DouYu, Huya merger block to prompt users to move to rival livestreaming players

China-based HUYA Inc. and DouYu International Holdings Ltd.'s terminated merger deal will lead to users of both platforms migrating to their domestic rivals, experts told S&P Global Market Intelligence.

DouYu said July 12 that it had scrapped its acquisition agreement with Huya after China's State Administration for Market Regulation, or SAMR, halted the proposed deal. The regulator said the merger would give Tencent Holdings Ltd., which has stakes in both companies, a dominant position in the game livestreaming market. The move comes amid intensifying regulatory scrutiny of big tech companies in China, which saw the listing of Alibaba Group Holding Ltd.'s affiliate Ant Group postponed.

Tencent holds shares in all major game livestreaming platforms. The tech company is the largest backer of DouYu and Huya, with 37.21% and 47.41% stakes in each, respectively. If the merger had gone through, it would have held a 67.5% share in the combined company.

As of July 10, DouYu and Huya held shares of more than 30% and 40%, respectively, in the Chinese game livestreaming market, SAMR said in the announcement.

The top two livestreaming players are likely to lose users to competitors Bilibili Inc. and Kuaishou Technology, according to Charlie Chai, vice head of research at TMT equity research firm 86Research.

Tencent also holds an 11.38% stake in Bilibili and a 17.52% stake in Kuaishou.

"Huya and DouYu are [in] a disadvantageous position now that they cannot compete against Kuaishou and Bilibili by combining their services. Kuaishou and Bilibili have short video services which they can use to attract users to their livestreaming services, and this will hit Huya and DouYu a lot," Chai said.

The number of paying users on Huya's and DouYu's platforms has been declining steadily.

In the last three quarters, Huya's average number of paying users decreased or stayed flat. The company's average number of paying users fell to 5.9 million in the first three months of 2021 from 6.1 million in the same quarter of 2020. DouYu also reported a decrease in its number of paying users in the last three quarters. In the first quarter of 2021, its number of paying users fell to 7 million from 7.6 million in the year prior, mainly because users spent more time per day and were more willing to pay during the COVID-19 pandemic in 2020.

The diversified services of both Bilibili and Kuaishou will help "strengthen user stickiness and provide better monetization models compared to DouYu and Huya," said Yulin Zhong, technology, media and telecommunications, or TMT, equity analyst at Haitong International.

Huya, DouYu, Bilibili and Kuaishou declined to comment.

Bilibili offers short-video and video-on-demand services as well as livestreaming services, mainly for animation and comics fans. The company had 20.5 million average monthly paying users in the first quarter, up 53% year on year.

Kuaishou calls itself a content community and social platform, and it offers search, video and e-commerce services. Livestreaming services contributed 42.5% of its total revenue in the first quarter of 2021, according to its latest earnings release. Kuaishou's average number of monthly paying users was 52.4 million in the first three months of 2021, compared to 67.0 million in the same period in 2020. The spike in users last year was related to COVID-19, the company said.

While DouYu and Huya have started to invest in content for short videos to stop users from migrating to other short-video platforms, Chai said it is uncertain whether the two players will "gain anything from this investment at this stage," given their competitors' mature platforms.

Zhong added that Bilibili and Kuaishou also have "social media functions similar to Instagram," which appeal to content producers and make it easy for users to "slip into" their platform. For example, Bilibili allows daily posts, which attracts influencers, and Kuaishou has a function that allows its users to comment and share posts. These features also increase user stickiness, Zhong said.

Huya's and DouYu's social features include real-time commenting, gifting and bullet-chatting, which involves commenting over videos, according to the company profiles on their respective websites.

Content rights cut

There is also the possibility that Huya and DouYu could lose exclusive game livestreaming rights to Tencent's games down the road, the experts said.

If regulators think Tencent's position causes "unfair competition" in the Chinese gaming market, it is possible that Tencent will have to divest some of its investments in the livestreaming players or give up some exclusive rights, said Xia Hailong, a TMT lawyer at Shanghai Shenlun law firm.

Tencent declined to comment.

Earlier, analysts told S&P Global Market Intelligence the biggest advantage of the Huya-DouYu merger was to save costs in order to attract popular streamers and to deploy marketing strategies that require Tencent's livestreaming license of its popular games.

Recently, the Chinese market regulator asked Tencent Music Entertainment Group to give up exclusive music copyrights because Tencent Music was restricting market competition with its dominant position.

Huya and DouYu will lose out on Tencent's "favorable content pricing" and will "have to bid for content in an increasingly competitive market if China's antitrust watchdogs [scrutinize] Tencent's market position," Chai said.

Less content support from Tencent will mean Huya and DouYu's content costs will go up, while its profits and users will drop, the experts said.

DouYu and Huya's profits were already slowing down prior to the merger.

Huya recorded a slight increase in net profit in the first quarter of 2021 to 185.5 million Chinese yuan from 171.2 million yuan in the first quarter of 2020. For the same period, DouYu reported a net loss of 62.02 million yuan, compared to a net profit of 260.45 million yuan in the first quarter of 2020.