Tencent Holdings Ltd.’s plan to spin off its online-music business and list shares in the U.S. is the latest sign that the long-beleaguered recording industry is finding its way to financial health.
The move will let American investors bet on the Chinese market for music-streaming services, which have brought new life to a business that’s been plagued by piracy. Tencent’s growth in China also mirrors inroads by partner Spotify in the U.S., where streaming has helped music sales grow at their fastest rate since the 1990s.
For record labels, the resurgence has helped them rebuild after years of decline. Free-downloading sites and the demise of physical media ravaged the industry. And the arrival of iTunes and legal downloading options in the early 2000s did little to stem the slide. But now streaming appears to have given music sellers a formula they can live with.
In the U.S., recorded music sales rose 17% to $8.5 billion last year, with streaming accounting for almost two-thirds of the total, according to the Recording Industry Assn. of America. It put the industry on its fastest pace since 23 years ago, when acts such as Hootie & the Blowfish dominated the airwaves.
Tencent, China’s largest social media and gaming company, is still working on terms of its spinoff proposal, which it announced in a filing to the Hong Kong stock exchange Sunday.
The announcement follows a similar move by Tencent last year in Hong Kong with its online reading business, China Literature Ltd. Its music platforms — QQ Music, KuGou and Kuwo — are becoming important vehicles for pop stars such as Katy Perry and Rihanna to reach a Chinese audience, alongside homegrown artists like Jason Zhang and Joker Xue.
Tencent Music Entertainment Group has picked banks to advise on a planned initial public offering in the U.S. that could raise at least $1 billion, people with knowledge of the matter told Bloomberg in May.
Tencent has the advantage of a fully developed entertainment and content empire that encompasses the ubiquitous WeChat messaging app, games, video streaming, a karaoke app and content-licensing deals with more than 200 international and domestic record companies. But like perennial rivals Alibaba Group Holding Ltd., Baidu Inc. and Netease Inc., Tencent has to contend with the rampant piracy that’s eroding the industry’s profits.
It also counts Stockholm-based Spotify as an investor, but the two companies may increasingly become competitors. Though Spotify is not in China, it challenges Tencent in regions such as Southeast Asia.
Spotify went public this year and currently has a market value of $31 billion. In May, the Financial Times said Tencent Music Entertainment’s listing could value the company in excess of $30 billion. Valuation could partly depend on where Spotify was trading at the time, the paper said.