China’s NetEase raises $600M for its music streaming business

As Tencent Music, China’s largest streaming firm, reportedly stalls on its proposed U.S. IPO, one of its closest challengers is doubling down.

NetEase Cloud Music, a rival operated by games and publishing giant NetEase, just closed a fresh $600 million injection from a bevy of investors that include Baidu and General Atlantic, the company announced this week.

NetEase will maintain a majority share in the company following this deal although it isn’t clear what the valuation is. The business is already valued at over $1 billion, that landmark was reached last year when it raised 750 million RMB, that was around $108 million at the time.

Tencent Music operates a constellation of streaming and live-streaming music apps which Tencent claims reach a cumulative audience of 800 million users. That’s quite a generous figure since China’s official stat keeper recognizes that the country has 800 million internet users, and it seems unlikely that any single business would be able to reach every single one of them. (Yes, stats can often lie.) 

Five-year-old NetEast Cloud Music, meanwhile, says it reaches 600 million users, a figure that it claims has increased by 200 million over the past year. With this new money in the bank, the company said it plans to go after more user growth and develop its platform, which includes over 10 million songs. The company has put focus on independent music, and it claims 1.2 million tracks from around 70,000 indie musicians.

Tencent, which has a tie-in with Spotify, submitted documents last month to go public via a U.S. IPO that could raise at least $1 billion. However, the Wall Street Journal reported a week later that the process had been paused amid challenging market conditions which saw stocks sink, including those of Tencent and Alibaba. The plan was to resume the process this month, according to the report, but so far there has been no update from the company.

Alibaba’s Xiami music service is widely considered to be another major music streaming contender in China, and it teamed up with NetEase Cloud Music earlier this year to share libraries in order grow their respective repositories of songs.

It makes sense that two rivals would team up to increase their rivalry with Tencent, which operates no fewer than four music services: Q Music, Kugou Music, Kuwo Music and WeSing.

Up for grabs is a streaming industry that, while nascent, is showing potential to grow among China’s 800 million internet users. Indeed, iResearch data cited by NetEase forecasts music spending in China to triple between 2017 and 2023. The music industry as a whole is poised to gross 376 billion RMB ($54 billion) in total sales this year with digital the fastest-growing source of income.

Tencent Music’s IPO opened the books on the leading contender in the space with some interesting points to note. Unlike Spotify and others, the business is profitable — $199 million on total sales of $1.7 billion last year — while subscriptions, the core source of revenue in the West, is just 30 percent of all sales. Instead, Tencent Music capitalizes on virtual gifts that are sent to live streamers and premium memberships.

However, the company’s revenue is well short of Spotify, which grossed $1.5 billion in its most recent quarter alone. Those in China are opting to see that gulf as an opportunity and that goes some way to explaining this new round for NetEase Cloud Music.