Spotify, Tencent And The Laws Of Unintended Consequences

spotify tencent midia

News has emerged that Spotify and Tencent Holdings could be swapping 10% holdings in each other’s companies ahead of Spotify’s public listing. There are some obvious implications for both enterprises, as well as some less immediately obvious, but even more interesting permutations:

  • Spotify gets a foothold in China: Tencent is the leading music subscription company in China with QQ Music, Kugou and Kuwo accounting for 14.7 million subscribers in 2016. Apple Music has got a strong head start over Spotify with 3.5 million Chinese music subscribers. Tencent, with its billing relationships, social reach (WeChat, QQ Messenger) and rights holders relationships (Tencent sub-licenses label rights) provides a potential China launch pad for Spotify. So, the obvious implication is that Spotify could use Tencent as an entry point into the market. But this is where things get complicated. Tencent is planning a $10 billion flotation of Tencent Music. How would this valuation be impacted by Tencent aiding the entry of a direct competitor – which is a leader in virtually every market it is currently in, into the market of? A joint venture could be the way to square the circle.
  • Spotify continues its narrative building: As I have long argued, Spotify needs to construct a compelling narrative for Wall Street. It needs to be able to show that it is making strong progress on many of its weak points. Getting better deals from the labels was one such move. Now it has ticked the ‘what about China’ box too.
  • Tencent gets a foothold in the US: Earlier this year the Chinese government put in place restrictions on Chinese companies investing in overseas companies, in order to slow the outflow of Chinese capital. (It slowed a potential investment by Alibaba in UMG). Swapping equity is a way to get round this restriction. It also builds on Tencent’s move extending its stake in Snap to 12%. Tencent is pushing the rules to the limit in order to become a key player in US digital consumer businesses (Spotify of course will become, in part at least, a US company when public). The intriguing question is whether Tencent will get any access to Spotify’s western billing relationships.
  • Valuation disparities: Tencent Music has around a 3rd of Spotify’s subscriber base, a fraction of its revenue and half of its market valuation. Yet a 10% swap deal is on the table. Which suggests that Spotify really, really feels that it needs that entry point into China….

If this deal pans out the way it has been slated, it will potentially save Spotify and Tencent from a resource-draining clash of Titans for when (not if) Spotify would enter the Chinese market. It also provides Spotify with a potential long-term insurance asset. When Yahoo acquired a stake in Alibaba it was very much the senior partner. But, as Yahoo’s business imploded its Alibaba stake became its core asset.

Spotify obviously won’t be thinking that way but history shows us to never say never.

UPDATED: This post has been updated to reflect that the 10% equity swap is with Tencent  Music, not Tencent Holdings Ltd

7 thoughts on “Spotify, Tencent And The Laws Of Unintended Consequences

  1. Mark, You are just cheerleading to few DUMB elephants inside of beautiful music store!
    We are witnessing TOTAL DEMOLITION of $300B of obvious to a dork of music goodwill to at the best $30B of subs and ads!

    If all the NUTS go serious NUTS we will plateau music at $30B in 2030.

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  4. Pingback: The One Reason Behind The Spotify-Tencent Stock Swap - Music 3.0 Music Industry Blog

  5. For centuries the West looked at the China market as a panacea for all that could be wrong with capitalism. Its undeveloped infrastructure and huge population offered great opportunities for the West to sell its surplus goods and constructions/development services. How the world has changed — the infrastructure has improved, the population migrated to cities and a communist government has become the fastest growing and dynamic economic in Asia and maybe the world since the Trump administration’s “America First” strategy doesn’t seem to have damaged TPP. With a reasonable digital infrastructure and tones of people, the digital market in China — not to mention the CD and vynil markets has great potential. Hopefully the industry can find a way to crack it, as it offers Western musicians a huge market for their products and services. As China supplants the US as the leading power globally, it will inevitably be pressured to abandon censorship — or the digital world will be too difficult for them to censor — and the market may turn out to be a boon to the industry. It’s going to take some time and lots of effort, but there is no larger market in the world… and it is becoming more and more westernized. Go get it!

  6. Pingback: Spotify, Tencent And The Laws Of Unintended Consequences [Mark Mulligan] | MusoPlug

  7. Dear Mark,

    Do you believe this entry into China could be enough to make Spotify profitable on a global scheme, or do you still believe Spotify should adopt multi-tier pricing across all markets?

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