Tencent’s Move to Buy 10% of Universal Music Group Shows the Global Music Business Is In Excellent Health

The following MBW blog comes from Jesse Kirshbaum, CEO of Nue Agency (pictured inset). Kirshbaum began his career working with artists such as J.Cole, Mike Posner and Pusha T, and has since racked up extensive experience securing talent for concerts and tours, plus agreeing endorsement deals for his clients and brand partners internationally. He founded New York-based Nue Agency – named in Inc Mag’s 500 list as the third fastest-growing Media Company in America – to “sit at the center of culture, brands and technology”. In addition to Nue Agency, Kirshbaum is the host of Hot 97’s web series “Hot In Tech”, while he also writes and curates Beats and Bytes, a weekly newsletter covering entertainment.

As the global music industry turns its head to 2020, Tencent, one of China’s largest internet and entertainment companies, shook the music business the last day of the year as it agreed to purchase 10% of Universal Music Group from its parent company Vivendi for $3.36 billion.

The deal, which pushed Universal Music Group’s valuation to north of $30 billion, was received well by Vivendi investors who saw the stock move up 0.4% after the investment news broke. Even Universal Music Group chairman and CEO Lucian Grainge hailed the deal saying in an internal memo that it was a “strong validation of [our] business strategy.” 

When looking at the implications of this deal, it is clear to both investors and industry insiders that the big winner here, long term, is Tencent. Tencent and its investors know the global recorded music business has been on an upward trajectory thanks to the adoption of streaming and better digital connectivity in emerging territories. For instance, consider the fact that the IFPI noted that the global recorded music business grew for the fourth consecutive year in 2018, increasing by 9.7% and driving over $19.1 billion in revenue.

This upward trajectory was mirrored again last year when Goldman Sachs issued an equity research report forecasting that the recorded music market will hit $45 billion by 2030, driven by a projected 1.15 billion users paying for music-streaming subscriptions.

Moreover, with emerging territories like Latin America, China, and India showing growing smartphone adoption and stronger internet and phone connectivity, the pool of global music consumers is poised to triple within the next three to five years. Ultimately, it was the growth of the global music business that is enticed Tencent and its investors to bet big on Universal Music Group.

As many of us in the industry ponder the long-term impact of Tencent’s investment, here are four takeaways from from what the industry should consider to be the deal of the year:

1) Tencent Will Pull the Trigger and Own 20% of UMG by 2021

In addition to purchasing 10% of UMG, Tencent reserved the right to buy another 10% stake on the same terms by January 15, 2021. You better believe that Tencent has every intention of pulling the trigger to control 20% of the largest music record company in the world.

For starters, Universal Music Group has adjusted well to the new music business, growing its overall revenue by 24% over the last year. Secondly, Tencent’s stake in UMG compliments their suite of other portfolio companies quite well. Remember, Tencent has a diverse set of companies it either outright owns or is a sizeable investor in.

For instance, its portfolio ranges from WeChat, a multi-purpose chat, payment and social media app with over a billion users, to stakes in hundreds of smaller firms such as Riot Games, the makers of “League of Legends”, Spotify, one of the largest streaming music services in the world, and Epic Games, an American firm whose offerings include “Fortnite”.

Tencent’s investment in UMG will allow the company to start creating new IP by packaging UMG’s massive roster of artists that include acts like Lady Gaga, Taylor Swift, Kendrick Lamar and U2 with its suite of apps, games, and entertainment properties and platforms.

2) Tencent can buy into UMG China, Becoming the Arm That Bridges China’s Music Market to the USA

Tencent not only reserved the right to own 20% of UMG by 2021 but have already started discussions on an additional agreement that would allow its majority-owned subsidiary, Tencent Music, to acquire a minority share capital of UMG’s subsidiary in greater China.

This additional deal will open up the door to China’s booming music market, which Entgroup, China’s leading entertainment industry consulting firm, noted was expected to grow from 347.1 billion yuan (50.43 billion USD) in 2017 to 523.5 billion yuan (76.06 billion USD) by 2023.

This booming market is ripe for the pickings and UMG will tap into Tencent’s resource and knowledge of the region to increase the profitability of UMG’s Asia Business, which in 2018 represented a little more than 13% of its 2018 sales.

Moreover, the deal will allow Tencent to grow its global streaming footprint by giving its digital streaming services more access to artists in the United States. This two-way culture swap pipeline will allow the cross pollination of two of the most important music markets in the world, generating new revenue opportunities across both regions.

3) Tencent’s Deal Will help Its Streaming music company, TME, to Compete with Giants Spotify, Apple Music, and YouTube

One of the key reasons Tencent took what some investors called a hefty price tag for a stake in UMG is the competitive advantage it will give its growing Tencent Music Entertainment streaming company (owner of services such as QQ Music, KuGou and Kuwo).

There is no question that part of Tencent’s streaming growth strategy was dependent on this deal due to the number of users it has to catch up to competitor streaming services like Apple Music and Spotify. Despite Tencent only having about 35 million paid subscribers, investors on Wall Street were quite optimistic about the streaming services growth due to the terms of the UMG–Tencent deal, with shares of Tencent Music rising 1.4% after the deal was announced from TME’s parent company.

Growing Tencent’s streaming service in the US market will also help fend off Bytedance’s TikTok, which has evolved to become one of the major competitors to Tencent’s streaming platform and is establishing quite the footprint in the US market.

4) Tencent’s Investment in UMG Is Good for The Collective Music Business, Even Competitor Labels

Overall, this investment is a validation that the global recorded music business is healthy and growing. Moreover, it validates the value of the record label, and gives competitors Sony Music and Warner Music Group a baseline of how to evaluate their business and attract investors.

In the case of Universal Music Group, it is clear that Vivendi will continue to work hard to attract additional investors in its record label. Lastly, don’t be surprised if Sony Music or Warner Music Group to get a strategic investor such as Bytedance or Alibaba to compete with Universal Music Group in monetizing the growing Asian music market.

Overall, the UMG–Tencent deal gives the music industry new hope and validates that 2020 and beyond will be a new golden age for the music business. Music Business Worldwide

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