Tencent’s New Sony Partnership Targets NetEase

A DJ plays a dance track.

Tencent (NASDAQOTH: TCEHY) recently partnered with Sony (NYSE: SNE) Music Entertainment to launch Liquid State, a new record label for electronic dance music (EDM) in Asia. The label plans to promote EDM across the region by signing talent across Asia and the world.

Tencent Music Entertainment (TME) CEO Cussion Pang told the South China Morning Post that Liquid State’s goal was “to create an unmatched culture exchange between the East and the West through the power of electronic dance music.” The songs will be streamed exclusively on TME’s streaming platforms.

Liquid State marks TME’s first move toward owning a music label, and its arrival spells trouble for NetEase’s (NASDAQ: NTES) Cloud Music — its biggest rival in China’s music streaming market.

TME rules the streaming market, but NetEase rules EDM

Tencent owns a 62% stake in TME, which was formed after it spun off its music unit and merged it with China Music Corporation in 2016. The merged company — which united China’s top streaming platforms QQ Music, Kugou, and Kuwo — controls about 76% of the country’s music streaming market with over 600 million monthly active users (MAUs), according to DCCI.

TME holds the streaming rights for songs from Sony Entertainment, Time Warner’s Warner Music, and Comcast’s Universal Music, along with additional rights from labels in mainland China, Hong Kong, Taiwan, and South Korea.

A woman listens to music on her smartphone.

TME is clearly the 800-pound gorilla in this space, but NetEase — which is better known as a PC and mobile games publisher — still controls about 16% of the streaming market with the NetEase Cloud Music platform. NetEase sub-licenses most of its content from TME, but it’s still locked in a legal battle with QQ Music over the exclusive rights to certain songs.

NetEase is an underdog compared to TME, but it’s still the market leader in EDM, which gained popularity across Asia over the past few years. Last September, research firm iiMedia named NetEase Cloud Music the top platform for EDM in China, placing it ahead of QQ Music, Kugou, and Kuwo — in that order.

NetEase notes that 40% of listeners surveyed between 2016 and 2017 listened to EDM, making it the second most popular genre after pop music. Looking ahead, NetEase expects the total number of EDM listeners in China to surge from 286 million in 2017 to 455 million in 2020. Unfortunately, TME and Sony’s Liquid State could lure away NetEase’s EDM listeners.

But NetEase won’t go down without a fight

Tencent crushed many smaller companies on its path to becoming China’s biggest social network provider and the world’s top video game company. But NetEase is one rival that refuses to die.

In addition to holding its ground in streaming music and dominating the EDM genre, NetEase is the only company that has consistently halted Tencent’s dominance of China’s mobile gaming market.

Tencent’s Honor of Kings is currently the highest grossing mobile game on iOS and Android in China, according to research firm Newzoo. However, NetEase’s Fantasy Westward Journey ranks second on iOS, while its other hit title Onmyoji ranks second on Android.

NetEase’s Onmyoji.

NetEase’s games currently hold four of the top ten spots in China’s iOS store, and two of the top ten spots on Android. Tencent’s games control five of the top ten spots on iOS, and three of the top ten spots on Android.

Therefore, NetEase is a persistent thorn in Tencent’s side, and analysts still expect its revenue to climb 39% this year on the strength of its PC games, mobile games, and side bets like its streaming music, e-commerce, and online service platforms.

However, NetEase’s earnings could dip 1% as it shifts from higher-margin PC games to lower-margin mobile games. Higher investments in underdog platforms like NetEase Cloud Music could also dent its margins.

The key takeaway

Tencent’s partnership with Sony is clearly a strategic move against NetEase, which remains a stubbornly resilient rival in the music streaming market. But the deal can also be considered part of a broader, escalating rivalry between the two companies across the music and mobile gaming markets.

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