Tencent Music Entertainment Admits Regulatory Pressure After Delivering Solid Q1 Performance

Chinese streaming giant Tencent Music Entertainment (TME) confirmed on Tuesday that it is facing heightened scrutiny from antitrust regulators after reporting better-than-expected first quarter financial results the previous day.

According to a Reuters report last month, the Chinese government is planning to slap a substantial fine on TME’s parent Tencent Holdings, as part of its broader effort to crack down on the country’s internet giants. To this end, regulators have kicked off a wide-ranging antitrust investigation, including a probe focused specifically on TME. Depending on the outcome, the entertainment powerhouse may be forced to give up exclusive content rights and sell some of its music assets, said the sources.

Tony Yip, TME’s chief strategy officer, made the following statement to analysts in a post-earnings call on Tuesday: “In recent months, we have received increased regulatory scrutiny from relevant authorities, and have been actively co-operating and communicating with the relevant regulators.” He added that TME will be “committed to complying with all relevant laws and regulations, including those related to antitrust”.

This is the first time the company has commented on the matter in public.

Driven largely by a boost in subscription and advertising revenue from its music-streaming platform, TME posted revenue and net profit growth on Monday, beating analysts’ estimates.

SEE ALSO: Tencent Music Entertainment Releases Q2 Financial Results, Lands New Cooperation with Universal Music

The Spotify-backed company reported 7.82 billion yuan ($1.22 billion) in revenue for the first three months of the year, an increase of 24% year-on-year. Analysts previously forecast revenue for the period to be 7.73 billion yuan ($1.2 billion), according to IBES data from Refinitiv. Its quarterly net profit reached 979 million yuan ($152.44 million), up 10.5% from a year earlier, surpassing Bloomberg’s 960.46 million yuan ($149.55 million) expectations.

The total number of paying users on TME’s online music platform reached 60.9 million, jumping 42.6% year-on-year. On a sequential basis, the number of online music paying users grew by 4.9 million, the largest quarterly net increase since 2016. However, monthly active users for TME’s music and social entertainment platforms declined by 6.4% and 14.2%, respectively.

On Monday, Sony Music Entertainment announced that it has extended its distribution agreement with TME, while entering into a new distribution deal with NetEase Cloud Music, TME’s biggest competitor. This move ended an exclusive arrangement between Sony and TME, challenging Tencent‘s dominance in China’s online music-streaming services. According to a report by The Wall Street Journal, TME lays claim to more than 60% of music copyrights in China.

In 2016, Tencent bought a majority stake in China Music Corp, which operated popular streaming apps Kugou Music and Kuwo Music, in a deal valued at $2.7 billion. Tencent proceeded to merge its QQ Music business with those two apps to form TME, which went public in the US in 2018.

According to market research firm Sootoo, at the time, the combined domestic market share of the three music-streaming apps was 71%, led by Kugou’s 33.7% share.

TME saw its New York-listed stocks climb 0.59% to $15.3 per share on Monday.