WSJ: TENCENT, SPOTIFY TALKING EQUITY SWAP

According to the WSJ, Spotify and Tencent Music (the latter owned by Chinese Internet giant Tencent Holdings) are discussing swapping 10% stakes in each other's businesses in advance of going public next year. The move would both align the services in licensing negotiations with the major labels and be potentially lucrative as each company is expected to be valued in the billions once on the market.

Tencent Holdings, which hit a $500B market cap last week, has invested heavily internationally, most notably in Snap Inc. Tencent would presumably pay Spotify cash to make up for the valuation discrepancy between the two companies.

With no plans to enter the Chinese market, the move by Spotify is akin to last year's deal between Uber and China's ride-hailing behemoth Didi Chuxing, in which Uber sold its Chinese operations in exchange for a minority stake.

Analysts estimate that just 2-3% of Tencent Music's 700 million users pay, compared to Spotify, which has a conversion rate of around 43%, or over 60 million of its 140 million users. Perhaps Spotify can provide some insight to grow that rate and help overcome some of the challenges that come with the Chinese marketplace.

To date Tencent has paid high prices to control the master Chinese licenses for the big three labels, and the value of its licenses could diminish as China's government has urged streaming services to share licensing deals. Alex Taggart, GM of Beijing-based music industry services firm Outdustry, told the Journal, "right now, the vast majority of users absolutely expect free, frictionless consumption of music."

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