Spotify and Tencent have agreed a share swap and investment deal. The exact terms between the streaming music company and the Chinese internet giant have not been revealed but industry publications have reported that under the deal Spotify and Tencent Music Entertainment TME) will get 10% of each other’s businesses. TME, which is majority-owned by Tencent is the leading music streaming service in China powering offers from QQ Music, KuGou and Kuwo. In addition to the stock swap Tencent has acquired a stake in Spotify by purchasing shares from existing backers.
Tencent acquired China Music Corp in for $2.7 billion in July 2016 and as of early 2017 is reported to have over 15 million paying music subscribers, giving it a market share of over 75% in the Chinese market. This level of dominance is hard to compete with under any circumstances but particularly for international services seeking to grow their businesses in China. By partnering with TME, Spotify stands to benefit from the local company’s growth without an expensive and potentially distracting launch into the region. There are obvious parallels here with Uber, where the US ride sharing company ended up withdrawing from China and selling its local business to local market leader Didi Chuxing in deal that saw Uber investors taking a stake in Didi and Didi investing in Uber.
For Tencent, a stake in Spotify continues a well established pattern of large scale international media investments. The company bought a 12% stake in Snap in November 2017 (having previously invested pre-IPO) and invested in Canadian messaging app, Kik, in 2015. The company has also made a number of games investments including: Frontier Development (2017), Supercell (2016), Glu Mobile and Robot Entertainment (both 2015). . Tencent’s international strategy is clear; rather than pushing its own services the conglomerate will typically expand its foot print with strategic investments.
In addition to its proxy-access to the Chinese market, Spotify is understood to have taken investment from TME. This continues the company’s practice of seeking non-traditional sources of funding ahead of its long-anticipated move to go public. In March 2016 Spotify took on $1 billion of convertible debt rather than seeking a more traditional round of venture funding. This move came against a background of revenues of €1.95 billion generating a loss of €184 million in 2015. However, in 2016 it was reported that despite revenue reaching €2.9 billion Spotify’s losses had grown to between €300 million and €400 million. This would appear to show the company’s finances on the wrong track for a successful IPO as losses were growing more quickly than revenue. In this context, taking on investment from TME as well as letting Tencent purchase secondary shares could be seen as the Swedish company buying time, with more financial runway for operations from the investment and the secondary share purchases alleviating some of the pressure from existing investors seeking to see a return on their investment.