News Roundup: August 11, 2020

Aug 4 - 11, 2020 | VOL 3.29

Hello Esports Enthusiasts!

Today we hit a milestone: the 50th issue of CEBND! It has really evolved since soft-launching early last year to a handful of friends and business partners. In January we made it easier to sign up, and since then e-mail subscriptions have increased at an average monthly rate of 18%, with only a 0.1% unsubscribe rate. It all happened by word of mouth, so a huge thank you to all of you for your interest and willingness to spread the word!

With this in mind, I am going to ask for your patience while CEBND goes on hiatus until October 13. Since 8 weeks is an eternity in esports time, I invite you to stay up to date by following us on Twitter at @ChinaEsportsBiz where we will be posting any standout articles. The archive of past issues will also remain open to subscribers at our webpage: www.v-ventures.biz.

Thank you for your readership, your support, and your patience, and don't hesitate to reach out with any feedback!

- John

GLOBAL NEWS

U.S. Executive Orders Shake Global Video Game and Esports Industry

As our readers are undoubtedly aware, last week U.S. President Trump issued two Executive Orders targeting TikTok and WeChat on national security grounds. The Tiktok EO came as a surprise only because Bytedance was already actively seeking to assuage the U.S. administration's very public concerns. But the WeChat order came as a bolt from the blue.

Given the vague* drafting of the Wechat order (see snapshot above), at this point it is unclear what "transactions" will ultimately be prohibited, as the EO delegates the authority to define them to the Commerce Department, in 45 days and on the same date that it is scheduled to take effect (which attorney Brian Fleming notes in this podcast is likely to slip to a later date). The uncertainty caused an immediate 7.9% drop in Tencent stock, wiping out $54B USD in value, and even spooked shareholders into selling off unrelated stocks such as Alibaba and Activision, an unsurprising reaction given the extent of Tencent's financial, strategic, and commercial ties in the U.S. and across the global gaming sector. Tencent's stock recovered 3% after the LA Times reported that the administration did not intend the order to ban Tencent-owned Riot's League of Legends, but a few days later U.S. Secretary of State Mike Pompeo managed to put even that small comfort to doubt, stating in a speech that the orders as written are "broader" than Tiktok and Wechat. At the same time, Secretary Pompeo is pushing a "Clean Network" initiative designed to create a global digital moat between Chinese and U.S. apps, which among other things could cut off popular esports titles such as PUBG Mobile from the iOS and Android app stores.

Although Tencent has downplayed the significance of the WeChat EO, the potential range of outcomes should create significant uncertainty for the global esports industry. A ban on transactions with Tencent that goes beyond Wechat could, for example, affect everything from the capitalization of popular esports title publishers like Riot, Epic Games, and Activision Blizzard, to the microtransactions that fuel free-to-play esports titles like League of Legends, Fortnite, Call of Duty Mobile, PUBG and PUBG Mobile, Clash of Clans, etc. A planned legal challenge from ByteDance against the TikTok order may shed light on the legal underpinnings of both EOs. In the meantime, Tencent is simply floating the position that the Wechat order only targets the version available to non-residents of China (i.e., "Wechat" vs "Weixin"), a strategy that allows it to avoid further provoking the Trump administration as well as negotiating against itself until such time as the Commerce Department clarifies the EO's scope.

If the U.S. broadens the WeChat EO to an offensive against Tencent, much of the gaming and esports sector in the U.S., one of the few economic bright spots of 2020, could be largely uprooted. Analysts so far appear dismissive of this scenario, but it's not necessarily a stretch for an administration that is already unaware or insensitive to the massive negative effect that a ban on WeChat alone will entail on U.S. business, not to mention the personal relationships of many who depend on WeChat to stay connected.

This is a developing story that should be on everyone's watch list. In the meantime, for some thoughtful analysis and perspective we recommend this article in TechBuzz China by Rui Ma, a deep expert on ByteDance and Tencent, as well as this roundup of the legal issues.

* Some have argued that the Wechat order is intentionally vague, but I am going to go out on a limb here with my 18 years of experience drafting contracts in a variety of high-stakes scenarios, and opine that it is simply sloppy work. - John

LEAGUES & TOURNAMENTS

WUCL Collegiate Esports Finals Held in Hangzhou

Finals for Tencent Esports' World University Cyber League [高校电竞联盟挑战赛] were held on August 9 at LGD Esports Center in Hangzhou, concluding national college tournaments in several titles published by Tencent: League of Legends (LoL), Honor of Kings 《王者荣耀》, Peacekeeper Elite 《和平精英》, Clash Royale, and Happy Poker [欢乐斗地主]. The 4-day finals were broadcast as part of a "pan-entertainment" program for the college-age audience, combining esports with celebrity appearances, musical performances, and anime/manga culture elements, all of which was watched by 13.5M viewers on the WUCL official platform.

According to Gyro Esports, more than 32,118 students from 1,018 colleges around the world competed in this season of WUCL, including 300 international universities and 2,000 students from North America, Japan, South Korea and Australia. According to data from iResearch, college students make up 36.2% of "esports users" in China, underscoring the importance of this demographic for Tencent. As we observed in Vol 3.18, Tencent's boost of WUCL in 2020 seemed designed to overshadow the longer-running WUCG, and may signal a trend towards publishers in China taking control of their titles in collegiate competitions.

Other League and Tournament News:

  • Shanghai Dragons dominated the Overwatch League Countdown Cup APAC Grand Finals, with a 3-0 win over New York Excelsior, while San Francisco Shock emerged victorious in the North America Finals. Each champion took home $50,000 USD. Over the next few weeks, OWL teams will play a series of make-up matches to even the disrupted season record, before teams advance to the OWL Grand Finals.

  • China's Honor of Kings Pro League, the KPL, wrapped up 2020 King of Glory World Cup semifinals in Beijing with TS Gaming (TS) and Dynamite Gaming (DYG) emerging victorious. Both teams now advance to finals on August 16 at Wukesong Arena, before a live audience.

  • The PUBG Champions League concluded its Summer Tournament with a win by powerhouse IFTY, which now clinches a seat with 5 other Chinese PUBG teams (COC, Tianba, TSG, SMG, 4AM) in the PUBG Continental Series 2: Asia Pacific.

  • The 2020 CFML spring finals came to an end with REC.LGD beating Q9 for the championship. CFML is the mobile game companion to the Crossfire Professional League (CFPL).

MEDIA / STREAMING

Douyu and Huya to Finally Tie the Knot

On August 10, game-centric livestreaming platforms Douyu [Nasdaq: DOYU] and Huya [NYSE: HUYA] each announced that their largest shareholder, Tencent Holdings Limited, had submitted a non-binding proposal for the two companies to enter into a stock-for-stock merger. Tencent holds a controlling interest in Douyu, and will hold 70.4% of Huya's voting power after consummating share purchase agreements with JOYY Inc. and Huya CEO Dong Rongjie. Tencent proposed that that the transfers be consummated by September 9, 2020, and while the companies' boards have not yet voted, the merger appears to be a near certainty. In corporate finance terms, love is in the air.

The deal will create a game streaming behemoth with 338M total monthly active users (MAUs) based on recent quarterly filings (see below) and a $10B market value, and significantly consolidate China's highly competitive and capital intensive livestreaming market. The next nearest competitor is fast-growing Bilibili Esports, which just broke through 172M MAUs last quarter, and in which Tencent happens to own an 18% interest. By comparison, Twitch, the largest livestreaming platform outside of China, is currently estimated to have around 140M MAUs worldwide. Former China game streaming competitors ChushouTV and PandaTV folded in June 2020 and March 2019, respectively, unable to keep up with the high cost of content. Smaller game streaming platforms like Huomao and cc.163.com do not align well with Bilibili's brand and are therefore unlikely candidates for a rollup to compete with Tencent's new user scale.

It is widely believed that Tencent's Penguin Esports will be consolidated into the merged company as well, and in fact Tencent has already established a department to coordinate the three platforms and balance competition. Insiders expect that the Douyu, Huya, and Penguin Esports platforms and brands will remain distinct, but the combined company will reduce operating costs and content acquisition costs by reducing competition, which has at times taken the form of talent poaching between Douyu and Huya. There may also be a strategic benefit to consolidating control of gaming content while gaming companies continue to chase the goal of combining livestreaming with cloud gaming and e-commerce. At a minimum, Tencent will have a massive competitive advantage in this corner of the market, reflecting its consistently aggressive investment in China's esports industry.

Douyu and Huya 2Q Earnings

Just in time for the announcement, both Douyu and Huya reported unaudited 2Q2020 financial results, each reflecting steady growth compared to 1Q2020 and increased profit. Key numbers:

Douyu:

  • Total Net Revenues: $354.4.1M USD/¥2.508B RMB (33.9% increase YoY)

  • Total Net Income: $45.1M USD/¥319.3M RMB, up from ¥23.2 RMB in 1Q2019, implying a net margin of 12.7% (an increase over Q1)

  • Average MAUs: 165.3M, slightly down YoY

  • Average mobile MAUs: 58.4M (15.4% YoY increase)

  • Average paying users: 7.6M (13.4% YoY increase)

Huya:

  • Total Net Revenues: $381.8M USD/¥2.697B RMB (34.2% YoY increase from 2Q2019)

  • Total Net Income: $32.1M USD/¥226.8M RMB (86.2% YoY increase)

  • Average MAUs: 168.5M (17.1% YoY increase)

  • Average mobile MAUs: 75.6M (35.2% YoY increase)

  • Average paying users: 6.2M (26.5% YoY increase)

BRANDS & MARKETING

Heartthrobs of Esports

Huya and Douyu is not the only romance in China's esports scene ... just in time for "Double Seven" Day a/k/a "Chinese Valentine's Day", the stars of top LPL teams TES and FPX melted Weibo with their photoshoots. The TES shoot appeared in Esquire Fine, China's Esquire magazine, and the FPX shoot was part of a campaign by Fendi (click the links for more pics). h/t @ran_lpl

In case anyone needed a reminder that the top pro esports players in China are also top influencers, here you go.

Other Brands & Marketing News

  • Bilibili Esports partnered with Logitech G, to create a "deep esports content space" that will presumably be most visible in Bilibili's exclusive broadcast of the upcoming 2020 LoL World Championship.

  • HyperX, a division of US-based Kingston Technology, became the jersey sponsor for China's Q9 Esports Club's CFPL team.

  • TOP Esports' LoL star Huang Haoxuan [ID: Karsa] (see center picture above) became the face of Panasonic's "nanoeX" air conditioner/purifier.

OTHER NEWS

New National Org Formed with Plans to Build ¥10B RMB Esports Fund

In Beijing, the China Sport School Federation [全国体育运动学校联合会科技体育分会] and the Esports Committee of the China Cultural Management Association [中国文化管理协会电子竞技管理委员会] announced a strategic partnership and the establishment of the "National Esports Joint Conference" [全国电子竞技联席会议] to standardize management and develop the esports industry. The parties also announced that a whopping $1.4B USD / ¥10B RMB fund would be created to develop a national management system of Chinese esports, and to integrate with international esports organizations, specifically including the Tencent-backed Global Esports Federation (GEF). Wei Jizhong, honorary Vice President for Life of the Olympic Council of Asia (OCA), and perhaps not coincidentally a board member of GEF, will be the National Esports Joint Conference's first President. As regular readers know, the GEF was formed last year as a rival to the older IESF and the AESF, which still formally counts the OCA as an ally. 

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