I have expressed my opinion on Spotify many times. My take on the company is that, in its current form, it is a complete value trap for those investors that dare to buy shares of this company under the planned Direct Listing taking place shortly.
The main reason is the terrible strategic position of the company. Spotify is trapped between users with many options (Apple Music, Deezer, Amazon, Google Play Music, Pandora…) and only three music labels (Sony, Warner and Universal) that control about ninety per of all music in the world and therefore the license fees Spotify needs for its operations.
Enter Tencent. The company bought recently ten percent of Spotify. In fact, it was an equity exchange.
The December 2017 equity exchange between them led to Spotify owning 9% of Tencent Music Entertainment. In exchange, Tencent received 7.5% stake in Spotify.
In principle, this doesn’t change anything, unless we look at the extremely dominant position of Tencent in China’s market for music streaming. Tencent owns QQ Music, Kuwo, and KuGuo.
You should see this information in combination with the aggressive activity of Tencent in India. As Motek indicates:
Tencent led a $115 million investment in Gaana. Gaana is a commercial music streaming service provider in India. As of August last year, Gaana was the no.2local (30% market share) music streaming app in that country. Given the opportunity, Tencent will most likely take a controlling stake in Gaana. Like China, India’s huge population also makes it ideal for cheap/affordable paid music streaming.
If Tencent achieves a dominant enough stake in both Spotify and Gaana in addition to its strong position in China, the three music labels will be put in a very uncomfortable negotiation position. Next time they discuss license prices , they will have to deal with a gigantic distribution arm expanding from China to India, Europe and USA. The tables may turn.
The reader should also remember that Tencent owns ten percent of Snap Inc too. As I discussed in a previous post, this could be the Chinese giant’s way of introducing their content and games to the Western makets. And, now, music could be an option too.
New Spotify investors that risk their skin in the Direct Listing game could in that case enjoy the ride of their lives thanks to the global ambitions of Tencent, the insatiable gigant from the Far East,
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