Streaming

NetEase Cloud Music Gets Approval for Spin-Off

Netease
Costfoto / Barcroft Studios / Future Publishing

A mobile phone shows app Netease cloud music interface.

China’s number two music streaming company trails Tencent Music.

Chinese video-game giant NetEase has secured approval from the Hong Kong Stock Exchange to spin off its music streaming subsidiary, Cloud Village, which runs the popular NetEase Cloud Music streaming service, the company says.

Cloud Village plans to raise roughly $1 billion, according to media reports, and will remain a majority-owned subsidy of NetEase. NetEase Cloud Music is a freemium music service that had 183 million users in the first quarter of 2021 and 24.3 million subscribers. It posted revenue of $232 million with a $44 million net loss in the first quarter of 2021. The division that houses NetEase Cloud Music grew 38% to $2.45 billion in 2020.

The app is a popular music curator for Generation Z consumers in larger, more affluent cities like Beijing and Shanghai than Tencent, which is stronger in lower-tier cities, label executives say.

Cloud Village’s spinoff arrives as surging streaming revenues have invigorated investor interest in music from around the world. China was the seventh-largest global market in 2020, up from number 12 in 2016, and music streaming royalties grew 34% to $718.1 million, according to the IFPI.

In December of 2018, Tencent Holdings spun off Tencent Music Entertainment (TME) with a $1.1 billion IPO on the New York Stock Exchange. Tencent then doubled down on music by acquiring 20% of Universal Music Group for 6 billion euros ($7.1 billion). Warner Music Group, the world’s third largest music company, raised $1.9 billion in a June 2020 IPO on Nasdaq exchange in the U.S. Market leader Universal Music Group will spin off from Vivendi on the Euronext Amsterdam exchange in September.

Most recently, U.S. music rights company Reservoir Media listed on the Nasdaq on July 29 through a merger with a special purpose acquisition vehicle.

NetEase Cloud Music runs well behind TME, China’s leading music streaming company, which had first quarter revenue of $420 million from 615 million users and 60.9 million subscribers. Tencent’s apps -- QQ, Kuguo and Kuwo -- collectively controlled 77% of China’s monthly active users in December among the top five streaming apps, with Cloud Music holding down the fourth spot behind Kuwo with 19% of users, according to Chinese research company QuestMobile.

Cloud Music will enter a more level playing field after Tencent Music ran into regulatory challenges that will eliminate some of its competitive advantage. Last month, China’s State Administration of Market Regulation instructed Tencent Music to give up its exclusive distribution deals with music labels and fined the company $77,150 for not properly flagging its acquisitions of Kuwo and Kugou in 2016.