Tencent’s music unit and Spotify are buying minority stakes in each other, marking the latest move by the Chinese internet behemoth to expand its global reach and presenting the Swedish streaming service with a way into China’s red-hot music market.
Spotify and Tencent Music Entertainment will exchange equity stakes of just under 10 per cent of each other, according to people familiar with the matter, by buying new shares in cash, ahead of expected initial public offerings next year.
Separately, parent group Tencent Holdings will make secondary purchases in Spotify to make up for the difference in valuations between the two music services. Spotify was valued at $8.5bn in a 2015 fundraising, although analysts estimate it would be worth at least $20bn if it went public, on the back of rapid user growth and a budding recovery in the music sector. Tencent Music was valued at about $6bn last year, and is reported to be seeking a public listing of $10bn.
Tencent, the conglomerate behind the popular messaging platform WeChat, has been racing to expand its presence outside of its home market through acquisitions and overseas investments.
Last month, Snap, parent company of social media group Snapchat, revealed that Tencent had built up a $2bn stake in the business, a holding that ranks as the fifth largest stake by a Chinese company in a US tech group, according to S&P Global.
In March, the company acquired a 5 per cent stake in Tesla, the electric carmaker, and last year, Tencent paid $8.6bn for a majority stake in Supercell, the Finnish start-up behind hit game Clash of Clans.
The Chinese company has previously tried to buy Spotify but the Swedish start-up did not want to sell, according to people familiar with the matter.
Spotify has more than 140m customers, of whom 60m are paying subscribers, operates in 61 countries and is partly credited with helping turn round music revenues after decades of losses due to piracy.
But it is not yet live in China, one of the world’s fastest growing music markets where consumers are increasingly taking up streaming on their mobile phones. China’s recorded music market grew 20 per cent last year, well above the global average of 6 per cent, according to the music-recording industry body IFPI.
Tencent’s three music-streaming apps — QQ Music, Kugou and Kuwo — dominate the Chinese market with a combined total of more than 500m monthly active users, although only about 15m of them are paying subscribers.
Daniel Ek, Spotify’s founder and chief, said the deal “will allow both companies to benefit from the global growth of music streaming”.
However, industry experts say it remains tough to bring western music to a market where domestic talent dominates.
Spotify is “aware that China is like India”, said one major label executive. “If you’re not making Bollywood movies you can’t really be in the film industry, and it’s the same for music.”
Spotify also views the Tencent arrangement as a way of shoring up its finances ahead of an IPO. The company aims to list on the New York Stock Exchange early next year.
The partnership will give the two companies better leverage in negotiating licensing deals with the large record labels. As executives accepted streaming as the format of the future, the world’s biggest music labels and the tech companies that distribute their songs have been in fierce talks to carve out royalties from streaming.
Spotify this year struck fresh licensing deals with its major suppliers — Universal Music, Sony Music and Warner Music — while Tencent has also negotiated deals with the big three labels for access to their music.
Cussion Pang, Tencent Music’s chief executive, said the companies would “work together to explore collaboration opportunities”.
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