Ep. 43: Douyu’s IPO, Panda.TV’s Death — Let the Gaming Live-Streaming Games Begin

Transcript

(Y: Ying-Ying Lu; R: Rui Ma)

[00:00] Y: This week, China’s interwebs were dominated by the news of leaked video footage of JD.com CEO Richard Liu’s encounters with the woman accusing him of raping her.

R: That and Luckin Coffee’s filing for IPO on the NASDAQ.

Y: That was pretty surprising, actually, given that it had just raised $150mm from BlackRock just a week ago at a $2.9Bn valuation, but if you listened to our Episode 32 on the business, you’ll know that it’s extremely cash-intensive, or cashflow-negative, so maybe it’s the smart move to make, strike while the IPO iron is still hot!

R: By the way, that Luckin episode was our 4th most popular episode of the past year, and you can check out which other episodes our listeners liked best on our Twitter. Hint: there is a lot of Tencent in the top 5.

[00:53] Y: Speaking of Tencent, today’s episode is on companies that have strong ties to Tencent, as do their competitors and pretty much the entire space, because it is on, yup, you can see it in our title, gaming livestreaming!

R: Which is not Ying-ying’s favorite subject at all, but she has agreed that we should do this episode because well, gaming livestreaming is big business in China, so much so that one of the subjects of today’s episode, Douyu, is actually the second gaming livestreaming company in a year to go public in the US, the first one being Huya last May.

Y: Another fairly recent IPO, Bilibili, which went public just barely a year ago, is also tangentially related, at least in the sense that it has a small portion of its revenues from gaming livestreaming. A very small portion. But that hasn’t stopped it from getting into esports anyways, and it now owns both a professional League of Legends and an Overwatch team.

R: As we’ve already explained in one of our deep dives on Tencent back in Episode 19, gaming is its lifeblood. No wonder then that all three of the companies we just mentioned? Yup, you guessed it, they all share Tencent as a shareholder.

Y: In fact, the ever prolific Tencent investment team invested in Huya and Douyu on the same day, March 9 of last year. By the way, now is a good time to remind you that if you know nothing about livestreaming in China, you should check out our Episode 7, How to Win Fans and Influence Losers.

R: Still one of my favorite titles, and I think one of our best episodes. But let’s move on to Douyu, Huya, and Panda TV. No relation to Pandaily of course.

Y: No but we all just really love pandas like all of China does. In fact, like all of the world does. Who doesn’t like pandas? They are so cute.

R: Yeah. I think snakes are cuter. Trust me. I’ll show you after we finish recording. But what are we waiting for Ying-ying? Let the games begin.

[03:23] R: Hi everyone! We are TechBuzz China by Pandaily, powered by the Sinica Podcast Network!

Y: We are a biweekly podcast focused on giving you a peek into what’s buzzing within the tech community in China.

R: We uncover and contextualize unique insights, perspectives and takeaways on headline tech news that don’t always make it into English language coverage. So you can be smarter about the world of China tech. TechBuzz China is a part of Pandaily.com, an English language site that tells you “everything about China’s innovation.” I’m one of your two co-hosts, Rui Ma.

Y: And I’m your other co-host, Ying-Ying Lu. We’d like to acknowledge our partners DealStreetAsia and SupChina, creator of the Sinica Podcast Network! In addition to TechBuzz, you can also find Sinica which covers current affairs, NuVoices on women, the business-oriented ChinaEconTalk, and the Caixin-Sinica Business Brief from China’s leading business magazine.

R: Speaking of DealStreetAsia, their annual private equity and venture capital conference, Asia PE-VC Summit, is set to take place on the 17th & 18th September this year. To register, go to their website at dealstreetasia.com!

[04:25] Y: By the way, Rui, we hit an important milestone last week, which is that Techbuzz officially turned one year old last week!

R: That’s right! We launched on April 17, 2018, and this is our 43rd episode! You know what I would like for our Techbuzz-versary, Ying-ying?

Y: What?

R: I’d like to see us break 100 ratings and reviews on iTunes! We are pretty close, so help us get there!

Y: Again, we read all of your comments, and if you send us a screenshot of your review, on iTunes, or any other platform, and your mailing address, we are happy to send you some TechBuzz swag!

[05:05]
R: Today’s episode is brought to you by the University of San Francisco. USF’s new Masters in Applied Economics combines econ training with practical skills in data analytics — all geared towards helping you understand and analyze today’s new digital economy. Their curriculum covers skills like R and Python, machine learning, and experimental design; plus topics like the economics of platforms, auctions, pricing, and competitive business strategy. To learn about joining the Fall 2019 inaugural class, TechBuzz listeners can visit usfca.edu/techbuzz.

[05:55] R: OK, so as you already know by now, today’s episode features Douyu, which proclaims itself to be China’s largest game-centric livestreaming platform. It filed to go public on the NYSE and set a target of up to $500mm for its IPO.

Y: But is it really the largest game-centric livestreaming platform in China? Well, yes and no. Let’s start with some topline stats. By MAU, it’s almost one-third bigger than Huya, with 154mm users versus Huya’s 117mm. However, by paying number of users it’s about one-eighth smaller, at just 4.2mm versus Huya’s 4.8mm last quarter.

R: And more importantly, in terms of revenue, in 2018, it was nearly one-quarter smaller than Huya, at just over half a billion USD whereas Huya was almost $700mm. Huya’s gross margin also reached a high of almost 16% last year while Douyu had negative gross margins until last year, where it was barely positive at 4%.

Y: And you know what else? Huya was actually profitable last year, with a 11% net margin, unlike Douyu, which had a negative 24% net margin. So yeah, maybe Douyu is the biggest by average number of monthly active users, but Huya seems to trounce it in almost every other financial metric. And today, Huya has a market capitalization of over $5Bn.

R: But that’s OK, because we aren’t here to tell you which company makes for the better long-term investment. Please note that nothing in this podcast constitutes investment advice. What we are interested in is the industry as a whole and the drivers behind it. And to do that, as always, we start with the founding story.

[07:48] Y: There are two companies that are important in this industry, and we’ll show you why shortly. One of them is YY, no relation to my name, the other is ACFun. We’ve talked about YY quite a bit back in Episode 7, the first livestreaming episode, so I think we should start with ACFun first.

R: ACFun stands for “anime comic fun,” which was a video sharing site founded in 2007 that utilized 弹幕, or bullet messages, ie viewer generated messages overlaid on the content so that you can see real-time reactions other viewers have to the video. The point was that it made watching videos a lot more interactive.

Y: ACFun featured prominently in many a Chinese youth’s childhoods, and its significance in popular culture is pretty unparalleled. But this story isn’t about ACFun, it’s about how ACFun accidentally “incubated” Bilibili and Douyu. Actually, Bilibili doesn’t figure too much into our story here, so we won’t go into it, but it was started by a senior employee of ACFun, who left in 2009 after having a dispute about future strategy. Bilibili is now worth over $5Bn in market cap.

[09:00] R: And now for the real stars of our story, Douyu founders and co-CEOs Chen Shaojie 陈少杰 and Zhang Wenming 张文明. Chen is the more visible figure, but basically, these two are nerds who saw the gaming opportunity early and started a platform called Zhangmenren 掌门人 that allowed gamers to play versus each other online. Like a Battle.net for those of you who game.

Y: Chen and Zhang, by the way, are pretty young. They graduated college in 2006 and started Zhangmenren just two years out of school. On the prospectus, they are listed as 35 and 34 years old respectively.

R: Anyway, after running the company for about two years, they sold it to gaming giant Shanda at the time, and Chen Shaojie stayed on to run the business. But he also bought ACFun for 4mm RMB, or a bit over half a million dollars. In 2012, when US gaming streaming startup Twitch was spun off, Chen got the idea to do gaming videos, instead of focusing on the anime that made ACFun popular. In January 2014, the gaming part of ACFun was officially spun off and renamed Douyu.

Y: Douyu means “fighting fish,” which is apparently named after some Thai sport where well, fishes fight. I guess Chen Shaojie didn’t forget his PvP gaming roots. Initially, according to him, they had trouble raising money. People didn’t get it. I mean, they raised a $3mm angel pretty easily because they were serial entrepreneurs, but Chen said that only lasted them two months of bandwidth costs.

R: But soon Sequoia jumped in with $20mm, and less than two and a half years after being spun off from ACFun, it would become a unicorn. If you ask Chen though, Douyu’s early days were very much on the brink. He really thanks Amazon for acquiring Twitch for almost a billion dollars back in August 2014. After that, he says, fundraising became significantly easier. No duh!

[11:04] Y: It’s odd how these things work out, because we know from investors in Twitch that it also benefitted in its own fundraising from the success of Chinese companies such as YY. So this is definitely a sector where there is a lot of cross-border knowledge and capital flowing and where keeping a close eye on foreign markets can help you identify homegrown wins.

R: 2014, it turns out, is a good year for Chinese esports in general. It was also the year Huya officially spun off from YY after being founded as an internal division in the beginning of 2012. That was after it reached nearly 30mm MAU in just over a year, with over $20mm in annualized revenues, it was pretty obvious this is a strong standalone business.

[11:49] Y: Those are impressive numbers. To give you some context, that same year, Twitch was at just 45mm MAU despite having been available for a number of years before being spun off from justin.tv in 2011. But then again, China accounts for basically two-thirds of both the over half a billion esports players and just under half a billion esports viewers globally. So that makes sense.

R: Gaming-centric livestreaming also makes up over a quarter of the total livestreaming market in China, and in 2018, it was already about $2Bn. But we are jumping the gun a little here. In 2014, as both Huya and Douyu were spinning off, one more very important player we haven’t introduced is also making plans to enter the industry. That someone, who figures prominently into our Games, is a man named Wang Sicong 王思聪.

[12:45] Y: Wang is China’s most famous fuerdai, or trust fund baby, being the son of Wang Jianlin, owner of Wanda, one of China’s largest commercial real estate companies and often its richest man at a net worth that wavers between $20 and $30Bn.

R: Wang Sicong also incredibly influential. On social media anyway. The 31-year old’s nickname is 国民老公, or the People’s Husband, due to his many fans and his status as probably the most eligible bachelor in China. How many fans, you ask? Well, he has a record 45mm followers on Weibo.

Y: Part of his appeal, or notoriety, depending on how you want to define it, comes from the fact that he often posts his views about other people’s businesses, including a scathing post about the indefensibility of influencer marketing company Ruhan’s recent IPO. That, if you remember, was the subject of our Episode 41. It went viral, as many of his posts do.

[13:44] R: Basically, he talks a lot of trash. But some of his points are valid, so he isn’t a total dummy. But the reason we bring him up is because you cannot talk about Chinese esports without talking about Wang Sicong. If Tencent is the biggest corporate player in the sector, then he is its most visible individual spokesperson. He is such an effective advocate, he’s practically become synonymous with the field.

Y: And after Twitch’s very visible success, Wang, who already owned a highly regarded esports team, IG, or Invictus Gaming, couldn’t be expected to just sit on the sidelines while Huya and Douyu grew like weeds. Nope. He announced his own project, Panda.TV.

R: In his own way, Wang Sicong really changed the way gaming livestreaming works. First of all, the guy is a master at PR. It begins with how he announced the company … on Weibo on the eve of the fourth anniversary of a major League of Legends tournament. And with his deep entertainment connections, PandaTV, launched with A-list celebrities such as Angelababy and some of the best gaming livestreamers in the business, of course including his own team, IG.

Y: In just two years, it raised almost a quarter of a billion dollars from strategic investors such as LeTV (aka LeEco) and Qihoo360. For a while, the gaming livestreaming market in China was dominated by these three players, and people liked to refer to them as the three warring powers in the Chinese classic Romance of the Three Kingdoms, Huya, Douyu, and PandaTV.

[15:21] R: Besides marketing stunts, Wang Sicong is often held up as a scapegoat for the current state of the game livestreaming industry, which is that top livestreamers are often signed exclusive and very expensive contracts. But we don’t actually think that’s very fair statement to make .

Y: Nope. If anything, Douyu and Huya have been just as guilty. You see, gaming livestreaming has one fundamental difference from general entertainment livestreaming, like the joke-telling or karaokeing you see on YY.

R: Yeah, the difference between gaming livestreamers and others is that most non-gaming livestreamers are very platform dependent. They are generally nobodies, then they become famous on the platform, and so they are heavily reliant on the platform.

Y: As Gu Feng 古丰, the original head of YY game livestreaming, the predecessor to Huya, notes, gaming livestreamers are often famous in their own right, from esports tournaments, gaming-related media, other social media platforms, etc. They are not as platform dependent and at least a portion, if not most, of their fans will follow them from platform to platform.

[16:29] R: Another advantages of gaming livestreaming is the fan’s obsession with the game itself. That is, you can be a fan of say, Ninja, one of the top streamers on Twitch, but that’s probably because you’re already a fan of Fortnite.

Y: And with games, people are generally fans for multiple years. We are still in the beginning of the esports age here, but popular MOBAs (Multiplayer Online Battle Arenas) like League of Legends has been around for a decade!

R: Or if you’re like my boyfriend, obsessed with Super Smash Bros, that game is like twenty years old. The point is, fans are both more influenced and stay longer with gaming livestreamers because of their admiration for the livestreamer’s specific talents and obsession with the game itself.

[17:15] Y: It’s also arguable that more skill is required to become a gaming livestreamer. Either way, they are now being paid record amounts to be exclusive to certain platforms. But this is was not always obvious, not even to experienced insiders.

R: Nope, David Li 李学凌, the well-respected founder of YY, the first livestreaming platform in China to go public, did not realize this at first, and did not allocate any money whatsoever to recruiting top gaming livestreamers when he seeded what eventually became Huya with $100mm in starting capital. He thought that the simple revenue sharing mechanism that propelled YY to success in general entertainment would also work for gaming.

Y: Well, it didn’t, and despite being well-capitalized and having great resources at its disposal, Huya saw its competitors surge in traffic. However, by 2016 Huya had realized the error of its ways and supposedly spent a record $15mm on a 3-year exclusive contract with livestreaming sensation Miss, one of the first well-known female Chinese gamers.

R: Two years later in 2018, that record itself would be broken by Douyu signing 王者荣耀 Arena of Valor livestreamer 骚白 whose contract would be double that at nearly $30mm. That’s probably because 骚白 had 20mm fans on Kuaishou alone, again reinforcing the fact that gaming livestreamers are not beholden to any particular platform.

[18:42] Y: In China, top streamers have large follower bases, but also have what Douyu calls “many integrated promotion activities during live streaming.” For example, 骚白 gave away $150K in hongbaos or red packets during his welcome campaign when he first signed onto Douyu. Obviously, he had a professional team that helped manage all of this.

R: And Douyu has been executing steadily on this strategy. Exclusive streamers accounted for a little more than one-third of livestreaming revenues in 2016 but are now over half of 2018’s. That’s not because the other platforms aren’t contesting though. As we’ve already said, Huya is a fearsome competitor, and in just the last two months of 2017 alone, Douyu lost 8 top-tier livestreamers to Huya, and 2 to the smaller PandaTV.

Y: Maybe those numbers don’t sound very big to you, but they actually do move the needle, because it’s extremely hard to get to the elite level of an exclusive streamer.

R: How hard, you ask? According to Douyu’s prospectus, at the end of 2018, it had 6mm streamers, of which less than 0.1%, or about 5200, are contracted streamers. About 6%, or another nearly 400K, are managed through agencies, meaning that a good 93% are just amateurs not making serious money.

[20:08] Y: The traffic also operates very much on a power law in the sense that on most livestreaming platforms, 10% of the streamers account for 90% of the fans and revenues. So yeah, you have to pay big money for the head of the curve, because the long tail just doesn’t do very much for you.

R: Millions of dollars might sound like a lot of money to pay for a livestreamer right? But the thing is, because these contracts tend to be exclusive with very few exceptions, each one is both an offensive and defensive move. That is, because fans will follow their favorite livestreamers wherever they go, if Douyu signs a top streamer, it’s both adding to its own users and taking away from those of its competitors as well.

[20:52] Y: But while the competition to sign top livestreamers is intense, but there is also a war being waged to retain them. That’s happening, however, mostly in the courtrooms. And it’s made very clear in the Douyu prospectus under the Risks section — “as we attract top streamers from other platforms, we have also been involved in legal disputes concerning top streamers with competing platforms.”

R: Yeah, no kidding. Douyu is an especially enthusiastic litigator. Earlier this year, the cmpany was accused of engaging in questionable practices by taking its pending IP disputes to appstores to try to force them into taking down Huya’s app, especially Apple. The courts ruled this as unlawful and unethical and people wondered why Douyu was risking its reputation ahead of its IPO.

Y: Why? Because I think it’s a life or death situation for Douyu. In Q4 2018, 72% of its streamers were game streamers, accounting for 81% of total viewing hours. 86% of its total revenues are from live streaming, and that share is increasing, not decreasing. Rival Huya is even higher at 96%. You can’t afford to not spend. I know what you all are thinking right now – but surely that can’t be all there is to the business?

[22:12] R: Well, sure, it’s not that simple. As is generally agreed, there are three core competencies of livestreaming platforms: 1) content acquisition, 2) traffic acquisition, and 3) monetization ability. Having top gaming streamers basically means that you have one and two — content and traffic — covered. But what about monetization?

Y: This is where gaming livestreaming looks weaker than general entertainment livestreaming. Because the level of interaction between fans and streamers is much lower, at least when the industry started, the ratio of paying fans for gaming versus non-gaming is only about one-third, and the ARPU is similarly lower at about one-third.

R: One-third times one-third meant that game livestreaming revenues were only going to be about 10% of a similarly sized audience for general entertainment livestreaming. That’s actually no longer true today, as gaming ARPUs are about half of general livestreaming.

Y: Yeah, YY’s ARPU was over $100 while gaming livestreaming ARPU seems to be around $50. But yes, general entertainment still beats gaming livestreaming.

R: And in the old days before livestreaming became super competitive, the economics were pretty awesome.

Y: Revenue-sharing between streamers and the platform would be 40:60, bandwidth costs would be about 20%, marketing costs were negligible, and other operating costs topped out at 10%, meaning that you were left with a 30% net margin. Companies like YY, by the way, are still pretty profitable, although not quite as much as 30%.

[23:52] R: Huya, being the brainchild of YY, seems to have done better at monetization than both Douyu and Panda.TV. One of the main differentiators it has going for it is its investment into its own esport events. Not only does this give it unique IP, but it also allows it to incubate livestreaming talent internally.

Y: Panda.TV was arguably the worst of the three at this. First of all costs across the board skyrocketed as competition flooded in. Remember the Thousand Groupon War, the one that Meituan eventually won, that we covered back in Episode 10 and updated for Episode 23? Well 2016 was called by many to be the Thousand Livestreams War, or 千播之战, because the number of livestreaming apps went from barely any to over 300.

R: By 2017 however, a few dozen had already declared bankruptcy, making it one of the shortest “trends” in recent memory. That year too, short video rose to be on top, and continues to dominate today.

[24:54] Y: While Panda.TV’s strategy of paying big bucks or using its relationships to procure bigshot livestreamers worked in the beginning, the lack of in-house star-making capability or an ecosystem of 工会, livestreaming agencies that recruited, trained and managed talent, really came to bite it in the butt later.

R: By the beginning of last year, there were already rumors that Panda.TV was running out of money. Coupled together with the fact that regulatory changes really decimated the capital on hand of China’s VC LPs, Chinese venture funds settled into a “capital winter,” or 资本寒冬, things weren’t great for anyone, but especially not Panda.TV.

Y: The decreased appetite for risk means that whatever dry powder was left in the market tended to go to the decacorns at the top of the pyramid, your Didi, or Bytedance, or Ant Financial, and not a third-place player like Panda.TV, even if it had the backing of China’s most eligible bachelor.

R: Also, there were accusations that maybe because the funding came too easily because of its celebrity CEO, fiscal mismanagement was rampant and accountability was low. People went there to “retire,” not to work 996.

Y: “Panda.TV’s UI looks so clean,” people said. Or rather, they smirked. Apparently that’s an euphemism for not having enough commercial partnerships.

R: Another interpretation of why Chinese apps are often considered “messy” by Western users. They’re just well monetized! Lots of partners!

Y: As for Wang Sicong, even though his involvement was so high profile and indeed he was Panda.TV’s most effective spokesperson, he has either invested in or is connected to about 40 companies, and being a fuerdai, he apparently never got too involved in the operations.

R: Only the glitz and the glam. When Panda.tv officially shut down on March 30, 2019, although its demise had been long rumored, it made shockwaves across the industry.

Y: No kidding. That was was the biggest headline in Chinese tech a month ago. We didn’t cover it because we figured TechBuzzers were more interested in the new Shanghai Stock Exchange, but trust us, it was a huge deal.

[27:11] R: All right, I think that’s quite a bit of gaming that we’ve gone through today. Hope all of you got the main gist of it. Which, Ying-ying, do you mind summarizing for us, what we learned today?

Y: OK, we learned that gaming livestreaming is a pretty big industry in China, and that one of its biggest players, Douyu, filed for a $500mm IPO this past week. Douyu was a spinoff from ACFun, a video sharing website that initially grew out of a community of anime lovers. Douyu’s archnemesis Huya, itself a spinoff of YY, went public last year. It’s now worth over $5Bn.

R: Both companies share overlapping shareholder Tencent, who owns 40% of Douyu, and both claim to be the #1 in its space. While Douyu does have a larger number of monthly active users, Huya has higher revenues and margins across the board, and is profitable, while Douyu is lossmaking.

Y: We also learned that both companies were founded back in 2012, not long after US game streaming company Twitch spun off. They were then both officially spun off in 2014, the year Twitch was sold to Amazon for almost a billion dollars, quickly raised a lot of money, and were soon joined by a third well-funded competitor, Panda.TV, which was run by China’s most eligible bachelor, Wang Sicong.

[28:39] R: Panda.TV and Douyu were the first to give livestreamers multi-million dollar contracts to be exclusive to their platform, and eventually Huya followed suit. The reason why this strategy was necessary is because unlike other livestreamers, gamers have fans across multiple platforms, have a longer lifecycle in terms of their celebrity, and so are not as beholden to the platform as general entertainment livestreamers are.

Y: Nonetheless, because Panda.TV wasn’t as good at developing a pipeline of future talent and suffered from lax management, it shut down last month despite having a star roster of investors. Meanwhile, Huya and Douyu have both doubled their revenues in the last year and are projecting very healthy growth rates. But we should note here that despite growing quickly, ARPUs are significantly lower for gaming livestreaming versus general livestreaming, like only half as much, and the reason typically given is that interaction between streamer and fans is lower.

[29:39] R:For most of these livestreaming platforms, whether gaming-centric or not, they are experimenting with two main strategies going forward. One is the expansion into other verticals such as ecommerce or education.

Y: The other is geographic expansion, mostly into developing economies like Southeast Asia, India, the Middle East and North Africa. But even for Europe and North America, it is generally agreed that the market is less competitive than in China, where it’s already a sea of red.

R: By the way, the geographic expansion strategy is not limited to livestreaming but all sorts of consumer internet media companies, the most notable one being Bytedance and its short video app Tik Tok.

Y: Right, so that’s it. With China being the world’s largest esports market, accounting for nearly two-thirds of both players and viewers, this is one highly competitive sector where it’s the undisputed lead.

R: And even Ying-Ying, who is not a gamer, agrees that this sector is interesting because it’s one of the most global ones out there with plenty of opportunities for cross-border capital. Twitch’s investors found comfort in YY’s business model from China, and all the gaming livestreaming platforms then took cues from Twitch and sold the story to their investors. Talk about unexpected synergies!

[31:02] Y: But that doesn’t mean all of these companies will survive. There are many who believe that the expensive content acquisition strategies are unsustainable. They are at least keeping lawyers busy — the platforms are constantly suing streamers and each other for breach of contract. And no wonder, with so many multi-million dollar contracts being thrown around, greed is bound to get in the way.

R: In response to this, Chinese people love to quote Warren Buffett, who apparently said: “You only find out who is swimming naked when the tide goes out.” 只有退潮了，才知道谁在裸泳. Well, the markets are still good, so the tide is high, but we already know Panda.TV wasn’t swimming with its pants on. The question is, how about the others? Are they also going to get caught swimming naked?

Y: What do you think? Let us know!

[31:59] Y: OK, that’s all for this week folks! Thanks for listening. As a reminder, episodes will now be available every other Friday instead of Wednesdays. We really enjoyed putting this together, and we are always open to any comments or suggestions. You can find us on twitter @thepandaily, @TechBuzzChina, and my personal Twitter account is @ginyginy.

R: And my Twitter is spelled RUIMA(@ruima). TechBuzz China by Pandaily is powered by the Sinica Podcast Network. Pandaily.com is an English language site that tells you “everything about China’s innovation.” Our producers are Shaw Wan and Kaiser Kuo. Our interns are Wang Menglu and Mindy Xu! See you in two weeks!