A closer look at China’s video game livestreaming duopoly
Oct 2, 2019
I argued last week that video game streaming is emerging as the strongest part of China’s vast livestreaming sector, driven by the rise of e-sports and the dedication of relatively committed fans. Today, I’d like to return for a closer look at the sector, evaluate the current leaders—and ask if both will experience more competitive pressure if another tech titan enters the sector. I’ll take a close look at the numbers for these companies, showing how you can see value in this sector.
China’s leading game streaming platforms, Huya and Douyu, control over 60% of the industry. The current market expectation is for this number to grow even higher with further consolidation. Huya went public in May 2018, while Douyu recently IPO’ed in July 2019, both in the US. Huya is more than 80% larger than Douyu with a ~$4.9 billion valuation, vs. Douyu’s ~$2.7 billion valuation as of August 26. Moreover, compared to Douyu, Huya has a slightly higher tilt towards game streaming with over 50% revenue derived from gaming, compared to 45% for Douyu.
When we look at streaming companies, what should we focus on? First, it’s important to understand how these companies generate revenue. Like entertainment streaming platforms, both companies receive over 85% of their revenue through virtual gifts. When we’re looking at these companies, the key factors are simple: how much revenue do they generate, and how much of it do they have to pay back to streamers to keep them on the site?
Revenue share: Over 80% of streaming revenue in China comes from virtual items that are gifted to broadcasters, in contrast to Western broadcasters and platforms, which rely almost exclusively on advertising and subscriptions as their primary revenue sources. The largest cost for any livestreaming platforms is the percentage of revenue share with content creators. A higher-quality platform should have better leverage with streamers, and therefore be able to payout less in revenue share while maintaining the same growth rate. Huya has been a better operator with stronger focus on unit economics, paying out just 47% of revenue to content creators, compared to over 50% for Douyu.
Streamer acquisition costs: Another large expense for game streaming companies is contracting professional streamers to its platform. For example, Ninja, one of the top game streamers on Twitch, announced that he was going to exclusively stream with Microsoft’s Mixer platform for a rumored $6 million over the next three years. While large signings make for splashy headlines, they generally do not benefit the platforms themselves because streamers will often migrate to a different platform after their contract ends. Many platforms failed in 2017 after a bidding war locked them into overpriced contracts with semi-professional and professional gamers. Although both platforms continue to acquire streamers, Huya has been more efficient, paying just ~10% of revenue to professional content creators in 2018 vs. Douyu at ~24%.
Mobile growth drivers: Mobile continues to be a strong area of growth for game streamers, both as a vector of viewing and of gameplay. Mobile counts for more because gamers tend to be more engaged on a mobile device vs. desktop streaming, which users may watch while multitasking. Huya has a higher user base for mobile games, particularly in Honor of Kings and Peacemaker Elite, two of the top e-sport titles in China. On the other hand, Douyu’s focus has been on PC games, which tend to have a shorter tail than mobile games.
Investing in emerging markets: Another key source of streaming growth is global expansion. Southeast Asia and Latin America are two emerging markets with high potential for a thriving livestreaming industry due to an increase in GDP/capita, high internet penetration and the presence of a strong gaming culture. Generally speaking, the cost of acquiring streamers in these regions of the world also tends to be lower. Private companies such as Omlet Arcade, which focuses exclusively on mobile game streaming and has nearly 1 million monthly unique users, have already made their way to these two particular markets to take advantage of the growth potential. Huya has a regionalized streaming service called NimoTV which competes with Omlet Arcade’s product. In the past two years, the platform has launched in a number of markets including Indonesia and Brazil. During its earnings call last quarter, management said that the platform has over 10 million MAUs and “growing rapidly.”
Margin expansion + multiple rerate: Falling initial signing bonuses for new streamers bodes well for the industry as it matures. Content delivery is currently a large cost for all livestreaming platforms, but this should come down as prices for bandwidth on content delivery networks (CDNs) across the industry fall due to increased competition and decreased bandwidth cost per user (the cost of CDNs have come down ~1/3 between 2016–2018). It is also likely that the revenue sharing ratio will drop a couple more points towards the low 40% range as the industry continues to consolidate. As e-sports grow in popularity, all companies in games streaming are likely to see stock prices rise in the coming three years.
While I believe that both companies will benefit from the upside in game livestreaming, Huya’s lower cost structure, higher profitability and a focus on emerging markets around the world make it a more attractive investment than Douyu.
Disruption from Kuaishou?
Kuaishou started as a short video platform known for a large user base of individuals hailing from Tier 3–4 cities and rural parts of China. It has distinguished itself from its rivals by giving users a glimpse of the Chinese countryside, attaining over 300 million DAUs. Tencent invested over $1.35 billion into the company, and it is now rumored to be valued at over $25 billion.
Unlike other short videos platforms, Kuaishou has decided to expand its livestreaming platform in order to grow and compete against rival Douyin. Kuaishou’s ambitions could put competitive pressure on the industry if there is a bidding war for streamers.
Kuaishou is at a disadvantage selling ads. Insiders say that many brands are reluctant to run advertisements on Kuaishou, since lower-quality user-generated content could hurt the brand. However, through streaming, Kuaishou could potentially capture an additional revenue stream in lower-tier cities previously not seen on Huya and Douyu.
Kuaishou disclosed in July 2019 game streaming DAUs of about 35 million, slightly higher than Douyu’s estimate of 26 million in 1Q19. The company is also planning to revamp its game streaming strategy to focus on professionally generated content similar to Huya and Douyu. While there is some concern that the entrance of Kuaishou could disrupt the current duopoly, I believe that the company will not be too aggressive about pushing users completely to livestreaming, lest it cannibalize Kuaishou’s main platform.
Conclusion: Games livestreaming is a very dynamic industry with both incumbent and new entrants. While the industry has certainly consolidated since 2017, leaving Huya and Douyu as the current leaders in the space, companies such as Kuaishou are also vying for a piece of the growing pie. I continue to believe that Huya will be a leader in this space given its lower streamer acquisition costs. Additionally, I can also see companies that focus on emerging market mobile game streaming, such as Omlet Arcade, gain more traction. I believe that as the domestic Chinese market becomes more saturated, games livestreaming companies in China will look to invest in emerging market platforms to further boost growth. Once a niche industry in China, the games livestreaming market has finally gone mainstream.