Tencent Music Beats Spotify Growth Rate, Turns Healthy Profit in Second Quarter

Tencent Music Entertainment
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Tencent Music Entertainment (TME) is displayed on the screen of an iPhone on June 12, 2018 in Paris, France. 

Spotify might be the Best of the West, but Tencent Music Entertainment again proved why it's the Beast of the East. The Chinese music streaming company reported a 17.5% revenue increase to RMB 6.93 billion ($981 million) from last year, according to the company's second quarter earnings released Monday (Aug. 10), a quicker pace than Spotify's 13.2% growth for the same periods.

Wall Street has clamored for TME shares this year. After a 2.1% decline on Monday (Aug. 10), TME's share price was up 33.6% year-to-date, handily beating the The New York Stock Exchange index's 1% gain and the tech-heavy Nasdaq's 20.9% improvement over the same period. Even so, TME shares haven't kept up with Spotify's blistering pace of a 99.4% year-to-date growth. Though TME is profitable and has strong growth in the world's largest country, investors have rallied around Spotify and its push into podcasts in an effort to become an audio platform, not just a music service.

TME acts like other global music services in a number of ways. Like Spotify, TME has licensed long-form, spoken word content to transition into a pan-audio platform. In the second quarter, as long-form audio reached 9.4% of monthly active users, up from 4.6% a year earlier, TME tripled the number of licensed non-audio tracks. (While Western audiences clamor over podcasts, TME offers audio of talk shows and TME provides resources, such as a direct-upload feature and promotional backing, to find and promote independent artists.)

But similarities to Spotify end there. TME has a two-pronged business model that created a $157 million operating profit on $981 million of revenues. The four music services -- QQ Music, Kugou Music, Kuwo Music and WeSing -- combined for $314 million, a 42.2% increase from 2019, driven by 65% growth in subscription revenues from 47.1 million paid users, up 51.9% year over year.

Most of TME's revenue -- and likely the majority of its profits, given the slim margins of licensed music -- comes not from music but from social features such as giving virtual gifts. TME's social entertainment ARPU was $18.06 in the quarter, down 2.6% from the prior year and more than 13 times greater than music's $1.34 ARPU, up 8.1% from 2019.