Tencent Holdings (00700.HK) is implementing a corporate restructuring plan that aims to turn the internet giant into an enterprise-focused service provider. While doing so, the company is spinning off some of its valuable assets.
In its latest move, Tencent has filed for the listing of its music entertainment arm in the United States, which will involve an initial public offering that seeks to value the unit at US$25 billion.
Tencent Music Entertainment Group is China’s biggest online music and social platform which runs digital streaming apps such as QQ Music and Kugou as well as karaoke app WeSing, which have about 800 million monthly active users.
While it is seen as China’s answer to Spotify and Apple Music, the company is quite different from the two foreign players in terms of business model.
Tencent Music is more of a social platform than a music streaming service. Most Chinese music lovers are still reluctant to pay for online subscriptions, which is why the company is leveraging on its social media edge to attract users to spend on virtual products in the online community.
According to Tencent Music’s filing, its music-centric social entertainment services, which include virtual gifts and premium memberships, accounted for over 70 percent of the 7.8 billion yuan (US$1.14 billion) revenue it generated in 2017.
On the other hand, its online music service had 23.3 million paying users in the second quarter this year, up from 16.6 million a year earlier. Average revenue per user was 8.7 yuan per month. Revenue subscribers represented only 3.6 percent of its total user base.
Paying customers of its social entertainment service reached 9.5 million in the second quarter this year, up from 7.1 million in the same period in 2017.
The average revenue per user (ARPU) was 111.8 yuan a month, or about 1,341 yuan a year.
Such figures are quite high, compared with the ARPU of mobile services in China. For example, China Mobile’s ARPU for mobile and home broadband services amounted to only 57.7 yuan and 33.3 yuan a month respectively last year.
In the IPO document, Tencent Music said revenue from social entertainment services included virtual gift sales and premium memberships.
For example, users send virtual gifts to show appreciation to those who share their karaoke or live performances, providing performers with an effective channel to interact with their fans and an attractive way to monetize their performances.
While the low paying user base indicates huge growth potential, it also shows that Chinese users are reluctant to pay for content.
Tencent Music said Chinese users’ willingness to pay for music is relatively low compared to their counterparts in more developed markets. It also pales in comparison to the customers’ willingness to pay for online games and video streaming services.
As such, the company is using social entertainment services to provide more opportunities for user interactions, which could mean more purchases of virtual gifts and generate more revenue than music subscription plans.
However, such a strategy does not solve the problem of having an extremely low ratio of revenue users.
That could hinder the company’s future growth as the entire business cannot be supported by a small number of paying customers.
By comparison, revenue customers accounted for 46 percent of Spotify’s user base and 43 percent of Deezer’s in the second quarter of this year.
Originally published at www.ejinsight.com on October 5, 2018.