Internet & Tech, Talking Point

Bad blood brothers

With TikTok in trouble, Tencent plots merger to thwart Bytedance


The new face of Chinese entertainment: Douyu’s livestreamers are active in promoting eSports

Tencent has never hidden its ambitions to become one of the world’s biggest entertainment platforms. It has a strong claim to having already achieved much of that goal, given the sheer number of its active users, many of whom spend many hours a day on Tencent’s online offerings that range from games to books to movies.

Its fast-growing local rival Bytedance has emerged as a genuine threat to Tencent’s aspirations. While Bytedance’s short-video platform TikTok has hogged international headlines, back home a fierce battle with Tencent has raged over its domestic version Douyin.

Indeed, when TikTok popped up for the first time in our coverage, we were reporting at the same time how Douyin was embroiled in a bitter wrangle with Tencent over the blocking of its service by the older internet behemoth’s popular WeChat app (see WiC411).

A year earlier, we had discussed how Tencent was introducing a news function inside WeChat to fend off some of the challenge from Bytedance’s news aggregator Jinri Toutiao (see WiC367).

Of course, over the last few weeks Bytedance has run into a different kind of opposition, after Donald Trump signed an executive order requiring the Chinese firm to sell TikTok’s US operation in 90 days. Yet while Bytedance struggles to deal with the biggest crisis in its short history, Tencent has kept up the pressure on its domestic rival, firing another shot at its eight year-old competitor with a merger proposal. Is it taking advantage of TikTok’s travails overseas?

What is Tencent’s latest move?

In an attempt to stay competitive in the fast-changing internet video market, Tencent has just proposed to merge two of its most successful portfolio firms in the eSports business (see WiC410).

Douyu and Huya, whose US-listed shares carry a combined $10 billion valuation, announced last week that they have received a non-binding proposal from Tencent outlining a stock-for-stock merger.

Meanwhile, Tencent said it has also agreed to pay $810 million to JOYY, a shareholder of Huya (as well as TikTok’s key rival Likee), in a separate deal that would raise its stake in Huya to 51%, with 70% voting rights.

Tencent is already the largest shareholder in Douyu, with a 38% stake, and the internet giant will try to take control or at least become the biggest shareholder of the merged entity, Reuters has reported.

If Tencent is successful in pushing through the deal the new company is likely to be named “Tiger Shark” in Chinese (Huya and Douyu mean ‘tiger teeth’ and ‘fighting fish’ respectively), according to Tech Planet, a popular WeChat-based tech blogger.

How good is Tencent’s relationship with Huya and Douyu?

Reportedly the founding teams of both firms are not particularly enthusiastic about the merger. “Both Huya and Douyu have said a final decision is yet to be made. That means the three parties have not agreed on some details and there are still uncertainties,” Tech Planet reckons.

Both firms stream video gaming content but instead of making money from advertising revenues, the duo are more reliant on taking a slice of the ‘gifts’ sent to the individual livestreamers they host on their platforms.

They are also two of China’s most popular video gaming sites, with nearly 300 million combined users (there are some overlaps between their customer bases), many of whom log in to watch eSports tournaments and follow the performances of their favourite professional gamers.

According to news portal, Tencent first invested in Douyu in 2016 and upped its stake by $630 million in March 2018 – the same day that it announced a $462 million stake in Huya.

Huya went public on the New York Stock Exchange in July of that same year, just two months after Douyu’s trading debut on Nasdaq.

Tencent has employed this same investment strategy across various sectors. With massive financial firepower – as effectively the largest private equity firm in China – it often invests in different start-ups that compete in the same market ( says Tencent implements the same strategy internally – asking different teams to compete in areas with the same operational focus). The aim is to ensure that it emerges as the eventual winner in promising emerging industries (see WiC460).

Huya was established in 2016 in Guangzhou (Douyu was founded in Wuhan two years earlier). But a company insider told Beijing News that it looked inevitable that the start-up would eventually be absorbed into the Tencent ecosystem. Besides providing vital financial backing, Tencent also owns the most important upstream resources – China’s most popular online games and its most watched eSports tournaments – while also operating its own eSports unit and streaming platform QQ eGame.

“If Huya [and Douyu] did not accept Tencent’s investment, Tencent could easily prove their albatross in terms of approving the broadcasting rights,” Beijing News explained. “But investment [in both Huya and Douyu] is also the best defensive strategy for Tencent. It simply cannot afford to see an unaffiliated company come to dominate the sector.”

Tencent’s strategy has paid off rather handsomely. It now enjoys a tight control over an entire industry chain, not to mention tenfold returns from its early investments in Huya and Douyu.

Why would Tencent want to create a “Tiger Shark”?

In recent years, Tencent has been increasing its managerial control over portfolio firms it deems strategically important to its own ecosystem. These include game developer SuperCell, Tencent Music Entertainment and China Literature. In the latter case, Tencent ditched the founding managers in April and replaced them with its own executives, following a dispute with online writers over content rights (see WiC494).

Despite having the same ‘parent firm’, the competition between Huya and Douyu has been brutal, with various legal disputes and public relations crises as the duo poached each other’s livestreaming hosts. In one notable case in November last year, Douyu sued a widely followed online anchor and sought a whopping Rmb145 million ($21 million) in damages for breaking an exclusive service contract. Earlier this year a court ordered Douyu to pay Rmb80 million for poaching one of Huya’s hosts.

From Tencent’s perspective, the extent of the competition between the pair may have become counterproductive. Bigger picture, by combining the archrivals Tencent is actually preparing for bigger competition from other video platforms such as Kuaishou and Bilibili, Tech Planet suggests. Incredibly, Tencent is an investor in both of these brands too (it owns nearly 20% in both companies). Kuaishou focuses more on the short-video market while Bilibili offers services similar to YouTube. But both have been expanding into eSports as well. Bilibili paid Rmb800 million for a three-year livestreaming deal for the League of Legends World Championships in China last December (a game which is owned by Tencent, of course).

Ideally, Tencent might want to merge all these portfolio firms into an all-round video unit under its absolute control. But bringing them all under the same roof is easier said than done, given the conflicting interests of the founding teams and their other financial backers.

Even the merger between Huya and Douyu is not going to be straightforward, analysts agree. But Beijing News believes Tencent has a bigger imperative: the need to put up the barricades to another potential challenge from Bytedance in the broader online video market.

Tencent honed in on the threat from Bytedance long before the hawks in the Trump administration, banning Bytedance platforms such as Douyin from broadcasting the games that it owns. Yet Bytedance has still managed to grow its streaming revenues quite quickly. “Many industry insiders think that Bytedance is the biggest thorn in Tencent’s side and the real reason why it is pushing for a Huya-Douyu merger,” Tech Planet agrees. “Bytedance has taken on Tencent in various [social media] sectors and it has been planning to develop its own online games and streaming through Douyin.”

So Tencent will be gloating over the TikTok situation?

Bytedance’s difficulties in the US may present Tencent with an opportunity to wound its rival while it is distracted elsewhere. But your enemy’s enemy isn’t always your friend. Donald Trump might have derailed TikTok’s overseas expansion but Tencent has also found itself on Washington’s sanctions list. Earlier this month Trump ordered American firms to stop doing business with Tencent’s WeChat platform – again within 45 days – citing national security concerns.

WeChat is nowhere near as influential on foreign soil as it is in China, allowing most investors to shrug off much of the potential impact of the US action. However, there will be concerns about the implications of a wider clash with Washington. Some of the Shenzhen-based giant’s online games are very popular in the US as well, following its acquisitions of Riot Games and Epic Games in recent years. That could make them a target for forced divestment by regulators concerned that Tencent might collect personal data through the US-based developers.

Mike Pompeo, the US Secretary of State, widened the threat when he told American media last week: “So when President Trump made his announcement about not only TikTok, but about WeChat – and if you read it, it’s broader even still than that – is that we’re going to make sure that American data does not end up in the hands of an adversary like the Chinese Communist Party, for whom we have seen data uses in western China that rival the greatest human rights violations in the history of mankind,” .

Tencent has also built up a signiciant investment portfolio in the American capital markets. Its 5% stake in Tesla is already worth nearly $20 billion, for instance, and it has invested in social media firms such as Snapchat and Reddit, as well as music companies including Universal Music and Warner Music. Many of Tencent’s China-based portfolio firms are listed in the US too, such as Huya, Douyu, Bilibili,, Pinduoduo and NIO (the list goes on and on).

If tensions between China and the US continue to worsen, it is not impossible to imagine a situation in which more of these stakes come in for closer scrutiny in Washington, as well as the risk of a further round of rules or restrictions that hamper Tencent’s interests.

Should that happen, Tencent’s founder and boss Pony Ma may soon find himself in the same predicament faced by his archrival Zhang Yiming, the founder of Bytedance…

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