by Julia Pierrepont III
LOS ANGELES, Aug. 14 (Xinhua) -- Tencent Music Entertainment Group, one of China's largest media companies, in a move that would flex its already well-developed muscles in the entertainment industry, is mulling a purchase of 10 percent of the music monolith, L.A.-based Universal Music Group (UMG), reported its parent company Vivendi.
UMG, with its revenue in excess of 7 billion U.S. dollars worldwide, is considered one of the "Big Three" music companies in the world, along with Warner Music Group and Sony Music, and was named by FastCompany, a leading business magazine in the United States, as "one of the top 50 most innovative companies in the world ... redefining what a modern label should look like."
"It's a smart business move on Tencent's part," Eddie Cane, former UMG label rep, told Xinhua in a recent interview. "They may dominate the market in China, but UMG dominates the global music market. It's simple math: the more songs you have to license and the bigger the artists, the more money you make."
UMG owns not only such trending global hitmakers as Lady Gaga, Taylor Swift, Drake, Ariana Grande, Billie Eilish and Kendrick Lamar, but also top classic bands like The Beatles, U2, Abba and Queen.
Tencent, owner of the wildly popular and ubiquitous social media WeChat super-app, has bought shares in the past in leading Western companies like Spotify, Tesla and Epic Games. It is a powerful music industry leader in China and owns QQ Music, a leading China-based music site which went public late last year in one of the largest U.S. offerings in recent years, plus a popular online Karaoke platform.
Tencent has managed to cash in on Chinese music-lovers' adoption of mobile technology and their willingness to buy music through streaming platforms.
Vivendi, a Paris-based mass media conglomerate controlled by French billionaire Vincent Bollore, announced that negotiations with Tencent were based on a corporate valuation of UMG of 33.6 billion dollars. The Chinese digital giant's potential 10 percent stake would ring in at 3.36 billion dollars.
Tencent did its homework first, entering into a licensing deal for UMG's content in 2017 to see how well it played in China.
"Vivendi is eager to explore enhanced cooperation which could help UMG capture growth opportunities offered by the digitization and the opening of new markets," Vivendi said in a statement, adding that the company hoped the Vivendi-Tencent relationship would help promote its artists in China.
"This deal enables Tencent to make money not just on the Western artists that they license on their platform in China, but on artists that are selling anywhere in the world. It's a smart kind of double-dipping," Cane said.
"Also, it gets them a seat at the big boy's table and a way to learn what sells globally," he added. "China is huge, and they're definitely invited to the party, but creatively, they're not in the DJ booth yet calling the playlist."
If all goes well, the deal also gives Tencent an option to buy an additional 10 percent of UMG within the next 12 months under the same terms -- a move that could pay off for both parties.
Last year, the Paris-based company disclosed its willingness to sell up to 50 percent of UMG in lieu of a public offering. Instead, they decided to gamble on the resurgence of the music industry, led by ad-based and subscription music streaming portals.
After the onset of digital downloads 10 years ago caught Hollywood's music studios napping and devastated the music industry, UMG has steadily worked its way back up the charts with a winning formula of direct-to-consumer downloads and by licensing their most popular recording artists to streaming giants, such as Spotify and Apple. To date, UMG has entered into licensing deals with more than 400 digital platforms worldwide.
This strategy has paid off handsomely as online music sales have rocketed in popularity worldwide, resulting in tripled revenues for UMG.
Vivendi's Chairman Sir Lucian Grainge characterized the pending Tencent deal as "an exciting development," while asserting that UMG would remain "part of the Vivendi family."
"I can assure you that Vivendi's supervisory and management boards, as well as the Bollore family, will continue to be steadfast supporters of our strategy, our work and our teams," he said. "It goes without saying that our commitment to recording artists and songwriters will continue unchanged."
While Vivendi's investors responded positively to the news, with shares up 7 percent in Paris trading, some investment banks that estimated the company to be worth between 19 billion dollars and 48 billion dollars expressed disappointment at the mid-level strike price of 33.6 billion dollars.
Previously, Arnaud de Puyfontaine, CEO of Vivendi, disclosed that proceeds from the UMG sale would be used to acquire companies and buy back shares.
Becoming a sizeable shareholder in UMG would not only give Tencent a seat at the power table and enable it to help shape the global music industry, but also help it to fend off hot competition from its chief rival at home, Bytedance, which is giving Tencent's mobile media giant, WeChat, a run for its money.
Douyin and TikTok, Bytedance's hit video app platforms, enable users to add musical soundtracks to their short videos, which rely on licensed tracks from leading music companies like UMG.
The Wall Street Journal reported that Shawn Yang, managing director of research firm Blue Lotus Capital Advisors, believes Tencent wants to be seen as the leading music platform in China and is making strategic moves to do just that.
"If there is anything that can create pressure on TikTok, it's music," said Yang. "It still relies heavily on music copyright."