Tencent's US music IPO reflects more upbeat recording industry

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Tencent’s plan to spin off its online-music business and list shares in the US is the latest sign that the long-beleaguered recording industry is staging a comeback.

The move will let American investors bet on the Chinese market for music-streaming services, which have brought new life to a business that’s been plagued by piracy.

Tencent’s growth in China also mirrors inroads by partner Spotify SA in the US, where streaming has helped music sales grow at their fastest rate since the 1990s.

For record labels, the resurgence has helped them rebuild after years of decline. The demise of physical media and free-downloading sites ravaged the industry. And the arrival of iTunes and legal downloading options in the early 2000s did little to stem the slide.

But now streaming appears to have given music sellers a formula they can live with.

Tencent, China’s largest social media and gaming company, is still working on terms of its spinoff proposal, which it announced in a filing to the Hong Kong stock exchange Sunday.

The announcement follows a similar move by Tencent last year in Hong Kong with its online reading business, China Literature.

Its music platforms - QQ Music, KuGou and Kuwo - are becoming important vehicles for pop stars such as Katy Perry and Rihanna to reach a Chinese audience, alongside homegrown artists like Jason Zhang and Joker Xue.

"The payment ratio will increase for digital music consumption in China in the long run," He Saiyi, an analyst with Huatai Securities, wrote in a research report on Monday.

"Tencent Music dominates the China market: it owns the most digital music copyrights in China and, in our view, has the most vibrant online music communities."

Content empire

Tencent Music Entertainment had picked banks to advise on a planned initial public offering in the US that could raise at least $1bn, people with knowledge of the matter told Bloomberg in May.

Tencent has the advantage of a fully developed entertainment and content empire that encompasses the ubiquitous WeChat messaging app, games, video-streaming, a karaoke app and content-licensing deals with more than 200 international and domestic record companies.

But like perennial rivals Alibaba, Baidu and Netease, Tencent has to contend with the rampant piracy that’s eroding the industry’s profits.

It also counts Stockholm-based Spotify as an investor, but the two companies may increasingly become rivals. While they don’t compete directly in China, Spotify challenges Tencent in regions such as Southeast Asia.

Spotify went public earlier this year and currently has a market value of $31bn. In May, the Financial Times said Tencent Music Entertainment’s listing could value the company in excess of $30bn.

Valuation could partly depend on where Spotify was trading at the time, the paper said.

In the US, recorded music sales rose 17% to $8.5bn last year, with streaming accounting for almost two-thirds of the total, according to the Recording Industry Association of America. It put the industry on its fastest pace since 23 years ago, when acts like Hootie & the Blowfish dominated the airwaves.

* Fin24's parent company Media24 is part of the Naspers Group. Naspers owns a stake in Tencent.

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