Tipping point

Heading for New York: Tim Gong, the founder and CEO of iQiyi

Of China’s 5,000 years of history, the Spring and Autumn period (771 to 476 BC) is certainly one of the most intriguing interludes. The interregnum was marked not only by tactical skirmishes among hundreds of fiefdoms seeking power and influence, but also a sense of pluralism that saw philosophers including Confucius trying to pitch their beliefs.

A similar dynamic has taken hold of today’s livestreaming video sector in China. After two years of consolidation, there were still more than 200 such platforms by the end last year (versus 600-plus in 2011), which host a dizzying array of internet celebrities vying for audiences and their wallets.

Deriving much of their income from the peculiar model of ‘tipping’, where viewers purchase virtual gifts to reward entertaining live broadcasters, these interactive platforms had grown into a Rmb40 billion market last year, or six times the size for 2014 (See WiC383).

The phenomenal species they create, known as wanghong (meaning those achieving overnight stardom through showcasing beauty, talents or skills online), rake in millions of yuan on a monthly basis. According to Shenzhen-based industry observer zhaihehe.com, the eight biggest platforms pocketed Rmb430 million last November alone.

Recently there has been a flurry of fundraising activity in the streaming sector. First to announce was a somewhat different online video beast. iQiyi, sometimes called China’s version of Netflix and 81% owned by Baidu, is planning to raise $1.5 billion through an initial public offering on NASDAQ.

In that giant’s wake at least four more niche livestreaming players were reportedly ready to launch offshore listings too.

That includes Shanghai-based Bilibili (best known for streaming anime content), YY Inc’s spin-off Huya Broadcasting (focusing on eSports), Wuhan-based Douyu (also targeting gaming), and Beijing-based Inke that targets broader entertainment content (such as dancing and singing). Other similar platforms like Huajiao (a showcasing platform backed by Qihoo 360) and Kuaishou (a short-video streaming website backed by Tencent) are also planning to float their shares.

The buzz surrounding them was further heightened last week when Tencent led a consortium to invest $461.6 million in Huya Broadcasting and Rmb4 billion ($631.9 million) in Douyu on the same day.

The capital influx has many worried that the market is already in a bubble.

“The competition within the livestreaming industry is huge, involving a lot of aspects that burn money,” marquee investor Thomas Cao told National Business Daily.

Much of the expense goes towards poaching and retaining internet celebrities that are capable of attracting high volumes of traffic. Douyu, a five year-old platform that has gone through several rounds of financing, announced in January that it will spend Rmb1 billion on training its live broadcasters.

“It’s a smart move [for these companies] to launch IPOs now as they are printing quite good financial results. There might be more uncertainty later,” said Cao, highlighting the risks of fresh regulatory tightening (see WiC373 for news of the latest licence required by the government to stream online content).

Inke, backed by private equity firm GSR Ventures, recorded a net profit of Rmb488 million in 2016, while both Huya and Douyu said that they were no longer lossmaking in recent quarters.

It is worth noting that e-Sport broadcasting is the fastest growing segment of the livestreaming market, with a user base that increased by 53% last year, versus the industry average of 23%, according to government data.

“China differs from most markets in that game studios do not exert copyright constraint, allowing Chinese platforms to show free-to-air gameplay,” said London-based New Street Research, attributing the growth of game broadcasting to rising interest in multi-player battle arena and role-playing games as well as eSports. (The professional tournament for Tencent-owned League of Legends attracted over 5 billion user views in 2016.)

“Game studios see broadcasting as a user acquisition tool,” the research house added, but noted that game broadcasting has much lower margins than pan-entertainment broadcasting as gaming hosts are more difficult to find and consequently taker a bigger cut.

That also explains why some analysts see huge risks in the investment case of Bilibili, which relied for 60% of its revenue in 2017 on just one exclusively distributed online role-playing game Fate/Grand Order, which is developed from Japanese animation. “It is unclear if Bilibili has an upcoming mobile game which can replicate Fate/Grand Order’s success,” Arun George, analyst at Global Equity Research noted.

Aside from signalling a potential merger between Huya and Douyu, Tencent’s dual investment will bolster its ability to market its own games. As for the IPOs, savvy fund managers will often shadow whatever Tencent invests in, given its past successes.

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