Tencent (NASDAQOTH:TCEHY) and Alibaba (NYSE:BABA) are usually considered fierce rivals in China's booming internet market. Tencent owns WeChat, the top messaging app in China, and it's been expanding that ecosystem into the e-commerce market with in-app shops and mobile payments. Alibaba owns the top e-commerce sites Taobao and Tmall, as well as the Alipay mobile payments platform.
Most analysts believe that Tencent and Alibaba's ecosystems will eventually collide. That's why it was surprising when the two rivals recently announced a rare partnership in music streaming.
Tencent Music and Entertainment (TME) owns the streaming rights to songs from Sony Entertainment, Time Warner's Warner Music, and Comcast's Universal Music -- the three biggest music companies in the world. It also holds the streaming rights at South Korean label YG Entertainment and Taiwanese labels JVR Music and LOEN Entertainment.
TME is granting Alibaba's Ali Music access to all those songs. In return, Ali Music is granting Tencent access to its streaming rights, which cover songs from Taiwan's Rock Records, HIM International Music, B'in Music, and Hong Kong's Media Asia. The financial terms of the deal were not disclosed.
What this means for Tencent
Tencent owns 62% of TME, which was formed after it spun off its music division and merged it with China Music Corporation last year. TME's QQ Music, Kugou and Kuwo now control 76% of the Chinese music streaming market, according to research firm DCCI, with a combined audience of over 600 million monthly active users (MAUs). Spotify, by comparison, has about 140 million MAUs.
NetEase's Cloud Music, TME's biggest rival, controls just 16% of the market. Baidu Music controls 4%, while the remaining 4% is split among smaller players like Alibaba's Xiami service. Two years ago, Tencent blocked Xiami on WeChat and prevented users from sharing music with their friends. The block was later removed after sparking bitter disputes between the two companies.
Therefore, TME's new partnership with Ali Music indicates that it's now more comfortable in its market dominance and is capable of partnering with smaller rivals. It also wasn't a coincidence that the deal was announced ahead of TME's latest round of pre-IPO funding, which will likely value the company at $10 billion. Tencent claimed that QQ Music was profitable last year, but the company hasn't disclosed any actual growth figures yet.
What this means for Alibaba
The Ali Music Group, which was launched two years ago, had a lower valuation of $3 billion after its first funding round last year. Its minuscule market share indicates that valuation might be too high, but gaining a foothold in the streaming market could help Alibaba expand its ecosystem beyond its e-commerce channels.
Alibaba is following Amazon's (NASDAQ: AMZN) playbook closely by building a digital and cloud storage ecosystem atop its e-commerce foundations. So just as Amazon offers free Prime Music as a perk to its Prime members, Alibaba could eventually do the same with Xiami with similar membership plans.
But generating revenue is still tough...
Tencent and Alibaba offer most of their streaming music for free, with most of the revenues coming from ads. A much smaller percentage buys premium subscriptions, which offer ad-free streams and other perks. iResearch analyst Xiong Hui estimates that there are only 10 to 20 million paid users across all streaming platforms in China.
Music streaming remains a fledgling market in China. iResearch estimates that the entire market is worth only a few hundred million yuan, compared to annual movie box office receipts of over 40 billion yuan ($6.1 billion). So for now, Tencent and Alibaba's partnership is a win-win for both companies, but significant revenue from it might not materialize any time soon.
Leo Sun owns shares of Amazon, Tencent, and Baidu. The Motley Fool owns shares of and recommends Amazon, Baidu, and NetEase. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.