Tencent Holdings Ltd (SEHK: 700), China’s largest and most used Internet service portal, agreed to acquire a majority stake in China Music Corp. (CMC), the nation’s leading music-streaming company, in a $2.7 billion all-cash deal
The deal would raise Tencent’s current 16% stake in CMC which owns music services Kugou and Kuwo, to 60%, creating a dominant competitor in China’s online-music market, The Wall Street Journal reported.
The move comes a few weeks after Tencent agreed to acquire 84% of Finnish mobile game developer Supercell Oy from Japanese telecommunications giant SoftBank Group Corp. (TYO: 9984) in a $10.2 billion deal.
In May, MCM had reportedly engaged Goldman Sachs and Morgan Stanley to conduct an IPO on NASDAQ.
In January, MCM’s Chinese music behemoths – Kugou Music and Kuwo Music – signed a reciprocal licensing and syndication deal with Tencent’s QQ Music, to exchange music copyrights for over one million songs within China. Under the new buyout deal, Tencent is expected to integrate Kugou and Kuwo with its QQ Music app, considered one of the best streaming music app in China.
China Music Corp., which has an offshore corporate structure, was founded by Xie Guomin, the company’s CEO. He is an attorney with experience in the digital licensing market, and former vice president and general manager of Sina’s music division, which he helped go public in 2000.
CMC has become one of the largest music platforms in the world, reportedly with over 500 million users, and partnerships with hundreds of labels around the world.
China remains a music market of enormous untapped potential, with an online user base of 650 million people and a growing number of licensed digital services, according to IFPI, the voice of the recording industry worldwide. However, an undeveloped culture of paying for music and a history of piracy makes progress slow. The hope is for further growth in the years ahead as labels and services roll out initiatives to establish a paid model for music.
Revenue in China’s music streaming segment is projected at $373 million in 2016, according to Statista’s Digital Market Outlook. Revenue is expected to show an annual growth rate (CAGR 2016-2020) of 16.40% resulting in a market volume of roughly $685 million in 2020. User penetration is at 14.70% in 2016 and is expected to hit 20.34% in 2020. The average revenue per user (ARPU) currently amounts to $2.24.
“The piracy issue has destroyed the whole system of online music (in China), regardless of the music quality, its market or administration,” Guomin commented last year. “As such, companies cannot earn much, and listeners are getting watered-down products. Another reason is that we do not have well-defined rules to protect the whole industry. Pirated music has negative consequences for the entire music industry,” he added.
In December 2015, CMC’s R2G division developed an exclusive partnership with Imagem and INgrooves. Through CMC’s Kugou Music and Kuwo Music, it acquired the licensing and distribution rights to over one million songs from Imagem and INgrooves in mainland China.
“We are committed to developing a vibrant and healthy marketplace for music in China which will be of great benefit to artists, and we are delighted to have one of the world’s biggest independent music distributors,” said Guomin after the deal with INgrooves.
Tencent was founded in Shenzhen in 1998 by Ma Huateng and Zhang Zhidong, and went public on the Main Board of the Hong Kong Stock Exchange in 2004. The company is one of the constituent stocks of the Hang Seng Index. Tencent’s diversified services include QQ, Weixin, WeChat, Qzone and Tencent, serving hundreds of millions of Internet users through its integrated communications, social networking, online gaming, news and video platforms.
South African media giant Naspers Ltd. (LSE: NPSN; SJ: NPN), owns a 34% stake in Tencent. In addition it has a sizable stake in Mail.ru (LSE: MAIL) and Flipkart. Tencent has been Naspers’s most successful investment, according to industry analysts.