Let the (online) games begin

DouYu means “fighting fish”

To those Westerners who grew up watching the Omen movies the three digits ‘666’ denote the mark of the Antichrist. But to Chinese gamers and eSports stars the number has a more congratulatory meaning. Fans type it into a streaming channel’s feedback sidebar whenever the pro player makes a good move. Why? In Chinese slang the number “6” (liu) sounds like “cow’ (niu), which colloquially means excellent or outstanding.

Many of those viewers will have regularly typed ‘666’ into the comments sidebars of gaming streams operated by DouYu, which this week completed its IPO in the US.

The Tencent-backed company hosts a variety of games played by thousands of top eSports stars. It is similar to Twitch.tv, the popular streaming site for gamers outside China. The two sites differ in that Twitch.tv makes money from ad revenues and subscriptions, while DouYu is more reliant on taking a slice of the ‘gifts’ sent to the individual streamers it hosts. This means that DouYu’s success is very dependent on the popularity of its streamers. DouYu says its ‘gifting’ model works in China thanks to the adulation of eSports fans for their heroes – it points out the number of paying users on its platform has jumped from 2.4 million to 6 million this year.

On Tuesday this argument received a mixed response from investors, as the company priced its shares at the bottom of its offering range. The $775 million IPO still made DouYu the largest Chinese IPO in the US this year, eclipsing Luckin Coffee, however, and valued the streaming firm at $3.7 billion.

But the Financial Times said the underwhelming response to the IPO reflected a “so what” attitude from investors who fear that, unlike Twitch.tv, DouYu’s source of revenue is less stable.

And there are other concerns too. One challenge cited in the prospectus was China’s censorship regime, with the company noting “our ability to obtain and maintain the licences and approvals required under the complex regulatory environment for internet-based businesses in China”. Beijing’s censorship of online video games (see WiC452) is a variable that is difficult for companies to control and a major threat to revenues if a popular game is banned.

Although the six year-old firm has managed to double its revenue almost every year, the costs for streaming rights and sponsorship of eSports tournaments have also been rising. According to Phoenix News, Chinese eSports is still “a money burning business”. That’s why DouYu was operating at a loss until this year, when it reported a $2.7 million profit in the first quarter versus a $127 million operating loss last year.

DouYu’s most direct competitor, Huya, went public on Nasdaq last year. Huya also has Tencent as one of its biggest shareholders. It competes with DouYu not only over viewership, but also for streaming rights to certain eSports tournaments. For instance, DouYu lost out on the streaming rights to the LPL (League of Legends Professional League) when it signed with Huya for a larger contract fee – and was forced to poach the league back with a subsequently higher offer.

Another rising competitor is Kuaishou, which started with 15-second short videos but has expanded into video game streaming.

Incredibly, Kuaishou is also backed by Tencent and it has been aggressively taking market share: for instance, 31 of the top 100 PUBG (Player Unknown’s BattleGrounds) stars have switched to streaming on Kuaishou, reported the South China Morning Post.

As the trio battle it out for gamers’ time and money, there is only one surefire winner and that is Tencent. The Shenzhen-based giant is perfectly hedged no matter which of the three emerges as the dominant platform. Moreover the three rivals are largely streaming titles that Tencent owns like PUBG, which only adds to the games’ popularity and the internet behemoth’s own online gaming revenues.

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