the company’s valuation?

While Spotify’s investors valued the company at over $8 billion, the streamer has yet to post a profit — in ten years.  And despite Spotify’s strong position in the market, it has yet to present a clear game plan on how to achieve profits.  This may worry some investors if and when Spotify actually goes public.

(However, Spotify’s recent deals with UMG and Merlin may show one possible strategy: allow labels to push two-week exclusive albums for Premium users.  This will serve as an incentive for free users to upgrade to Premium.)

Contrast all of that with Tencent Music.  Last July, Tencent Holdings acquired a controlling stake in music streaming company China Music Corporation.  This allowed Tencent to step up as the dominant music streamer in the country. The move allowed the combination to be valued at $2.7 billion.  That combination became Tencent Music Group this year.

Half a billion music listeners = Profit

So, exactly how many people listen to music via streaming in China?  Two years ago, the number stood at 500 million.  Analysts expect the number to grow to 570 million by 2018.

There are certainly competitors, but they’re playing catch-up.  According to iResearch, as of January 2017, the Kugou app holds 28% of total Chinese listeners.  15% of Chinese users listen to their favorite music through QQ Music.  Kuwo app has a 13% userbase.  All three services make up a 56% market share. Of course, it also helps to own all three.

Here in the United States, streaming music services collectively crossed the 100 million mark last September.  This includes Spotify, Apple Music, Pandora, and others. Spotify has yet to reach out in acquiring other services after the failed SoundCloud acquisition talks.

In the end, it’s the economy, stupid

Tencent Music is projected to have record revenue of $714 million for 2016.  2017 and 2018 revenue will jump to $1 billion and $1.4 billion, respectively.  Analysts expect the company to report net earnings of $85 million, $227 million, and $358 for all three respective years.  Chinese media reports cited these numbers from an internal company file.

As of Tuesday, Tencent’s shares closed at 248.40 Hong Kong dollars, or just under $32.  The company is now valued at $302 billion.