E-commerce & Livestreaming in China
By: Celia Qiu, Investment Analyst
As internet infrastructure continues to advance, China’s livestreaming industry has been developing at an unprecedented speed. Livestreaming is now fully embraced by many internet verticals, including online gaming and e-commerce. Advanced internet infrastructure has also lowered the entry barrier for livestreaming and the total number of livestreamers is growing substantially.
China has the largest gaming population globally, with over 700 million participants as of December 31, 2020. Growth in player engagement has brought eSports and game livestreaming to the mainstream. The wide adoption of bullet chats and virtual gifts makes interactions between viewers and streamers prominent in China. The entire industry is expected to grow to 49.7 billion RBM (Chinese Yuan) by 2022E (E=expected).
The two major game livestreaming platforms are Huya and Douyu. Tencent holds a stake in both companies, which play vital roles in the online game ecosystem. The platforms offer a full library of gaming resources (gaming cohorts, streamers, eSports tournaments, community) that maintain gamers’ engagement and extend the longevity of games. Tencent announced in June of 2020 that it was considering a merger of Douyu and Huya. The merger could further help generate synergies between the two platforms in terms of content generation and cost savings and thus create a more benign competition landscape.
In our view, the core competitiveness of both new and existing game streaming platforms is the ability to preserve talent, as traffic on platforms tends to concentrate around top streamers. To attract top ranked streamers, livestreaming platforms have signed exclusive contracts and shared 50%+ of virtual item sales with these broadcasters.
E-commerce livestreaming first emerged in 2016 as an interactive way to sell products to consumers. The total gross merchandise value (GMV) of livestreaming e-commerce is expected to grow at a compound annual growth rate (CAGR) of 39% in the next five years, reaching about US$1 trillion by 2025E, accounting for 25% of total e-commerce sales in China. Taobao, Douyin and Kuaishou should remain the three dominant players with ~80% market share in 2025E.
As of December 2020, more than 90% of level-1 category merchants on Taobao had been involved in livestreaming, and the total sales through livestreaming reached 72.9 billion RMB during the Double 11 Shopping Festival on November 11, 2020, which was 15% of the total sales on Taobao during the same period. For Taobao, merchants perform 90% of livestreaming, and Key Opinion Leaders (KOLs) perform only about 10%. However, on Douyin and Kuaishou, most livestreaming is conducted by KOLs as traffic is concentrated at the top.
We think the increasing popularity of livestreaming e-commerce:
- is a natural result of rising mobile time and evolving consumer behaviors. As users spend more time on online shopping, it has become a more entertaining and interactive experience;
- helps consumers make their purchase decisions amid the explosion of available products online;
- provides value to merchants as an effective way to attract, connect, and interact with consumers. Livestreaming also helps merchants sell large volumes of limited stock keeping units (SKUs) in a short period, leveraging the influence of large fan bases with strong purchasing power.
There are currently three types of livestreaming e-commerce: KOLs, brand, and platform-based livestreaming.
According to Alibaba, there were more than 1 million livestreamers as of December 31, 2019. Competition is intense, and traffic is highly concentrated on top ranked KOLs. Taking Double 11, 2020 for example, the total GMV generated from livestreaming was 72.9 billion RMB, of which more than 40% was from Top 10 KOLs. The Top 10 KOLs have very strong bargaining power in price negotiations with brands to ensure that products sold through their sessions are the cheapest and therefore generate more orders. They also request lower revenue share with platforms due to large GMV contributions.
On November 23, 2020, China’s National Radio and Television Administration (NRTA) issued a notice which requires platforms to check the quality of products sold via e-commerce livestreaming and to limit the amount of money that can be “tipped” by viewers to channel hosts by day/month. Virtual gifting revenue could have amounted to 150 billion RMB in 2020E, with the top 2% users contributing to 75% of the revenue equating to over 2,700 users tip more than 1 million RMB per year. In our view, these regulations could curb virtual item sales on major livestreaming platforms and put 2021 revenue growth under pressure.
 iResearch, July 2020
 iResearch, November 2020
 Taobao Livestreaming, November 2020
 Taobao, Bernstein analysis, July 2020
 Dolpin Haitunzhiku.com, November 2020
 Morgan Stanley Research, November 2020
Compound Annual Growth Rate (CAGR) is the rate of return that would be required for an investment to grow from its beginning balance to its ending balance, assuming the profits were reinvested at the end of each year of the investment’s life span.
Gross Merchandise Value (GMV) is the total value of merchandise sold over a given period of time through a customer-to-customer exchange site.
Key opinion leaders (KOLs) are people or organizations that have such a strong social status that their recommendations and opinions are listened to when making important decisions
Margin is the difference between a product or service's selling price and the cost of production, or the ratio of profit to revenue.
Stock Keeping Unit (SKU) is a product code that you can use to search and identify stock on hand from lists, invoices, or order forms
Unit Economics describes a specific business model's revenues and costs in relation to an individual unit.
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