Tencent Music sets sombre tone for China tech

The logo of China's Tencent Music Entertainment Group is seen next to an earphone in this illustration picture taken March 22, 2021. REUTERS/Florence Lo/Illustration

HONG KONG, May 17 (Reuters Breakingviews) - Tencent Music Entertainment (TME.N) has kicked off China tech's earnings season on a jarring note. Quarterly sales slumped 15% year-on-year, to roughly $1 billion, thanks to the triple whammy of a slowing economy, more competition and new regulations. It'll be a familiar refrain for the Spotify-like (SPOT.N) group's $430 billion parent and peers.

Even before China’s latest Covid-19 lockdowns paralysed economic activity in major cities, Tencent Music had flagged shrinking sales for 2022. Regulatory scrutiny on antitrust and unfair market practices have empowered rival music and video apps from NetEase and TikTok-owner ByteDance, costing the company listeners last year. Monthly active users in the three months to March continued to slide, with audiences in its concert live-streaming and karaoke apps plunging 28% year-on-year to 162 million. Revenue from these social entertainment services, including lucrative sales from fans tipping musicians, fell by a fifth. That division accounted for over 60% of the total top line and probably the bulk of the company's earnings.

Moreover, Beijing is clamping down on the live-streaming sector. Minors will soon be banned from spending money on these apps while those under 16 will not be allowed to perform; tax authorities are targeting how much online celebrities make too. With competition showing no signs of abating read more and already-weak domestic spending unlikely to rebound soon, Tencent Music's cash-cow business is looking out of tune. Its New York-listed stock has shed 85% of its value from a March 2021 peak.

The company's pain will be shared by technology peers, particularly its parent. Tencent, which is set to report quarterly earnings on Wednesday, has been grappling with slowing growth, added rules in advertising, video games, online content and financial technology as well as challengers like ByteDance.

More pleasing to the ear for Tencent and its music arm’s shareholders is the latter's focus on profitability over growth. The company has been scaling back on marketing and promotions to attract users while doubling down on its more stable Spotify-like subscription business, where quarterly sales grew a promising 18%. That should hit the right notes in what will be a tough year ahead.

Follow @mak_robyn on Twitter

(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

CONTEXT NEWS

- Tencent Music Entertainment on May 16 reported revenue of 6.64 billion yuan ($979 million) in the three months to the end of March, a 15% decrease from the same period a year earlier.

- Net profit attributable to equity holders fell 34% year-on-year to 609 million yuan.

- Tencent Music's New York-listed shares rose 3.4% to $4.29 during after-hours trading following the results.

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

Editing by Antony Currie and Katrina Hamlin

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Thomson Reuters

Robyn Mak joined Reuters Breakingviews in 2013. Previously, she was a Research Associate for the Global Policy Programs at the Asia Society in New York where she focused on US-Iran relations, US-Myanmar relations and sustainability issues in Asia. She has also worked as a researcher at the Carnegie Endowment for International Peace in Washington DC and interned at several consulting firms, including the Albright Stonebridge Group. She holds a masters degree in international economics and international relations from the Johns Hopkins School of Advanced International Studies and is a magna cum laude graduate of New York University.