Why Tencent’s Merger Between DouYu & Huya had to Happen

The battle has ended with the Tencent empire bringing together DouYu and Huya - the last two major survivors from China’s gaming live stream industry. Since battle commenced in 2014, hundreds of live streaming companies have failed in China, including renowned Panda TV and Chushou, with all of them having ambitions to become the Chinese equivalent of Twitch.

Before last week’s announcement was made, Tencent had already invested heavily in both Douyu and Huya. Back in March 2018, before Huya IPO’d in the US, Tencent invested $461M during Huya’s B-round funding, while also investing $632M in DouYu. This resulted in 18.98% ownership of DouYu, becoming the second-largest shareholder, behind DouYu CEO, Shaojie Chen. Tencent’s investment in Huya represented 36.9% of the company, with Lingdong Huang, Vice President of Tencent Holdings, becoming the chairman of Huya.

In DouYu and Huya’s last earnings reports, the two companies reported monthly average users of 165 million and 169 million respectively. Several months have now passed since the board of directors at DouYu and Huya received preliminary non-binding letters from Tencent Holdings for the merger. The business combination is expected to close during the first half of 2021, and Chen and Dong will act as co-CEOs of the new entity. Now following last week’s announcement, here we explain Tencent’s grand plan and predict how this new gaming giant will operate.

Benefits of Merger and Potential Competitors

There were several signs that demonstrated Tencent’s desire to accelerate the progress of the merger, most notably when DouYu issued an apology to Huya for bad marketing practices in mid-September. This led to many in the industry predicting a merger at some point, enabling Tencent to have more control over the distribution of its content, Tencent Holdings owns 100% of Riot Games - the developer of League of Legends.

This competition is commonplace in China when there are only two leaders in the same sector. This was seen before with Uber and Didi, as well as other tech giants that have found the best way to succeed is to partner. Didi Chuxing eventually acquired Uber’s independent business unit in China after months of free rides for users. DouYu and Huya have competed for content for years, investing hundreds of millions of dollars.

This long-term competition will come to an end after the merger, and reduce the cost of unnecessary duopoly frictions. The most immediate sign of this merger will be a steady decline in rights acquisition fees.

However, Tencent does need to be aware of other competitors within this space, not just the gaming live stream platforms. China has the largest gaming population in the world, and is quickly breaking into the wider entertainment industry. Here Tencent faces challenges from Kuaishou, ByteDance and Bilibili in China.

Kuaishou is an emerging short-form video competitor to Douyin / TikTok, whilst Bilibili focuses on anime, gaming & cartoon video content. In August, Bilibili signed a three-year strategic partnership deal with Riot Games for the exclusive Chinese media rights for the League of Legends World Championship, as well as the Mid-Season Invitational and All-Star event. Kuaishou has also invested heavily in gaming live streaming and has now surpassed 300M monthly active users in their gaming community. Although Tencent owns shares in Bilibili and Kuaishou, it doesn’t have a decisive controlling interest, especially at Bilibili which also has investments from Alibaba Group and SONY. Following the DouYu and Huya combination, Tencent is reported to control 67.5% of the new company’s voting power.

ByteDance is considered one of the biggest competitors to Tencent. Despite the fact that ByteDance’s TikTok became a target of the U.S. government, the company has shown its capability and value on a global scale. Though ByteDance’s Douyin (Chinese version of TikTok) has not heavily invested in the gaming segment, Tencent has shown its caution towards this platform. In 2019, Tencent issued injunctions against ByteDance’s Douyin and Xigua video platforms, prohibiting Honor of Kings and League of Legends videos on these two video channels.

Ultimately the merger between DouYu and Huya is a way for Tencent to protect its leading position in gaming and live streaming. Tencent holds firm control of every level of the esports supply chain and is not willing to give up this position. By bringing together and owning these distribution platforms, it protects its position but also reduces the rising acquisition costs.

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