Who will benefit from the Huya-Douyu merger?

The internet giant Tencent has successively acquired Funcom Games, a Norwegian game developer, and Leyou, Hong Kong-based game developer and distributor. According to Niko Partners, in 2020, Tencent's investment transactions increased by 300% compared to 2019.
In the Internet industry, Tencent appears in many popular fields such as live streaming. In last October, Tencent planned to merge the two companies as the largest shareholder of Huya and Douyu. This deal is expected to be completed in the first half of this year, and Douyu will be delisted as a subsidiary of Huya. However, at the end of last year, in order to prevent capital monopoly and unlimited expansion, the Chinese government introduced relevant anti-monopoly policies, which brought some uncertainties to this merger.

The revenue of Douyu and Huya declines year-on-year 
According to the earnings report, Huya and Douyu's fourth-quarter revenue was 2.990 billion yuan and 2.27 billion yuan respectively, up 21.2% and 10% year-on-year respectively. At any time last year, live streaming platforms continued to benefit from the dividends of the epidemic and the boom in Esports entertainment programs, with revenues maintaining growth, but compared to the growth of previous quarters, both Douyu and Huya see a declining revenue.

In terms of business composition, the main source of revenue for both live streaming platforms is live-streaming revenue, which accounts for more than 90% of revenue, with a relatively single revenue composition.
The main impact on the live revenue still lies in the anchor, especially the most influential is the number of popular anchors, Huya in popular anchor signings inferior to Douyu. 

In terms of paid users, Huya has 6 million paid users in Q4, while Douyu has 7.6 million paid users, and Douyu's paid conversion rate is slightly higher. In addition, the growth of Douyu's paid users is decreasing. In Q4, Douyu's paid users grew by 4.6% year-on-year, compared to 12.7% in Q3.
From the platform itself, the main reason is the low conversion rate of paid anchors. According to the survey of related sources,  it takes an average of 26 visits per user to generate a paid conversion. And most of the platform traffic is concentrated in the head anchor, the popular anchor survival difficulties, not to mention the paid conversion, which seriously lowers the overall paid user growth level of the platform.

From the industry point of view, the growth of China's live game user market scale is slowing down. China's live game market scale is expected to grow 22.8% in 2020, and the growth rate will slow down to 18.6% in 2022, according to the data of iResearch. It can be seen that the revenue growth rate of the two companies is declining, and these factors will hinder the development of Huya and Douyu.
Look at the relevant user data, according to the report released by Gamma data in August, nowadays mobile game users and short video users are highly overlapping, as of 2020 Q2, 94.7% of the users who choose to watch game videos as a pan-game behavior will watch short videos; in the mobile game users, the number of users who watch short videos also reached 91.3%.
It can be seen that whether it is short video or game to take away a lot of user traffic and user time, to a certain extent, the live industry will also bring some impact, especially on the head game live platform in the user data, such as Huya and Douyu.


Break down the cost structure to see the difference
According to the financial report, the fourth-quarter net profit of Huya is 253 million yuan, while the net loss of Douyu is 229 million yuan. Huya's operation is very similar to Douyu, so why Douyu is at a loss?
The main reason why Douyu Q4 turned from profit to loss is actually the growth in costs exceeded the growth in revenue. According to the data, during the reporting period, Douyu live broadcasted more than 90 large official events such as League of Legends S10 Global Finals, the number nearly doubled compared to the previous quarter, and the increased investment in e-sports broadcasting and e-sports content led to higher costs.

By analyzing the operating costs, it is found that both live streaming companies are facing the problems like rising costs and increasing marketing expenses, compressing profit margins. According to the financial statements, Huya and Douyu's operating costs increased by 19.6% and 23.7%, respectively, while revenue-sharing fees and content costs increased by 29.8% and 25.6%, respectively.
Douyu's marketing expenses also increased by 27.3%. The financial report shows that Huya's Q4 marketing expenses increased by 63.2%. According to the survey, it can be found that Huya has launched more aggressive measures in terms of improving user engagement in order to heavily promote the new interactive features within the app, as well as in terms of Huya's applet tools and YOWA cloud gaming platform.
Huya has been mainly in show mode, according to the income data of show anchors, it is not difficult to find show anchors fans seem to be more generous, but from the action of Huya, also showed great ambition in e-sports, e-sports live cashing channels more. And the way to make money with e-sports as the core of Douyu does not seem to be as flexible as Huya.


How much dividend is left for Douyu and Huya?
Before the release of the earnings report, Bloomberg reported that Tencent may make concessions regarding the merger between Huya and Douyu. When this news came out, it also made people think a little more. Especially in Douyu's earnings report, general and administrative expenses increased 54.0% year-over-year to RMB 117.7 million, and the increase in this figure was mainly due to the increase in professional services fees associated with the company's merger with Huya.

Tencent has long been interested in the traffic and money-generating capabilities of Huya and Douyu, becoming the largest shareholder of the two live-streaming platforms one after the other.
With the tightening of live platform regulation, some live platforms feel the crisis. The two major live-streaming platforms, Huya and Douyu, have been in constant competition, and after experiencing their respective losses, Tencent announced the merger of Huya and Douyu and transferred Penguin Esports to Douyu at a price of 500 million yuan.
Once this merger is successful, Douyu will become a wholly-owned subsidiary of Huya, and according to a survey by Mob Research Institute, the two companies together will occupy nearly 80% of the market share, steadily occupying the leading position in the gaming market. However, this prestigious merger was intervened by the Market Supervision Bureau and the merger process could only be suspended while it was under review.
Tencent is not the only one whose acquisition is under national antitrust review. But the merger of Huya and Douyu is still subject to considerable uncertainty.
In addition to the merger facing some uncertainties, UGC and PUGC models such as Kuaishou and Bilibili are splitting the traffic in the live broadcast world, and the market share of Huya and Douyu is being eaten away.
Overall, Huya and Douyu can largely make up for their own operational shortcomings through cooperation, but with the variables of mergers and acquisitions, Huya and Douyu are still in a situation where two giants are fighting each other. With the decrease in user traffic of live game platforms, Huya and Douyu should focus on mining the stock of users in the future, and need to explore more commercialized cash models to achieve diversified operations in order to better fight against growth challenges.

This is an article from WeChat official account MeiGuyanjiushe (ID: meigushe), translated by Chris Yuan.