The Big Huya/LPL Media Rights Deal and DYG's Textbook Landing in Shenzhen
Vol 4.3 | May 6, 2021
Hello Esports Enthusiasts!
I have a fun one for you today! Assuming your definition of “fun” is, like mine, going deep on esports media rights and ecosystem building in China. Don’t miss the mini-news roundup at the end.
As always, feel free to reach out to me directly if you're interested in learning more about any particular facet of China's esports industry. And please send me your feedback!
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Nothing in this newsletter is intended as investment or legal advice.
Huya Locks Up LPL Rights through 2025
Last week, as part of its annual reporting with the SEC, Huya [NYSE: HUYA] revealed that it had acquired the exclusive 2021-25 production, broadcast, and sublicensing rights in China to essentially all official LPL events for ~$310M USD / ¥2.013B RMB [LINK: English]. On an annual basis, that eclipses the 800M RMB that Bilibili reportedly paid Riot Games for exclusive China rights to all 2021-23 international League of Legends tournaments, and is almost 7X the ¥60M RMB is rumored to have paid for LPL rights in 2020. [LINKS: English, Chinese] The news was reported first in The Esports Observer and quickly spread to Chinese news sites, as further evidence that the LPL has widened its lead as the world's most valuable esports league. [LINK: English, Chinese]
While very impressive, it’s not yet clear if the license fee is a useful marker for current esports media rights values, as this was essentially a deal between sister companies. Tencent controls Huya as well as LPL rightsholder TJ Sports, a joint venture between Tencent Esports and Tencent-controlled Riot. More on the fee below, but first, as someone who has drafted and negotiated way too many similar license agreements over my career, let me offer few thoughts on the other terms of the deal:
At 5 years, the term is itself a milestone as the longest in esports for any major broadcast license. In the constantly evolving world of esports, long-term commercial agreements are rare, and multi-year terms are a sign of maturity.
One important byproduct of the term is that the agreement locks in the competitive structure of LPL through 2025 based on its current format of Spring Split / Summer Split / All-Star Weekend, which has really only solidified over the last 2 years. This is good news for new sponsors and investors.
There is an intriguingly redacted clause relating to future negotiation rights for an unidentified "New Platform"… comment below if you think you know what that is and are willing to share!
Overall, the terms are to my eyes very licensor-friendly, suggesting that TJ Sports was solidly in the driver's seat during negotiations. For example: Huya has exclusive sublicensing rights, but they are unilaterally subject to TJ Sports’ approval. Douyu and other Tencent-owned platforms will of course share the rights, but TJ Sports can potentially lock out third parties like Kuaishou, Bytedance, and Bilibili. Also, TJ Sports retains significant control over match footage such as replays and highlights, which could be resold as another revenue stream for TJ Sports. TJ Sports also retains considerable control over sponsors and advertisers, as well as use of LPL marks and IP. Huya assumes all responsibility for policing user generated content, and “guiding” public opinion.
Ultimately, Huya is on a very short leash commercially and creatively. In my experience, this kind of deal requires constant cooperation and communication to be successful for both parties. There may be an assumption that the sister company dynamic will be sufficient, but I have seen it go the other way before as well. Five years is an eternity in esports and China tech.
Did Huya overpay? There is little external data to go on. If we compare to traditional sports, Huya’s license fee is a mere fraction of the $1.5B USD that Tencent paid in 2019 for 5 years of NBA rights. While nobody questions that the NBA’s media value is higher than the LPL’s the comparison is not completely unwarranted. A 2020 research report by WanPlus found that LoL and LPL viewership regularly touched NBA and CSL viewership in China. Given the comparatively high growth rate of esports, one could argue the LPL rights were likely undervalued. [LINK: Chinese]
On the other hand, both Huya and Douyu's financial reports going back to 2019 tell the story of a business with negative to slim profit margins due to the high cost of content, including events, contracts with KOLs, etc. Huya’s cost of content and revenue sharing in 2020 accounted for 80% of net revenue. [LINK: English] This suggests a limited ROI, but perhaps Huya has reason to believe that it will more efficiently monetize its platform over time.
So, while it is possible that the fee was the pure product of an arms-length negotiation, which each company would certainly have a fiduciary duty to conduct, the result helps Tencent establish a new benchmark for premium esports media rights. From Tencent’s perspective, the transaction can be viewed as an investment by its distribution side into the production side, feeding the flywheel economics of Tencent’s myriad gaming and entertainment holdings. Everyone wins.
KPL team DYG finds a home in Shenzhen
Last month, Tencent held a splashy ceremony in its home city of Shenzhen to welcome top KPL (China’s top Honor of Kings pro league) team DYG to its new home in Nanshan District, where it takes on the name “Shenzhen.DYG”. The renamed Shenzhen.DYG continues the trend in the KPL, China's top pro league for Honor of Kings, towards a regionalized home-and-away system, and is a textbook example of leveraging policies promoted over the last two years by large cities to develop local esports hubs.
Established by livestreaming platform Douyu in 2016 (DYG = Douyu Gaming), DYG went from the bottom of the KPL to winning the Autumn Finals and placing second in the Winter Championship in 2020. The move to Shenzhen was announced in January 2021 as part of Timi Studios' Presser [LINK: English], shortly after winning the Winter Championship and Shenzhen’s announcement of subsidies to develop the local esports industry and revitalize the Nanshan District, including up to ¥5M RMB for top clubs settling in Nanhsan and rent subsidies for esports organizations. [LINK: Chinese] According to Yan Qi, DYG's General Manager, the team scrambled to make a bid right after the subsidies were announced. Construction on DYG’s new home at the Nanshan Cultural Center began in February and finished only two months later, by which time DYG’s players had already moved to Shenzhen.
For DYG, the benefits of Shenzhen, beyond cash incentives, are the consumer demographics. Shenzhen boasts more than 4,000 gaming enterprises, including 27 listed companies, where the average age skews young and tech-savvy. DYG plans to build community ties through local events, college competitions, and a talent development system. DYG is also leveraging its relationship with Douyu to create a fan zone and promote its players. [LINK: Chinese]
For Shenzhen, it’s yet another example of a major city seeking to revitalize a district with a new consumer-facing commercial center based on esports, and with alarming speed. Honor of Kings clubs seem to be favored right now as “home teams”, perhaps because the game incorporates Chinese mythology elements which can be tied to a local cultural brand. In any case, the expectation is that an “industrial ecology” will be created that benefits multiple businesses:
Through [establishing the home arena], Shenzhen will aggregate the "global" industrial advantages of esports, continue to cultivate league talent, brew home field culture, enrich competition categories, and accelerate Pengcheng (another name for Shenzen) into the era of esports for the whole people.
Before I sign off, here are a few headlines that caught my attention this past week:
China's biggest esports stadium is in Chongqing, at the Chongqing Sunac Cultural Tourism City《重庆QG融创电竞中心》at Shapingba. It will be the home venue for KPL team Chongqing QGhappy, and is intended to spur “cultural tourism”.
Qualcomm’s chip brand Snapdragon will become the title sponsor of JDG's Peacekeeper Elite《和平精英》team, JDE, which will be renamed JDE Snapdragon. Western brands are apparently not deterred by the recent Nike boycott from entering Chinese esports (nor should they be, IMO).
For an almost exact inversion of the above headline: Chinese mobile company Xiaomi will be the title sponsor for the U.K.’s first PUBG Mobile National Championship.
Netease held the Call of the Abyss IV tournament, the fourth global esports finals for Identity V, at the new Hangzhou venue where esports will make its debut as a medal sport in the 2022 Asian Games. The event, featuring a performance from pianist Lang Lang, was the biggest esports event since the pandemic began.
ESL extends DouYu media rights contract. Douyu gets exclusive China rights to ESL Pro Tour, ESL Dota 2 and ESL Mobile events.
China’s Tencent in talks with U.S. to keep gaming investments. According to the article, “CFIUS has been looking in to whether Epic Games’ and Riot Games’ handling of the personal data of their users constitutes a national security risk because of their Chinese ownership….” I don’t even want to dwell on that sentence — it’s not nice to scare the USD $170B gaming economy and the entire tech investment community unless truly warranted. I just hope that whatever CFIUS decides, it will articulate rational standards based on facts, not political anxieties, that provide certainty to global investors going forward.
That’s it for this week. Thanks for reading! - John