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

 

HONG KONG - It may be a while until Tencent Music Entertainment starts hitting high notes again. China's $15 billion answer to Spotify is adding subscribers at an impressive pace, suggesting at least some of its regulatory woes are winding down. Its karaoke apps, though, are losing users as censors prepare to crack down on streaming services. The company's shares have more than halved this year, yet it's too soon to call bottom.

Tencent Music's streaming business has escaped relatively unscathed from an antitrust investigation. Watchdogs recently banned its parent, Tencent, from entering into exclusive agreements with record labels and fined it 500,000 yuan, roughly $77,000, for unfair market practices, but that’s a slap on the wrist for the $560 billion titan. On Monday, Tencent Music boss Ross Zhu reassured investors that the new copyright rules were unlikely to have a big impact on its online subscribers, which expanded 41% year-on-year to over 66 million in the three months to June. That helped lift revenue from listeners and advertisers in the segment by a third in the same period.

Alas, this harmonious performance is drowned out by the discordant noises emerging from Tencent Music's main revenue generator. Quarterly sales growth in so-called social entertainment services, which include karaoke and concert live-streaming apps, slowed to just 7% to $783 million - nearly two-thirds of the top line. Worryingly, paying users on these apps slumped 13% from a year earlier, to 11 million. The company now expects 2021 sales from this business to be flat, implying second-half revenue will fall from the previous year.

Tencent Music blames competition from "pan-entertainment platforms". That probably refers to ByteDance's Douyin, the Chinese version of TikTok, which has an estimated 600 million daily active users, according to local media reports. Moreover, executives also warned that the company was making "conservative adjustments" to "comply with stricter regulatory directions".

That rings a sour note. Regulators and state media have been dialling up criticism of unhealthy online behaviour and content to protect minors, targeting everything from karaoke songs to video games to internet celebrity fan clubs. Tencent Music might advise shareholders to don earplugs for a bit.

 

CONTEXT NEWS

- Tencent Music Entertainment on Aug. 16 said revenue in the three months to end-June was 8 billion yuan ($1.2 billion), an increase of 16% year on year. Online paying users increased 41% to 66.2 million.

- Net profit attributable to equity holders of the company decreased 12% from a year earlier, to 827 million yuan.

- Separately, Tencent Music is considering delaying a planned Hong Kong listing until next year, the Nikkei reported on Aug. 16, citing people familiar with the matter.

- Shares of New York-listed Tencent Music closed down 9% to $8.92 on Aug. 16, before the earnings results. They rose 3.4% during after-hours trading.

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

(Editing by Pete Sweeney and Sharon Lam) ((For previous columns by the author, Reuters customers can click on MAK/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | robyn.mak@thomsonreuters.com; Reuters Messaging: robyn.mak.thomsonreuters.com@reuters.net))