Can live streaming make money? Takeaways from Huya’s May IPO

Putting an end to longstanding rumors that Huya was getting ready for its independent IPO, the live streaming site is now China’s first independent listed live stream gaming platform (strictly speaking Huya is a spin-off of parent company YY). According to the SEC prospectus, Huya listed on NYSE on May 11, 2018, 11pm Beijing time.

These revised documents gave Huya an advisory share price of $10-12 and an initial offering of 15 million ABS shares. According to sources quoted by Reuters, Huya set its IPO price at US$12 per share, the upper end of the scale, and raised US$180 million. Trading under the name HUYA, lead underwriters include Credit Suisse, Goldman Sachs, and UBS.

Huya’s parent company YY holds 48.3% of shares and YY President David Li Xueling holds 3.7% as the first shareholder. Tencent-owned Linen Invest Limited holds 34.6% of its outstanding shares as its $460 million B round investor. As head of two publicly listed livestreaming platforms, Li Xueling also holds 16.6% of the controlling shares issued by YY as well as 82% of the company’s voting rights.

Luck depends on the interplay of risk and opportunity

Setting it apart from YY’s IPO listing, media attention this time was on the company’s future profitability.

Huya was officially launched in February 2012, focusing on live stream gaming, but also covering live streaming entertainment, outdoor adventure, and sports among others. Although video live stream revenues have been growing fast, Huya has yet to turn a profit. In 2017, Huya’s net operating income was RMB 2.185 billion. Taking away advertising and other business, live streaming brought in around RMB 2.07 billion. Revenue from live streaming services increased 161.3% YoY to RMB 2.06 billion, but with gross profits of $39.2 million, Huya had net losses of $15.5 million.

YY, one step ahead, brought in the bulk of its revenue via online games. Its latest quarterly earnings report showed that in Q4 2017, live streaming accounted for RMB 3.36 billion of its total income of RMB 3.625 billion, a massive 92.9%. Of this, YY made RMB 2.67 billion, while Huya made RMB 692.7 million from live streaming. Online gaming earned RMB 128.1 million, and member services earned RMB 50.5 million. Other revenue (mainly from online advertising) earned the company RMB 80 million.

Reassuringly, the financial reports show that Huya’s livestreaming debts have narrowed. This may be a sign that it is on the route to profitability.

Overseas, Huya can benchmark companies such as Twitch. Why does China have a company like this to benchmark? Huya took control of its own talent management and used common sense to gain its foothold in game streaming. It caught the upsurge of PlayerUnknown’s Battlegrounds “chicken dinner” games. During Q4 2017 and Q1 2018, Huya’s livestreaming saw a major user volume spike, and its Q1 earnings pushed it to a historic break-even, one of the driving factors behind its IPO bid in the US.

Other big games companies have discovered new value in live streaming platforms and live streaming games to extend the lifespan of their products. This has also given a financial injection to live streaming platforms and closed the loop resulting in more profitable operations. With more and more live stream gamers, their role in the entire gaming industry chain is also increasingly important. Because they come into direct contact with players, channels are increasingly relied on by games publishers. With the cooperation of games hosts, independent games that had not found their place in the market earlier were able to boost their influence and their subsequent download rates. On the other hand, live games provide players with a platform for daily communication and recreation, forming a user base for esports in general. Live streaming works in a similar way to the Premier League and NBA, and this is why it has received so much attention inside and outside the industry. Of course, the eyes of Wall Street are included.

One problem that can’t be ignored is the scarcity of live streaming broadcasters in online gaming. High costs for hiring popular hosts are now a core part of the fierce competition for the first and second place between Huya and Douyu. Popular anchors Queen MISS, Wei Shen, and LPL spring championship winner UZI, have all made lucrative transfers between platforms in the past. There is clearly competition for “high cost” talent in the marketplace. And this is a problem that won’t be easy to fix. So from now on, Huya will keep accumulating users and revenue at a rapid rate, while profit margins hover around break-even point. This is likely to be a major obstacle to maintaining post-IPO profitability.

Backed by Tencent, benchmarking Twitch

The challenge faced by Huya is obvious—how to establish its own specific advantage in game streaming?

Frost & Sullivan reported that in terms of monthly active users (MAU), Q4 2016 and 2017 saw most active users spend the most time on mobile apps. Measured alongside most active anchors, Huya has the most active live stream gaming community in China.

Top 10 live streaming apps from Feb 2017 to Feb 2018

Considering a report by Jiguang, as of February 2018, the three apps with the highest livestreaming penetration rates are Douya (4.25%), Huya (3.61%), and YY (3.33%).

In spite of this, compared with Twitch’s dominance overseas, Huya still needs more time to mature. To give a little of Twitch’s history, its predecessor Justin.tv discovered that its popularity rested on live stream gaming alone, after which it spun Twitch off to make its own way. Four years of independent development and operations had kicked up a storm, but this is not enough to survive. Despite being situated in innovation central, Silicon Valley, Twitch needed backers and capital to become the company it is today. Twitch resisted being bought by Google but ended up in the clutches of Amazon. This is the path Twitch took to reach its strong position in gaming today!

Huya has gotten much more interest from capital markets than Twitch. And now Tencent has thrown its own scale and capital into the ring to help it rise rapidly. Almost $1.1 billion worth of investment in Douyu and Huya captured the entire game streaming market. Huya is seen as a strategic investment and the plan is clear. Gaming is Tencent’s main source of revenue, so it naturally has more traffic, channels, and users. Regardless of how you see it, for Huya, the investment is a great help. As for future returns, they depend on whether Huya’s post-IPO strategy and market performance bring value back to Tencent. But the general direction seems to indicate solid future success.

According to an earlier PricewaterhouseCoopers report on trends in the sector, China and the Asia-Pacific region are becoming the largest consumer markets for online gaming and will maintain a steady compound annual growth rate (13.9%), with total revenue for the sector reaching US$195 million by 2021. Looking at the driving force behind this propulsion in value, PricewaterhouseCoopers predicts that by 2021, the value of advertising from live stream media will reach US$84 million, and events revenue will reach US$54 million. Player fees alone will net US$31 million. Ultimately, the rise of eSports in China is related to the booming video game market. In 2016, the Chinese video game sector was worth US$15.4 billion. By 2021, it is expected to challenge today’s largest market, the US, for first place, with expected revenues of $26.2 billion.

All this goes to show that the economic benefits of game live streaming should not be underestimated.

—Translated by Heather Mowbray