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Tencent Music Expects Setback From Regulations, Says Subscriptions Are Safe

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. 

The company is downplaying the loss of exclusive music on its platform following a July 26 crackdown by the Chinese government.

Tencent Music Entertainment executives insisted new regulations won’t impede the growth of its subscription business during its second-quarter earnings call on Wednesday (Aug. 18) -- but they will do some damage. Tencent Music was notified by the Chinese government on July 26 that it has 30 days to eliminate its exclusive licensing agreements with record labels -- part of an effort to target what it considers to be monopolistic behaviors that are harmful to economic growth.

During the call, Tencent Music executives consistently downplayed the importance of losing exclusive music on its platform. “While the decision will have an impact on our music business, it is worth noting that all the music that has been available on the platform will continue to be available on the platform to our users,” said chief strategy officer Tony Yip.

Tencent Music’s executive chairman Cussion Pang said the company is in conversations to license content from companies that had exclusive content with other platforms. “We will be fully committed to bringing the best quality of music and continue to expand our music library for our users,” he said.

With regulatory restrictions on licensed music, Tencent Music can operate on the fine line between forbidden, exclusive music and “differentiated” content that doesn’t require a license from a large record label. Tencent Music takes self-produced music from independent artists and co-produces music with its parent company, tech giant Tencent -- an arrangement that has already resulted in the co-production of “two dozen” successful song with popular artists and which Tencent Music signaled it intends to take better advantage of. Live streaming also gives Tencent Music an opportunity to give users unique -- but not exclusive -- experiences such as a live event held by two of the company’s services, Kugou Live and WeSing. Cross-platform performances produce “a significant increase in revenues” and attracts “more paying users,” said Yip.  

Yip insisted the regulations would not impede the company’s music subscription revenues, which grew 32.8% to $277 million in the second quarter from the prior-year period, and that the company expected to continue to add 4 million to 5 million subscribers per quarter. “From a regulatory standpoint, we believe regulators are also keen to promote the overall, healthy development of the music industry and having a viable and long-term monetization model is an important part of that.”

Analysts have been warning investors about Tencent Music’s dire situation for weeks. On Wednesday, Deutsche Bank downgraded TME from a buy to a hold rating without changing its $9 price target. That follows downgrades by J.P. Morgan on Aug. 12 and Morgan Stanley on July 16. TME shares have fallen 45.7% -- from $14.36 to $7.80 -- since July 26, when a Chinese regulator ordered Tencent Music to end its exclusive licensing agreements with record labels. The share price dropped 0.3% on Wednesday and 12.3% on Tuesday after Tencent Music’s early release Monday of its second-quarter financial statements.

Regulators’ demands will hurt the company in various ways, however. Yip said the music services’ advertising revenue will be lower than previously expected. And as a result of regulations about content safety and tipping behavior, the company “expect[s] the second half [of 2021] to see further pressure” on margins,” he said.