3 Reasons Tencent Music Is a Better Buy for Investors Than Spotify

Chances are, if you listen to music these days, you're a streamer. Streaming now makes up roughly 75% of U.S. music industry revenues, and the streaming industry is projected to reach $9.9 billion in global revenue this year, according to Statista. The No. 1 market for streaming is, unsurprisingly, the U.S., with $4.2 billion, well ahead of the second-largest market, China, which is estimated to generate roughly $743 million in streaming revenue this year.

And while Swedish music streamer Spotify (SPOT -1.30%) made waves when it went public in April of this year, a new global entrant just made its public debut in December: Tencent Music Entertainment (TME 3.52%). While Spotify opened to much fanfare and shares surged to almost $199 this past summer, its stock has since fallen to $120 per share, below its IPO price of $132.

Tencent Music, after much delay, finally decided to go public amid today's tumultuous markets, pricing its IPO at the bottom of the $13-$15-per-share range, and raising only $1.1 billion, down from its previous goal of $4 billion.

So now that both streaming giants are up and running in the public markets, which is the better buy? Here are a few reasons I'd take Tencent Music over Spotify all day long.

Much better financials

On just about every relevant measure, Tencent Music beats Spotify:

Data source: Tencent Music Entertainment F-1, Spotify third-quarter press release. MAUs = monthly active users.

It's pretty hard to look at these numbers and make any sort of case for Spotify over Tencent Music. While Spotify does currently generate almost twice the revenue of Tencent Music, Tencent Music is growing three times as fast, has over four times the monthly active users, and also has a bigger opportunity to get more of its users to pay in the future (with a lower percentage of monthly active users as paying members).

Lower artist payments make Tencent Music more profitable

The key ingredient to Tencent Music's profitability? It doesn't have to pay its artists as much...because a huge amount of its revenue isn't tied to professional music.

While many Chinese citizens aren't willing to pay much (or at all) for streaming services, a key piece to the Tencent Music story is the vibrant Chinese online karaoke community, whereby viewers tip amateur singers over their smartphones. Tencent Music keeps part of the payment.

While only about a quarter of Tencent Music's MAUs engages in these "social entertainment" activities, the company generates over 70% of its revenue from them. Spotify, in contrast, doesn't have this ancillary stream of revenue (which doesn't require the payment of royalties to music labels), and thus must rely on subscription and advertising revenue, which is why margins are lower.

Secondly, for the music rights it does pay, Tencent Music has a much better bargaining position. Whereas the top five music labels globally hold 85% of all music rights, in China, the top five labels control only 30% of music rights. Since Tencent Music is the dominant streaming platform in China, it likely has much more bargaining power over royalty payments to Chinese artists than Spotify does.

A higher-growth, protected market

According to Tencent Music's recent registration document, the Chinese music market, which includes streaming, online karaoke, live-event streaming, and advertising, is supposed to grow a whopping 36.7% annually from 2017 to 2023, increasing from RMB 33 billion ($4.8 billion) to RMB 215 billion ($31 billion).

That's in contrast to the global streaming market, which is projected to grow at only a 5.2% CAGR over that time, according to Statista.

As of early 2018, Tencent Music had a dominant 76% market share in China, a huge lead over second-place NetEase Music, which had just 16%. Tencent's dominant position means it's likely to capture much of this high-growth market.

In contrast, Spotify will have to duke it out with a well-funded competitor from Cupertino (Apple) for the mere 5%-growth global market. Which position would you rather be in?

It's no contest

Tencent Music has a market capitalization just shy of Spotify's ($21.3 billion vs. Spotify's $23.9 billion) even though it makes only about half of Spotify's revenue. However, given Tencent Music's much higher growth, better profitability, large market opportunity, and more protected competitive position, I'd much rather add Tencent Music to my portfolio than Spotify.