The Future of Video Game Live Streaming: What’s Douyu’s Next Move?

In the second half of 2020, October 12, 2020, the video game live streaming platforms DouYu and Huya TV formally accepted the proposal from their major shareholder Tencent for a strategic merger. According to the merger agreement, all of DouYu’s issued shares will be acquired to become a private, wholly-owned subsidiary, while being delisted from Nasdaq in the United States. This merger means that the two leading video game live streaming companies in China, who had competed for years, have ended their competition. However, it is still unknown what the future holds for the live streaming industry. This issue of the CMU Summit Column takes DouYu as an example to explore the live streaming industry, revealing the problems DouYu is facing while attempting to maintain prosperity, in order to analyze the opportunities and challenges for DouYu and the industry.

1. DouYu’s Situation

The financial report published by the company since its listing in 2019 showed that the main source of income was “reward” for broadcasters, which is a function that allows customers to tip the streamers they appreciate. In the first three quarters of 2020, net revenue fluctuated around 2.1 billion yuan, more than 90% of which was from live streaming services, advertisements and other revenue accounted for less than 10%.

One reason for the fact that revenue accounts for little revenue is due to the platform’s concentration in video gaming. As a gaming live streaming platform, when compared with ordinary video streaming sites or short video sites, DouYu can’t compete in either total user count or user communities. This problem has also resulted in DouYu only receiving ad offers from areas related to video gaming. Therefore, in the short term, it is not easy to achieve rapid growth in built-in advertisements and businesses other than live streaming. Looking ahead, it is possible that in the next few quarters, revenue will continue to rely heavily on live streaming.

Simultaneously, DouYu’s live streaming user base is growing at slower rates. According to its financial report data, the average active user in the first quarter of this year was 165.8 million, an increase of 8.0% from 153.5 million in the same period last year. According to a report from the Shengang Securities Research Institute, starting from the second quarter of 2019, the growth of monthly active users (MAU) and user base has begun to slow down. This decrease signals that the gaming live streaming industry’s profits have begun to shrink, and the market penetration rate has gradually stabilized.

As DouYu’s main business has encountered a bottleneck, China’s video game live streaming market is slowly changing. The market has attracted more and more participants.

At the beginning of December 2019, Bilibili announced that it will increase its e-sports, and will bid the exclusive broadcast rights of the League of Legends S games in the next three years for 800 million yuan. At the same time, Bilibili also began to sign contracts to introduce the leading streamers, including the former famous DouYu streamer Feng Timo and the well-known anime streamer Lex. Not long ago, the three founders of DaE Entertainment joined Bilibili’s Live Broadcasting Division, continuously enriching Bilibili’s video game live streaming resources. Bilibili’s investment in the video game lives streaming industry has brought a significant increase in its overall revenue. In the first quarter of 2020, revenue from services including live streaming increased by 172% on a year-to-year basis, accounting for 34.3% of the overall revenue, an increase from 21.2% in the same period last year. These investments of human resources and capital do indicate Bilibili’s determination to compete in the streaming industry. Other companies who entered the industry at the same time such as short video platforms including Tik Tok and Kuaishou who have a huge user base. In this saturating market, these new players have brought DouYu even more problems, and future competition will become more intense.

2. DouYu’s Attempts

DouYu’s Live Streaming E-Commerce Platform

In the era of live stream e-commerce, the trend of “video-based” information continues to develop. E-commerce live streaming has also become a hot topic. Quest Mobile preliminarily estimates that in 2020, China’s total live e-commerce transactions will reach about 600 billion yuan, with a penetration rate of about 5.5% in the e-commerce market.

In fact, as early as 2016, various e-commerce platforms, such as Taobao, JD, Mogujie, and Vipshop, have launched live broadcast functions and a live shopping guide mode. After more than four years of development, more and more e-commerce platforms, live video platforms, MCN agencies, and brand operators have participated in the live broadcast e-commerce industry. The live broadcast e-commerce industry chain has been clear, and the industry has entered a period of rapid development.

The live streaming e-commerce industry chain consists of supply, platform, and consumers.

• The supply side mainly includes commodity suppliers (manufacturers, brands, distributors) and content creation methods (hosts/MCN).

• The platform includes e-commerce platforms (Taobao, JD, Pinduoduo, Mogujie, Kuaishou e-commerce, etc.) and live streaming platforms (Kuaishou, Tik Tok, Taobao Live, etc.).

Commodity suppliers provide sources of goods to e-commerce platforms, determine the live content plan for MCN agencies or streamers for content output, and ultimately guide consumers to make transactions on the e-commerce platform. E-commerce platforms, live broadcast platforms, and MCN institutions are the main benefactors, and their income generally comes from commissions collected at a certain percentage of the total transactions.

Live broadcast e-commerce is similar to traditional e-commerce, and live broadcast information has real-time output. Real-time live broadcasts can bring more realism and presence to users who watch it. At the same time, users can communicate and interact with the streamer for product information through comments.

For DouYu, as early as November 2016, they worked with Taobao, JD.com, and other platforms to embed shopping links in many live broadcast rooms. After that, DouYu made many attempts to enlarge its live streaming e-commerce services, but they all ended unfinished.

On April 17th, 2020, under the support of multiple provincial governmental agencies in Hubei, The “Help Hubei Brands, Buy More for Hubei” public welfare live streaming event was launched. From April 17th to 20th, the event has assembled a team of DouYu’s most prominent online gaming streamers, outdoors activities streamers, and members of the Hubei local e-sports team eStar to form an “All-Star” e-commerce promotion team. These streamers, who receive enormous attention, have huge influence among young consumer groups, own more than tens of millions of fans, covered a large number of users on the platform with a total of more than 140 million fans. According to DouYu’s report to China’s Science and Technology Web, from April 17th to 20th, 28 top influencer streamers sold 809,000 Hubei specialty products for the Hubei charity event, with cumulative sales of 30,344 million yuan.

However, the project did not just focus on selling goods from Hubei. On May 18th, 2020, DouYu’s live streaming e-commerce platform was officially launched. The Taobao franchise also cooperated with DouYu to accelerate the joint construction of commercial channels for e-commerce. This action is not unreasonable. iiMedia Consulting estimated that in 2020, the live broadcast e-commerce market will reach 961 billion. In 2019, the penetration rate of live streaming e-commerce in the e-commerce market was 4.1%, and the low penetration rate obviously brought substantial profits to the live streaming e-commerce industry. However, the situation is not optimistic for DouYu. DouYu’s live streaming e-commerce shopping platform had only 12.1% market share, which is far from Tik Tok who has 57.8% of the market share, and Taobao who owns 41.0% of the market share.

In such a Red Sea market, DouYu has to find distinct perspectives. Different from prevailing platforms such as Taobao and Tik Tok, with the support of a large number of game players, DouYu is trying to win the male customers. Concentrating on technology products related to e-sports and VR is in line with the platform’s characteristics, and maybe more precise in targeting users. At the same time, DouYu enjoys incomparable streamer resources. In the previous event of bringing goods to Hubei, DouYu took advantage of the huge fan-base advantage of the famous streamers to promote the order rate of users.

Cloud Gaming

DouYu was the first to build and launch a cloud gaming platform. Prior to this application, DouYu has deployed nearly 20 terminal games and more than 30 mobile games, including popular games such as Jedi and DOTA2.

Cloud gaming is a way of providing game services based on cloud computing. Users do not need to download games locally. The game data stream is calculated, stored, and compressed on the cloud server, and then the video stream is transmitted to the terminal through the high-speed network, freeing the terminal equipment from the limitation on graphics computing and data processing capabilities.

The most upstream of the cloud game industry chain is various game developers (NetEase, EA), cloud computing providers (Alibaba Cloud, Amazon, Microsoft), and hardware manufacturers (Intel, AMD).

The midstream of the industry chain is cloud game platform services. Cloud game platform service providers connections between users and game developers by constructing a cloud platform, and provide games on the market to users through the platform. There are two types of service providers: 2B (Haiyun, Shun Technology) and 2C (Activision Cloud, Tencent Instant Play). Cloud game platform service providers are the main force of the cloud game industry chain and also the most active and innovative part of the current cloud game industry.

At the bottom of the industry chain are various terminal equipment vendors, which are vendors that provide game terminal equipment such as smartphones, TVs, computers, and consoles. In addition, there is a very important network operator in the cloud game industry chain. The network operator runs through the midstream and downstream of the industry chain, provides basic network services, and completes cloud and terminal transmission.

The current business model of cloud games is not yet clear. The entire cloud game industry is still in the early stage of development. The cooperation method among game developers, publishers, and cloud platforms has not yet been clarified, and the profit division plan has not been established. The unified standard business model is still awaiting further discussion. However, most of the existing cloud game platforms adopt a paid subscription system, but for China, the mainstream is still employing a free game and paid items charging mode.

The advantages of DouYu developing cloud gaming include the following:

1. 5G: The construction and development of Chinese 5G networks is rapid. Simultaneously, cloud gaming, as one of the first consumer-level contents in the 5G era, has gained strong attention and support. All three Chinese telecom operators have launched the construction of cloud gaming platforms, which are expected to provide users with a high-speed and low-latency gaming experience.

2. Compatibility: As a video game live streaming platform, it has natural game attributes, coupled with the low equipment threshold of cloud games, giving the cloud game platform a special advantage in game development. At the same time, it is easier to cooperate with game vendors, become game content partners, and attract users through exclusive content.

3. Game model innovation: In March this year, Yunlu Technology and Huawei Cloud launched the “Cloud Game Interactive Live Streaming” and provided the service on DouYu. The game streamers used the “Cloud Game Interactive Live Streaming” during the live streaming process. In this scenario, the streamer can interact smoothly with the audience in the live room and play the game together. This “cloud game + live broadcast” form better stimulates interaction with the audience and increases user stickiness.

However, there are also huge challenges in entering the cloud gaming market：

1. The cost of data is high: the data consumption of cloud games remains high, and the capital threshold restricts participation from small and mid-sized businesses. According to industry research results, the current cloud gaming cost for a single user is between 2–3 yuan per day, the estimated annual cost is about 700–1,000 yuan, and a typical cloud game user consumes about 50G per month. Compared with the current 5G data packages issued by the three major operators, the lowest standard package includes 30G data at a price of over 120 yuan, which is 1,548 yuan per year. Even if the user’s data consumption is conservatively estimated, the most basic 5G package is still significantly higher than the price of cloud games. Therefore, most of the vendors who deployed cloud games in China are prominent hardware and technology vendors, or operators with considerable user traffic. Small businesses with limited scale lack both content and volume, so it is difficult to make an impact.

2. Picture quality and latency issues: Picture quality and latency are important challenges that affect the user’s visual experience. For first-person games such as shooter games that requires great attention to speed and aiming accuracy, the high delay will seriously damage the operating experience. Even if the cloud gaming platform can improve the image quality through technical aspects, the required data consumption will far exceed the affordability of most users.

C. DouYu’s Long Journey

The growth of the number of users has slowed down, the business scale has reached the ceiling, the revenue structure is unitary, and the external competition has intensified. All the challenges are inducing DouYu to mine all the value of users. As of now, live streaming e-commerce and cloud games are new subjects that are being deployed.

For live broadcast e-commerce, whether it can grasp its due profits to relieve the reduced growth of game-core users and unitary source of revenue depends on how to structure and distribute a live streaming e-commerce system, distribute content, and apply user base advantages in video game live streaming to reconstruct the consumer shopping scene.

For cloud games, data cost, technology, and game content are all aspects that require attention. However, efficiency improvement and cost reduction are inevitable in the future development of the network environment, and they also induce new development opportunities for cloud games. It can be predicted that with the maturity of 5G technology and the popularization of commercial use, the penetration rate of cloud games will definitely increase significantly. More importantly, the uncertainty in the business model requires more research and experimentation. If DouYu is among the first groups of successful players, the company will have the opportunity to determine how the video game live streaming industry proceeds.