Tencent Music IPO filing offers glimpse into world of Chinese online karaoke

Karaoke ranks high as the activity of choice for a night out with friends in China. The glitziest venues have hundreds of rooms, concert-quality audio-visual equipment, all manner of special effects to get that party going, and buffet spreads to test the most practised plate-pilers.
There are even karaoke booths in shopping malls where users can pay by songs. Then there’s online karaoke.
WeSing is the most popular of the karaoke apps available in China. Little-known outside the country, it has more users than there are people in the US, Canada and Mexico and is operated by Tencent Music Entertainment Group, the music industry spin-off of China’s biggest social network operator.
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There’s a heavy social networking aspect that makes the app so popular. With the app, users can turn their phones into virtual karaoke studios where they can sing their favourite songs to lyrics. Friends can share their “recordings” with each other. There’s a feed where one can see the “works” of friends or personalities one follows. Users can send virtual gifts, leave comments much like a Facebook post, and even challenge others to a sing-off.
One can even buy singing lessons through the app. Professional livestreamers have taken to singing for the virtual gifts, which they split with the platform.

Tencent Music filed for a US listing this week and was previously reported to be hoping to raise US$2 billion, which would put it in the top 10 biggest share sales in the world this year. WeSing is important for those thinking of investing in Tencent Music, which is popularly compared with Spotify, the world’s biggest music streaming service from Sweden.

“While (Tencent Music) hasn't made much headway in growing its subscription revenue and is relatively struggling on that front, versus its social entertainment services revenue, it has been able to exploit its local knowledge to make money via its karaoke and live streaming,” Sumeet Singh, a Singapore-based analyst from Aequitas Reseach, wrote in a research note. “It seems to be doing great on the social front.”

Online karaoke, like social commerce and live-streaming, is being embraced in China as companies and internet users experiment with new formats to deliver entertainment and sell products and services. China surpassed the 800-million mark in internet users for the first time, further cementing its position as home to the world’s biggest online community, as the country kept up its investment in infrastructure and pushed to lower access fees.

WeSing is among the four music apps owned by Tencent Music and contributes to what the company classifies as social entertainment services, which account for 70 per cent of total revenue in the first half of 2018. Music streaming revenue accounted for the rest.

Social entertainment services revenue nearly doubled to 6 billion yuan (US$917 million) in the first half of 2018 from a year earlier, driven by online karaoke and live-streaming services, according to the prospectus. The services refer primarily to virtual gifts and memberships available on those platforms.

The other three music apps under the Tencent Music umbrella are Kugou Music, Kuwo Music and streaming app QQ Music, which works more like Spotify.

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Tencent Music reported a total of more than 800 million monthly active users in the second quarter of 2018, who each spend on average more than 70 minutes per day on its platform. In contrast to Spotify, which is still unprofitable, Tencent Music posted 1.7 billion yuan in profit as of end of June, up from the 1.3 billion yuan same time in the previous year.

The number of internet users in China rose by 30 million in the first half of this year to 802 million, representing a penetration rate of 57.7 per cent, according to a report by state agency China Internet Network Information Centre (CNNIC) released in August. All but 1.7 per cent of the users access the internet through mobile devices, according to the report.