Chinese internet giant Tencent Holdings Ltd. is expanding its music and live-streaming business in Asia, taking on industry giants Apple Inc. and Spotify AB.
The Shenzhen-based company, the world’s biggest videogame publisher by revenue, is increasing the reach of its Joox music-streaming service in Southeast Asia and is exploring plans to enter the Indian market, Poshu Yeung, vice president of Tencent’s international business, said in an interview in Hong Kong.
“We are trying to find new things to do that is still alongside entertainment, and we picked music,” Mr. Yeung said. “Music is very universal. Your phone is an entertainment hub, and entertainment includes only three things: movies, games and music.”
Tencent, whose market value of around $228 billion makes it one of Asia’s most valuable technology companies, is pushing into entertainment and music as growth matures in the online videogame industry.
It became China’s biggest music-streaming provider by market share following its acquisition of China Music Corp., valued at roughly $2.7 billion, in July.
Now, Tencent is looking to tap growing digital-music demand in Asia. The number of music-streaming users in Hong Kong, Singapore, Malaysia, Thailand, Philippines and Indonesia is expected to reach 87 million by 2020, up from 47 million last year, according to forecasts by McKinsey & Co.
The Joox service is already in Hong Kong, Indonesia, Malaysia and Thailand and Tencent plans to bring it to at least two more markets in the region next year, Mr. Yeung said. Tencent will also introduce live-streaming content in 2017, and will seek to monetize the service through users buying digital currency for virtual gifts, he said. Asia, not the U.S. and Europe, will be the focus of its expansion, as such markets are more culturally similar, the company said.
“We have done a lot in China. Hopefully, we can bring our product, knowledge and experience to those markets and build the local mobile internet market,” Mr. Yeung said.
Tencent’s expansion would pit it against more established music-streaming companies such as Sweden’s Spotify and Apple Music. Spotify operates a “freemium” service—where subscription is free but it charges additional fees for certain features—in Singapore, Malaysia, Hong Kong, Taiwan and the Philippines. It introduced its services in Japan and Indonesia this year. Apple has been trying to crack growing digital music demand in Southeast Asia since 2012, and is in six of the region’s largest nations, as well as Hong Kong and Japan.
Tencent’s revenue from online games grew 27% to 18.2 billion yuan ($2.62 billion) in the third quarter this year. Still, its growth rate lagged behind that of its social networks and online advertising unit, which grew 58% and 51%, respectively, from a year earlier. Online games formed 45% of its sales in the quarter, compared with more than half a year ago.
To expand outside of China, Tencent, along with co-investors, shelled out $8.9 billion to buy the Finnish game developer Supercell Oy.
Streaming is the recording industry’s fastest-growing revenue source, according to the International Federation of the Phonographic Industry. Revenue from streaming subscriptions and ads globally have grown more than fourfold to $2.89 billion in the five years to 2015, IFPI said in a report. More than 68 million consumers paid for a streaming subscription in 2015, up from 8 million in 2010.
Even so, music-streaming companies operating in Asia face challenges in trying to figure out a profitable business. Content costs are high, advertising rates low, and there is limited end-user willingness to pay, McKinsey & Co. said. Software piracy is also rampant in the region, putting pressure on music-streaming providers to keep subscriptions cheap. YouTube-mp3.org, the largest stream-ripping site globally, has more than 60 million unique users a month, IFPI said. Stream-ripping lets users create an audio file from a YouTube video.
Tencent’s music-streaming business isn’t profitable yet, Mr. Yeung concedes, but the company earns revenue by selling advertising to brands such as Adidas, Dior, Chanel, and handset makers including Samsung Electronics Co. and Oppo. Advertisers can also use the platform to market their products.
Unlike in videogames, where Tencent has opted to expand globally through partnerships and acquisitions, the Chinese company is looking to build up the music and entertainment business from the ground up. It has set up local offices in parts of Southeast Asia, including Thailand, where it now has more than 200 staff. Many of the staff are former students that the company hired as interns. Mr. Yeung said the younger demographic is appropriate to select music and localize the content.
“That makes us extremely local with the right target audience,” he said.
Write to Yun-Hee Kim at email@example.com