Before the outbreak of Covid-19, the “ESPN of video games” Twitch was already the leading site to stream and watch video games being played live. But during a worldwide lockdown, the platform saw a meteoric rise in activity — up 20% in a matter of months — and made a timely expansion into virtual concerts and other online events.
Twitch’s rapid growth has been watched closely in China, the world’s biggest video game market, though the platform itself is unavailable in the country. So who are the players vying to be Twitch’s Chinese equivalents?
Though Twitch outstrips competitors such as YouTube Gaming in terms of viewership and revenue, China in fact has two major companies in its livestreaming arena. These are Huya — which spun off from innovative parent company YY — and Douyu. Now, Chinese tech giant Tencent, which owns a 37% stake in Huya and 38% of Douyu, is reportedly in talks to merge the two, a deal that Bloomberg reports would “create an online giant with more than 300 million users and a combined market value of $10 billion.”
While China’s livestreaming industry now powers a booming virtual economy — spanning from tipping to advertising and ecommerce — it was the figureheads behind these two livestreaming companies, and China’s vast number of video gamers, that made this industry what it is today.
Duowan: The Birth of China’s Virtual Economy
Like many Chinese tech entrepreneurs, David Xueling Li (李学凌) started his career as a journalist and editor. A philosophy graduate, Li had worked at news portal Sohu as an IT editor in 2003, before joining then-up-and-coming internet company NetEase as editor-in-chief of its news section.
Li was not only interested in journalism, but also clearly passionate about video games. During the SARS outbreak in 2003, he took advantage of the epidemic to work from home, where it was easier for him to play games on the side. The opportunity to actually work directly with video games came when Lei Jun (雷军) — then an executive at software company Kingsoft and later the founder of electronics company Xiaomi — pitched him the idea of a gaming portal, which Li agreed to immediately. With 1 million USD of seed funding from Lei, he left NetEase in 2005 to create Duowan (多玩), a startup that would eventually incubate China’s livestreaming industry.
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As a journalist, Li disliked the traditional, advertising-based business model for media outlets. While running ads for games was profitable, Li realized that being a game distributor would bring in much more money, which led to the decision by Duowan to operate games designed by other companies. “If I do advertisements, I think maybe I can get 100 USD, but if I run the gaming myself I will get 500 USD in revenue,” he told Hans Tung and Zara Zhang on the GGV Capital podcast.
Around the same time, the idea for a voice chat tool came up. People in Li’s office would play video games together after finishing work at 9pm, but with some colleagues working from home, communication proved difficult.
Thus YY — which stood for “yuyin“ (语音) or voice messaging — was born, and became a huge factor in the platform’s booming popularity. Back in the late ’00s, Chinese video gamers that played titles like World of Warcraft had few options to communicate as they were playing. But with the introduction of YY, they could jump on group calls to plan out strategies.
While YY was originally designed for gamers, the voice chat tool soon gained traction in other arenas. The later addition of video streaming features also laid the groundwork for livestreamed entertainment, through which karaoke singers and other personalities performed in their own virtual private rooms that fans could enter and watch, sometimes for a fee.
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What was special about YY’s livestreams at the time was that the audience could interact with the host. Li had likely realized the importance of user engagement early on in his career as a news editor — while working at NetEase, he also helped build its informative, high-quality, and often very entertaining comment sections, which allowed the platform to stand out amid myriad Chinese news portals.
Today, Chinese viewers interact with livestreamers through virtual gifts — “race cars” and “private jets” that aren’t much more than GIFs and lines of code but can cost hundreds of RMB, if not more.
YY was, in fact, the first in China to create this virtual gift economy, though it was largely unintended. In order to create a ranking of its karaoke performers, YY allowed each user one vote, but as fans tried to increase their singers’ rankings, Taobao vendors began selling additional votes for 2.5 RMB each.
YY wasn’t particularly concerned about the cheating, but black market vendors often attempted to steal real users’ accounts, and hacking became an issue. YY’s solution? Sell votes on its own — at 1 RMB per vote, it could undercut the black market. Although it was mostly intended as a measure to force hackers to leave the platform, to the founders’ surprise YY actually made 40 million RMB in revenue in 2010 just from selling these votes.
Though YY, which went public in New York in 2012, was born into the culture of online games in China, Li also realized a fatal flaw in its livestreaming business. Tencent was already the largest publisher and operator of video games in China, long before the rise of now-viral smartphone games such as Honor of Kings (王者荣耀). If Li wanted to grow his livestreaming business for online gaming, he needed to work with Tencent.
YY’s online gaming unit — which included esports — was rebranded as Huya in 2014, while its original livestreaming platform continued to expand horizontally. Huya — which also went public in 2018 — was spun off from YY as Tencent acquired a minority stake. It would eventually become the world’s largest platform for esports and gaming, thanks to China’s unrivaled market size.
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Douyu: From Anime Fansite to Nasdaq IPO
Compared to YY and Huya, Douyu arrived to the game much later. Its history dates back to the Chinese anime site AcFun, which was nicknamed “A-site” (A站).
AcFun predated streaming site Bilibili (B站 or “B-site”) and actually helped introduce danmaku, or “bullet comments” — user-generated comments floating over a video — to the Chinese internet in 2008.
While AcFun began as an amateur website, it was sold in 2010 to Chen Shaojie — a software engineer that had, along with childhood friend Zhang Wenming, sold a video game to Shanda (盛大), then one of China’s largest game distributors. But Chen had little interest in Japanese anime culture. Like YY founder Li, Chen was a gamer, so he built a livestreaming channel called Shengfangsong (生放送) that quickly attracted traffic from the gaming community.
While it was once solely anime-focused, in recent years streaming site Bilibili has reoriented itself to host a variety of video content, catering to a broader audience of Chinese Generation Z.
Chen had a similar vision: he decided that livestreaming was the future, but was also costly for AcFun. So he spun off AcFun’s livestreaming channel into a new venture called Douyu in 2014.
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Douyu quickly became a frontrunner in the video game livestreaming industry, and was among the wave of Chinese tech companies going to IPO on the Nasdaq stock exchange last year.
Douyu and Huya’s dominance of gaming livestreaming is now well established. But the question then becomes: is the market large enough for the two to coexist?
Tencent Enters the Chat
Tencent, now a hegemon in China’s online gaming industry, clearly does not think so — sources have revealed that a Tencent-propelled merger of Huya and Douyu is already underway. Tencent currently owns 37.2% of Douyu and 50.1% of Huya, making it the largest shareholder in both companies.
Perhaps unsurprisingly, the rivalry between Huya and Douyu has been fierce throughout the years, as both platforms scramble for viewership and contracts with popular livestreamers. That rivalry has sometimes led to conflict, and Chinese courts have identified unfair competition between the two platforms. But at the same time, the Huya-Douyu competition has been hugely beneficial for China’s video game streaming industry, inflating the income of hosts and making access affordable for viewers, at the cost of the platforms themselves. To fans, a merger will likely mean the end of an era.
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But even if that merger goes through, it won’t be the end of the story. As the battlefield consolidates, other video platforms are eyeing horizontal expansions into the gaming market. Bilibili, for instance, has acquired broadcasting rights for esports tournaments, such as the League of Legends World Championship. Meanwhile, short video platform Kuaishou, which is also popular among Chinese youth, has also launched campaigns to support video game content creators with both financial resources and exposure.
Nevertheless, the Huya-Douyu merger was what Li, the founder of YY, had originally predicted back in 2018. “I think the final situation is [that] Tencent Games will combine with Douyu and Huya together and form one whole,” he told GGV Capital at the time.
“One big company,” he continued. “This company will also make games and game broadcasting, just like you would own NBA teams and ESPN. You put all those things together into a very powerful ecosystem.”
Header image: Florian Olivo via Unsplash
