When antitrust laws were first introduced in the United States more than a century ago, they were aimed at taking on the oil industry. For many years antitrust watchdogs have taken a more lenient view on the rise of technology giants like Amazon, Facebook and Google which have come to dominate e-commerce, social networking, online advertising and search. But last month the US Congress signalled a change of stance: it introduced bills that would make it harder for the tech giants to buy emerging competitors; or prevent ‘big tech’ from exploiting a market position in one sector to seize the upper hand in another.
The authorities in China, too, have grown more wary of how powerful its tech giants have become. In April, regulators slapped Alibaba with a record $2.8 billion fine for anti-competitive practices that had disadvantaged merchants on its e-commerce platforms. A recent editorial in the Global Times underlined the point. “China’s internet enterprises must say goodbye to the phase of barbaric expansion and build up the concept of compliance. That will become the essential strategy in their development,” it warned.
Last week, antitrust regulators struck again, rejecting tech giant Tencent’s proposal to combine the country’s two biggest game-streaming platforms Huya and Douyu after reviewing the deal for almost six months.
The State Administration for Market Regulation (SAMR) claimed that a combination of the two companies – both backed by Tencent – would hurt competition as the pair account for more than 70% of China’s game-streaming market by revenue (see WiC507).
The verdict is important because it is the first ever M&A deal to be struck down on anti-competitive concerns in the Chinese internet sector (long-time China watchers will remember that the first rejection of an M&A deal on antitrust grounds was the attempted acquisition of Huiyuan Juice by Coca-Cola in 2009; see WiC7).
As TMT Post noted: “The merger of Huya and Douyu will allow Tencent to control the combined entity, further strengthening its dominant position in the game-streaming market. At the same time, it also gives Tencent the ability to control the upstream and downstream markets [i.e. Tencent would be able to influence the games that are streamed, thus potentially prioritising its own titles over rival offerings]. Eliminating and restricting competition is not conducive to fair development of the market, it reduces the selection for consumers and is not conducive to the healthy and sustainable development of the online game and game-streaming market.”
The merger proposal was announced well before the government launched its initial (and to many, surprising) antitrust review of the internet sector late last year. At the outset, the deal envisaged that Huya would acquire its competitor in an all-stock transaction that would see Douyu delist from Nasdaq. The newly combined company would have been valued at about $11 billion, with Tencent holding about two-thirds of the merged firm’s voting shares.
There was a strong commercial case for the merger. Competition in the game-streaming industry had intensified, with Bilibili and Kuaishou shaping up as formidable players in the sector. The costs of acquiring new content from game production studios and boosting user numbers on the competing platforms had and continue to increase across the industry.
In the first quarter of the year, Huya’s operating costs were Rmb2 billion ($308 million), up almost 8% from a year ago. Douyu’s operating expenses reached Rmb1.9 billion, an increase of 5.6% year-on-year. And while Huya’s net profit rose 8.7% to Rmb186 million over the period, Douyu reported a loss of Rmb62 million, as compared with a profit of Rmb260 million in the same period last year.
Subscriber growth for the pair has been largely stagnant. Monthly active users on Douyu reached 59.1 million in the first quarter of this year, up slightly from 56.6 million in the same period of 2020 (albeit that being an especially strong quarter, given the demand for streamed content from locked-down households during China’s worst period of Covid-19 infections). Perhaps that explains why the number of paid subscribers on the platform fell 600,000 in this year’s first quarter too. Huya saw the number of paid subscribers drop during the same period as well.
Tencent’s plan to bring together the two companies was to forge a livestreamed gaming leader akin to Amazon’s Twitch. “Having two game-streaming platforms is bound to cause cannabilisation. And for Tencent the merger would have improved efficiency and economies of scale,” an industry insider told Entertainment Capital, a news site.
Tencent is facing more antitrust scrutiny in other parts of its empire. Reuters has reported that regulators are looking closely at Tencent Music too and may force the music streaming business to give up a portion of the streaming rights it has secured through exclusive licencing deals with music labels.
But Tencent did achieve a small win last week, when it received approval to privatise search-engine affiliate Sogou in a deal valued at around $2 billion. The takeover will make Sogou a direct and fully owned subsidiary. The search engine, which was listed on the New York Stock Exchange in 2017, is expected to delist after the deal.
Sogou (see WiC389) is the closest rival to Baidu, the country’s largest search engine. Tencent owns 39% of Sogou and controls more than half of its voting rights, first proposing to buy out other investors last July.
The best parts of Sogou’s search business are in a feature known as the inputting method (when users type in certain terms, the relevant search results pop up directly below the character selection bar). Analysts have claimed that the feature is important as a gateway to collecting more data on customer habits and preferences, which could then be used to advance Tencent’s position in sectors like video games. But Sogou doesn’t have a dominant position, according to iiMedia, with about 44% of the market for ‘inputting’ or about the same as Baidu. Baidu is still a much bigger player in the search market overall too, so the takeover of Sogou does not present a monopoly risk in the same way as Tencent’s more dominant presence in other areas.
What happens to Huya and Douyu, now that their deal has been blocked, however? One option is that Tencent sell its stake in one of the two to consolidate its resources. Others think the two will coexist – akin to smartphone makers OPPO and Vivo, which also share the same shareholder (see WiC409) – but continue to compete. “In future, the competition and cooperation between Huya and Douyu may continue for some time. Just like the relationship between Vivo and OPPO: both parties collaborate on technology and procurement; but battle for traffic and attention. In the end, they achieve something of a balance,” argued Entertainment Capital.
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