On July 10, China’s State Administration for Market Regulation (SAMR) issued a decision to block the anti-monopoly declaration for a $5.3 billion merger filed by Huya and Douyu, both of which provide video game live-streaming services. As the first internet-platform merger blocked by the Chinese antitrust agency, the ruling will have implications for future cases.

A key consideration in this decision was the tech giant behind the merger: Tencent. Since Tencent already owns Huya and part of Douyu, the potential merger of Huya and Douyu would give Tencent over 60 percent of the market in terms of revenue, the number of active users, and commentators in the videogame live-streaming market. In addition, because Tencent already controls over 40 percent of the online gaming market, which is a related market to video game live-streaming, the potential merger would allow Tencent to use its dominance in both markets to conduct a “two-way vertical blockade” and restrict competition in both markets.

Soon after the decision, on July 12, Douyu announced the termination of the merger agreement with Huya.

Not all potential mergers are required to file a declaration with the government. According to Article 21 of China’s Anti-Monopoly Law and Provisions of the State Council on the Standard for Declaration of Concentration of Business Operators (国务院关于经营者集中申报标准的规定), companies involved in proposed concentrations must file a declaration under two circumstances: (1) When the involved businesses have a combined global revenue that exceeds 10 billion Yuan and at least two of the business operators each have more than 400 million Yuan revenue in China; or (2) when the involved businesses have a combined revenue in China that exceeds 2 billion Yuan and at least two business operators each have more than 400 million Yuan in China. Huya and Douyu each had revenue of 8.3 billion Yuan and 7.2 billion Yuan in 2019 respectively, which means they fall within the scope for a declaration and government review.

Factors that the antitrust agency must consider during antitrust reviews include the impact of the concentrations on market share and market control, market entrance, consumers, and economic development. These are the elements the SAMR evaluated in its review here as part of its conclusion that the merger has or will have negative impacts on consumers and the relevant market.

Below is an informal translation of select parts of the ruling.

Background and procedure

On November 16, 2020, the SAMR received an antitrust declaration for the concentration of business operators submitted by Tencent Holdings Co., Ltd. (hereinafter referred to as Tencent). Upon review, the SAMR found that the application documents and materials were incomplete and required supplementary information. On January 4, 2021, the SAMR confirmed that the supplementary application documents and materials complied with the provisions of Article 23 of the Anti-Monopoly Law, and launched a review for the concentration of business operators. On February 2, 2021, the SAMR decided to conduct further examinations. On April 30, 2021, with the consent of the declaring parties, the SAMR decided to extend the review period. [Author's note: According to China’s Anti-Monopoly Law, agencies shall finish the primary review within 30 days and may conduct a further examination for another 90 days. The review may be extended for an additional 60 days under certain circumstances.] On June 24, 2021, before the expiration of the extended review period, the declaring parties filed for a case withdrawal, which was accepted by the SAMR. On June 24, 2021, the SAMR launched a review investigation based upon the re-declaration filed by the declaring parties. The SAMR believed that this merger has or may have the effect of eliminating or restricting competition in the videogame live-streaming market and online gaming operation service market in China.

Basic information about the case

One party to the merger: Huya was registered in the Cayman Islands in March 2017 and listed on the New York Stock Exchange. It controls domestic operating entities through agreements and is mainly engaged in interactive entertainment video services such as videogame live-streaming. Huya is solely controlled by Tencent.

The other party to the merger: Douyu was registered in the Cayman Islands in January 2018 and listed on the NASDAQ. It controls domestic operating entities through agreements and is mainly engaged in interactive entertainment video services such as videogame live-streaming. Douyu is jointly controlled by Tencent and the team of Douyu’s founder Chen Shaojie.

According to the concentration agreement, Tencent intended to acquire all the equity shares of Douyu through Huya. After the transaction, Tencent would obtain sole control of the merged entity.

Relevant market

Relevant commodity market

After review, Huya and Douyu are found to have horizontal overlaps in the videogame live-streaming, entertainment live-streaming, e-commerce live-streaming, and the short video market. Tencent is engaged in online gaming operation services, which is an upstream sector of video game live-streaming.

[Additional explanations of each sector omitted here]

Relevant geographic market

The businesses involved in this case all need to obtain licenses from state regulatory agencies; they mainly serve domestic users and are produced in Chinese. Therefore, the relevant geographic markets for the above-mentioned businesses are defined as China.

Antitrust analysis

According to Article 27 of the Anti-Monopoly Law, the SAMR conducted an in-depth analysis on the impact of this merger on market competition from many angles, including the market share of the operators participating in the merger, and their control over the market, the level of market concentration in the relevant market, and the impact of such merger on downstream companies and other related companies. The SAMR believed that this merger has or may have the effect of eliminating or restricting competition on the videogame live-streaming market and online gaming operation service market within China.

A. The merger will strengthen Tencent's dominant position in the video game live-streaming market in China, and will have the effect of eliminating and restricting competition.

1. The merger will further strengthen the dominant position of the post-merger entity in the market. In China’s videogame live-streaming market, the market shares of Huya and Douyu exceed 40% and 30% respectively in terms of revenue, and 70% in total; in terms of the number of active users, the market shares of the two exceed 45% and 35% respectively, and 80% combined; from the perspective of commentator resources, both take up more than 30% of the market, which makes it more than 60% together. Huya and Douyu are the top two video game live-streaming platforms in China and have far more market power than other competitors. Before the transaction, Tencent already had sole control of Huya and joint control of Douyu, but there was still a certain degree of competition between Huya and Douyu. This merger will completely eliminate such competition and further strengthen its dominant market position.

2. The video game live-streaming market has high entry barriers, and it is unlikely to have new entrants in the short term. The relatively high entry barriers in the market are mainly reflected in areas such as copyright licensing, capital expenses, and commentator resources.

3. The merger may adversely affect consumers. The transaction will completely eliminate competition between the two largest videogame live-streaming platforms in the market and further reduce consumers’ choices. The post-merger entity may use its market power to lower product quality, increase service prices, or degrade the user experience, and therefore injure consumer rights.

4. The merger may harm the interests of practitioners in video game live-streaming. The transaction will completely eliminate the competition between Huya and Douyu, further reduce the choice of commentators, lower the ability of commentators and commentator unions to negotiate salaries, and therefore injure the rights of practitioners.

B. The merger will enable Tencent’s capability of carrying out a two-way blockade in the upstream online gaming operation service market and the downstream videogame live-streaming market in China, which may have the effect of eliminating and restricting competition.

1. Tencent has strong market control in both upstream and downstream markets, and would have the capability of carrying out a two-way vertical blockade.

First of all, after the merger the entity would have strong market power in both upstream and downstream markets. In the upstream online gaming operation service market, Tencent accounts for more than 40% of the market, ranked first. The market shares of other competitors are much less than that of Tencent, which makes it difficult for them to constitute effective competition constraints. In the downstream videogame live-streaming market, as mentioned before, the market share of the post-merger entity will exceed 60%  in terms of revenue, the number of active users and commentators.

Second, the entry barriers of the online gaming operation service market are high, and it is unlikely to have new entrants in the short term. The capital expenses and time costs for entering the market are relatively high, and it is required to obtain relevant certificates and game licenses. Publicity plays an important role in game promotion, and video game live-streaming is an important way to promote online games. The transaction will further raise the barriers to enter the online gaming operation service market.

2. If the merger takes place, the post-merger entity has the motivation to carry out a two-way vertical blockade. On the one hand, the key to start videogame live-streaming is to obtain the game’s copyright license from the videogame service providers. Tencent has the motives to eliminate and restrict competition and further strengthen its competitive advantage in the videogame live-streaming market, through blocking any videogame copyright licensing. On the other hand, video game live-streaming is an important channel to promote a game. The consumers of online games and live-streaming are highly overlapped and can move from one sector to the other. The main profit of online gaming operation service providers comes from players or commercials. After the transaction, Tencent has the motive to use the live-streaming platforms it controls to block the promotion of its competitors in the online game market, and therefore eliminate and restrict competition in the upstream online gaming operation service market.

Hence, after the merger, Tencent would have strong market control in both the upstream and downstream sectors, and has the capability and motives to block online game copyright licensing against competitors in the downstream videogame live-streaming market, and block live-streaming promotion channels against competitors in the upstream online gaming operation service market. It would close both upstream and downstream markets, push out existing competitors and stifle potential competitors.

Decision

During the review period, the SAMR notified the declaring parties that the merger has or may have the effect of eliminating or restricting competition, and conducted multiple rounds of discussions on how to reduce the adverse effects with the declaring parties. The declaring parties submitted multiple commitment plans with additional restrictive conditions (hereinafter referred to as the commitment plan), and on April 22, 2021, they submitted the final commitment plan. The SAMR assessed the commitment plan from the perspectives of its effectiveness, feasibility and timeliness, in accordance with the Anti-Monopoly Law and the Interim Provisions on the Review of Concentration of Business Operators. After evaluation, the SAMR determined that the commitment plan cannot effectively mitigate the adverse impact of merger on the competition in the video game live-streaming market and online gaming operation service market in China.

Considering that this merger has or may have the effect of eliminating or restricting competition on the videogame live-streaming market and online gaming operation service market in China, the declaring parties fail to prove that the positive effects of the merger outweighs the adverse effects on competition or that [the merger] is in line with the public interests. In addition, the commitment plan submitted by the declaring parties cannot effectively mitigate the adverse effects of the merger on competition. The SAMR has decided to block the merger of such business operators under Article 28 of the Anti-Monopoly Law and Article 35 of the Interim Provisions on the Review of Concentration of Business Operators.

The decision takes effect on the date of publication.

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