Tencent Music charges for more content as paying users drive profit beat

The logos of QQ Music, Kugou and Kuwo are seen on the screen of an iPhone on June 12, 2018 in Paris, France. QQ Music, Kugou and Kuwo are the three streaming Chinese music services owned by Tencent.
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China's Tencent Music Entertainment Group said it had started charging for more of its content in the first quarter as the popularity of its pay-for-streaming services helped drive up profit to above expectations.

The company, controlled by Chinese tech giant Tencent, reported results for the second time since it went public in December and said paid users of its online music service jumped 27.4% to 28.4 million in the three months ended March 31.

Shares of the company, however, fell 3.6% in after-hours trading, in tandem with a sell-off in the broader market triggered by an escalation in the U.S.-China trade dispute.

"As our users increasingly consume music content through streaming services, we are riding on this trend to gradually transition into a pay-for-streaming model over the coming years," CEO Cussion Pang said in a statement on Monday.

Unlike Western peers such as Spotify Technology, Tencent Music generates only a fraction of revenue from music subscription packages, and instead relies heavily on services popular in China such as online karaoke and live streaming. The Swedish streaming service is a stakeholder in Tencent Music.

Tencent Music expects its decision to shift more music behind a paywall, including music from popular Taiwanese singer Jay Chou, to bring in more revenue generated.

While pay-for-streaming accounts for a very small percentage of Tencent Music's total offering, the company is gradually adding to the list, Chief Strategy Officer Tony Yip said on a post-earnings conference call.

"It will take some time to promote a broader user adoption. We are seeing encouraging results so far, which gives us confidence this is the right strategy," Yip said.

In the first quarter, the company earned 0.72 yuan per American depositary share, excluding items, beating analysts' average estimate of 0.69 yuan, IBES data from Refinitiv shows.

Revenue growth of 39% to 5.74 billion yuan ($835 million), however, fell short of analysts' estimate of 5.797 billion yuan.

"As Chinese consumers are getting more and more used to the paying model, and TME is the biggest company in the business, long-term prospect looks still very positive," said Li Chengdong, a Beijing-based tech analyst.

The company also said its co-president and director, Guomin Xie, had resigned due to personal reasons and named Zhenyu Xie as its chief technology officer.