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China’s Tencent Music raises $1.1 billion in downsized US IPO

Tencent Music, China’s largest streaming company, has raised $1.1 billion in a U.S. IPO after it priced its shares at $13 a piece ahead of a listing on the Nasdaq.

That makes it one of the largest tech listings of the year, but the pricing is at the bottom end of its $13-$15 range indicating that the much-anticipated IPO has felt the effects of an uncertain market. Indeed, the company is said to have paused the listing process, which it started in early October, for a time so choppy are the waters right now — and that’s not even mentioning a shareholder-led lawsuit that was filed last week.

Still, this listing gives TME — Tencent Music Entertainment, a spin-out of Tencent — an impressive $21.3 billion valuation which is just below the $30 billion that Spotify commanded when it went public earlier this year via an unconventional direct listing. TME was valued at $12 billion at the time of Spotify’s listing in Q1 of this year so this is also a big jump. (Meanwhile, Spotify’s present market cap is around $24 billion.)

The company operates a constellation of music streaming services in China which span orthodox Spotify-style streaming as well as karaoke and live-streaming services. Altogether, TME claims 800 million registered users — although there’s likely a little creative accounting or double counting across apps involved since the Chinese government itself says there are 800 million internet users in the entire country.

Notably, though, TME is profitable. The same can’t be said for Spotify and likely Apple Music — although we don’t have financials for the latter. That’s down to the unique business model that the Chinese firm operates, with subscription and virtual goods a major driver for its businesses, while Tencent’s ubiquitous WeChat messaging app helps it reach users and gain virality.

Tidy though the numbers are, its revenues are dwarfed by those of Spotify, which grossed €1.4 billion ($1.59 billion) in sales in its last quarter. For comparison, TME did RMB 8.6 billion ($1.3 billion) in revenue for the first six months of this year.

TME executives are taking that as a sign that there’s ample scope to grow their business, although it seems unlikely that will ever be as global as Spotify. The two companies might yet collaborate in the future though, since they are both mutual shareholders via a share swap deal that concluded one year ago.

You can read more about TME in our deep dive below.

We also wrote about the lessons Western services like Spotify and Apple Music can learn from TME.

What Spotify can learn from Tencent Music

On Tuesday, Tencent Music Entertainment filed for an IPO in the US that is expected to value it in the $25-30 billion range, on par with Spotify’s IPO in April. The filing highlights just how different its social interaction and digital goods business is from the subscription models of leading music streaming services in Western countries.

That divergence suggests an opportunity for Spotify or one of its rivals to gain a competitive advantage.

Tencent Music is no small player: As the music arm of Chinese digital media giant Tencent, its four apps have several hundred million monthly active users, $1.3 billion in revenue for the first half of 2018, and roughly 75 percent market share in China’s rapidly growing music streaming market. Unlike Spotify and Apple Music, however, almost none of its users pay for the service, and those who do are mostly not paying in the form of a streaming subscription.

Its SEC filing shows that 70 percent of revenue is from the 4.2 percent of its overall users who pay to give virtual gifts to other users (and music stars) who sing karaoke or live stream a concert and/or who paid for access to premium tools for karaoke; the other 30 percent is the combination of streaming subscriptions, music downloads, and ad revenue.

At its heart, Tencent Music is an interactive media company. Its business isn’t merely providing music, it’s getting people to engage around music. Given its parent company Tencent has become the leading force in global gaming—with control of League of Legends maker Riot Games and Clash of Clans maker Supercell, plus a 40 percent stake in Fortnite creator Epic Games, and role as the top mobile games publisher in China—its team is well-versed in the dynamics of in-game purchasing.

At first glance, the fact that Tencent Music has a lower subscriber rate than its Western rivals (3.6 percent of users paying for a subscription or digital downloads vs. 46 percent paying for a premium subscription on Spotify) is shocking given it has the key ingredient they each crave: exclusive content. Whereas subscription video streaming services like Netflix, Hulu, and Amazon Prime Video have anchored themselves in exclusive ownership of must-see shows in order to attract subscribers, the music streaming platforms suffer from commodity content. Spotify, Apple Music, Amazon Music, YouTube Music, Pandora, iHeartRadio, Deezer… they all have the same core library of music licensed from the major labels. There’s no reason for any consumer to pay for more than one music streaming subscription in the way they do for video streaming services.

In China, however, Tencent Music has exclusive rights to the most popular Western music from the major labels. The natural strategy to leverage this asset would be to charge a subscription to access it. But the reality is that piracy is still enough of a challenge in China that access to that music isn’t truly “exclusive.” Plus while incomes are rising, there’s extraordinary variance in what price point the population can afford for a music subscription. As a result, Tencent Music can’t rely on a subscription for exclusive content; it sublicenses that content to other Chinese music services as an additional revenue stream instead.

“Online music services in China have experienced intense competition with limited ability to differentiate by content due to the widespread piracy.” Tencent Music, SEC Form F-1

This puts it in a position like that of the Western music streaming services—fighting to differentiate and build a moat against competitors—but unlike them it has successfully done so. By integrating live streams and social functionality as core to the user experience, it’s gaining exclusive content in another form (user-generated content) and the network effects of a social media platform.

Some elements of this are distinct to Tencent’s core market—the broader popularity of karaoke, for instance—but the strategy of gaining competitive advantage through interactive and live content is one Spotify and its rivals would be wise to pursue more aggressively. It is unlikely that the major record labels will agree to any meaningful degree of exclusivity for one of the big streaming services here, and so these platforms need to make unique experiences core to their offering.

Online social activities like singing with friends or singing a karaoke duet with a favorite musician do in fact have a solid base of participants around the world: San Francisco-based startup Smule (backed by Shasta Ventures and Tencent itself) has 50 million monthly active users on its apps for that very purpose. There is a large minority of people who care a lot about singing songs as a social experience, both with friends and strangers.

Spotify and Apple Music have experimented with video, messaging, and social streams (of what friends are listening to). But these have been bonus features and none of them were so integrated into the core product offering as to create serious switching costs that would stop a user from jumping to the other.

The ability to give tips or buy digital goods makes it easier to monetize a platform’s most engaged and enthusiastic users. This is the business model of the mobile gaming sector: A minority percentage of users get emotionally invested enough to pay real money for digital goods that enhance their experience, currency to tip other members of the community, or access to additional gameplay.

As the leading music platform, it is surprising that Spotify hasn’t created a pathway for superfans of music to engage deeper with artists or each other. Spotify makes referrals to buy concert tickets or merchandise —a very traditional sense of what the music fan wants—but hasn’t deepened the online music experience for the segment of its user base that would happily pay more for music-related experiences online (whether in the form of tipping, digital goods, special digital access to live shows, etc.) or for deeper exposure to the process (and people) behind their favorite songs.

Tencent Music has an advantage in creating social music experiences because it is part of the same company that owns the country’s leading social apps and is integrated into them. It has been able to build off the social graph of WeChat and QQ rather than building a siloed social network for music. Even Spotify’s main corporate rivals, Apple Music and Amazon Music, aren’t attached to leading social platforms. (Another competitor, YouTube Music, is tied to YouTube but the video service’s social features are secondary aspects of the product compared to the primary role of social interaction on Facebook, Instagram, and WhatsApp).

Spotify could build out more interactive products itself or could buy social-music startups like Smule, but Tencent Music’s success also suggests the benefits of a deal that’s sometimes speculated about by VCs and music industry observers: a Facebook acquisition of Spotify. As one, the leading social media company and the leading music streaming company could build out more valuable video live streaming, group music sharing, karaoke, and other social interactions around music that tap Facebook’s 2 billion users to use Spotify as their default streaming service and lock existing Spotify subscribers into the service that integrates with their go-to social apps.

Deeper social functionality doesn’t seem to be the path Spotify is prioritizing, though. It has removed several social features over the years and is anchoring itself in professional content distribution (rather than user-generated content creation), becoming the new pipes for professional musicians to put their songs out to the world (and likely aiming to disrupt the role of labels and publishers more than they will publicly admit). To that point, the company’s acquisitions—of startups like Loudr, Mediachain, and Soundtrap—have focused on content analytics, content recommendation, royalty tracking, and tools for professional creators.

This is the same race its more deep-pocketed competitors are running, however, and it doesn’t lock consumers into the platform like the network effects of a social app or the exclusivity of a mobile game do. It recently began opening its platform for musicians to add their songs directly—something Tencent Music has allowed for years—but this seems less like a move to a YouTube or SoundCloud-style user-generated content platform and more like a chess move in the game of eventually displacing labels. Ultimately, though, building out more social interaction around music will be critical to it in escaping the race with Apple Music and the rest by achieving more defensibility.

Drake’s ‘Scorpion’ destroyed major Apple Music and Spotify streaming records

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It’s been a big week for Drake. 

First the artist confirmed on multiple tracks off his album Scorpion that he is indeed a father. Now, one day after the new album’s Friday launch, we’ve also learned that Scorpion broke a big streaming record: It earned the most streams on its very first day, on both Spotify and Apple Music. 

Apple Music confirmed the broken record on Instagram, noting that Scorpion was streamed more than 170 million times in its first 24 hours of release. An earlier post also noted that the album had hit #1 in 92 countries. Read more…

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Here's the first 6 minutes of the 'Carpool Karaoke: The Series' premiere

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James Corden’s mega-popular segment now has an Apple flavor.

You can catch the first six minutes of the premiere episode of Carpool Karaoke: The Series, which released on Tuesday night, as part of a 16-episode season for Apple Music.

Will Smith is the first guest, and they open with a rendition of “Gettin’ Jiggy Wit It.” Then they get into a very over-the-top version of “Boom! Shake The Room,” while also discussing if Smith would ever play Barack Obama. 

There’s also a teaser of other hosts and guests, such Gwyneth Paltrow (an easy choice, given she’s in another of Apple’s shows, Planet of the Apps), Maisie Williams and Sophie Turner from Game of Thrones, and Billy Eichner singing it out with Metallica, of all people. Read more…

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Kendrick Lamar dropped his new album on Apple Music and everyone on Spotify is having a nervous breakdown

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Kendrick Lamar dropped his new album DAMN. late Thursday night on Apple Music and fans are rejoicing … except for Spotify users.

Patiently waiting for this Kendrick to drop on Spotify pic.twitter.com/UybNOr65NE

— Alex Carras (@LEGENDofWAFFLE) April 14, 2017

Waiting for Kendrick’s new album to hit @Spotifypic.twitter.com/CDLOsPves6

— kung fu kenny (@Kenny_Velez) April 14, 2017

Team Spotify patiently waiting for Kendrick like..pic.twitter.com/Ip7qpNqkOW

— k y k y (@DjKhyled) April 14, 2017

all the apple music people are swimming in the new kendrick and all the spotify people are patiently waiting for the album to go up like pic.twitter.com/XzM8jJhsmF

— carter (@phebreze) April 14, 2017 Read more…

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'India's Spotify' launches artist originals to take on Apple Music

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The audio and music streaming landscape in India is heating up. Slowly yet surely. 

Saavn, termed “India’s Spotify” by Billboard, just rolled out its Artist Originals (AO) program that will conceptualize, produce and distribute new music with independent artists from India and South Asia. 

The AO program boosts Saavn’s original programming such as podcasts and audio shows. It’s touted as giving creative opportunities to India’s underground artists, and it aligns with the founder’s vision of moving away from “a music-only product to an entertainment platform.”  Read more…

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'India's Spotify' launches artist originals to take on Apple Music

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The audio and music streaming landscape in India is heating up. Slowly yet surely. 

Saavn, termed “India’s Spotify” by Billboard, just rolled out its Artist Originals (AO) program that will conceptualize, produce and distribute new music with independent artists from India and South Asia. 

The AO program boosts Saavn’s original programming such as podcasts and audio shows. It’s touted as giving creative opportunities to India’s underground artists, and it aligns with the founder’s vision of moving away from “a music-only product to an entertainment platform.”  Read more…

More about Podcasts, Indie Music, Music Artist, Spotify, and Apple Music

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Dubset raises $4M to legalize remixes for Spotify and Apple Music

dubset Record labels refuse to allow streaming of remixes and hour-long DJ sets unless copyright owners get paid for every little sample. Dubset just raised $4 million to handle that legal mess so Spotify and Apple Music can offer the type of music that used to live illegally on SoundCloud. Read More

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The first trailer for 'Carpool Karaoke: The Series' is here

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James Corden’s Carpool Karaoke segment, which normally airs on The Late Late Show with James Corden, is becoming a show in its own right. 

We knew that back in July 2016, when the series — which will be an Apple Music exclusive — was originally announced. But now there’s a trailer to whet our appetites, and it promises the same jolly, singalong goodness that we know from the original show. 

The trailer, which was aired during Sunday’s Grammy Awards, features a host of celebrities including Will Smith, Shaq, Metallica, John Cena, Alicia Keys and others.  Read more…

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Ola thinks it has the perfect trick to compete in Uber's fastest growing market

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There’s only so much you can differentiate when you are a cab ride hailing company that is competing with Uber. You could possibly ensure better cars, better service and better pricing.

Having tried most of these, with mixed results, India’s Uber rival Ola is looking at making cab experience more entertaining for riders, hoping it would make riders hop on to its cabs more often.

In November, the Indian company announced Ola Play, a a connected car entertainment platform, through which it gave the controls of the in-car entertainment system to passengers. The service was available only to users who subscribed to Ola’s “Select” plan, which according to the company “saw hundreds of thousands of new users opt for Select subscription, resulting in 3x growth”. Read more…

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