Last year, Tencent Holdings Ltd. (“Tencent”) announced plans to merge Huya Inc. (“Huya”) and Douyu International Holdings Limited (“Douyu”) and as recently as July 10th, 2021, The State Administration for Market Regulation (“SAMR”) stated that it would block the merger on antitrust grounds. This is substantial as it is the first time the Chinese government has blocked a merger in the tech sector for antitrust reasons.
Huya and Douyu, which provide videogame live-streaming services akin to Twitch in the US, are two of the largest companies of their kind in China. Both companies have been listed in the US and have been invested in by Tencent, one of the biggest technology companies in China.
According to the announcement of SAMR, Huya and Douyu respectively have more than 40% and 30% of the downstream live gaming market shares, ranking first and second in the market respectively. If the two companies are combined, the total shares will reach 70%. In the market of upstream online game operation service, Tencent has occupied more than 40% of the shares, ranking the first in such market.
Under the Antitrust Law, if the merger has the effect of restricting or eliminating competition, the competitive antitrust authorities shall prohibit such merger. In order to decide whether to prohibit such actions, SAMR comprehensively analyzes and evaluates the market share of Huya, Douyu and Tencent in the relevant market and their controlling power over the market, the degree of market concentration, the impact of concentration on market entry and technological development, and the impact of the concentration on consumers and other relevant companies in the market. Moreover, Tencent also proposed a commitment scheme with additional restrictive conditions for the purpose of reducing any adverse impacts on competition.
As SAMR stated, Tencent has already obtained exclusive control over Huya and joint control over Douyu. If Huya merges with Douyu, Tencent will have exclusive control over the merged new company, which will strengthen Tencent’s dominant position in the live gaming market.
In addition, the merger will enable Tencent to have the ability and motivation to implement closed-loop management and two-way vertical blockades in the upstream and downstream markets, which may have the effect of limiting or even eliminating competition, thus damaging fair competition, the interests of consumers and the healthy and sustainable development of the online gaming and live gaming markets. The commitment scheme proposed by Tencent was believed to not be enough to prevent the formulation of a monopoly and thus, the SAMR rejected the merger.
When reading news previously released related to the merger between Huya and Douyu, we can see that Tencent had reported to the antitrust authorities for the merger. On this point it is vital to highlight that regardless of whether a merger may be finally approved, it is important for large companies to report their merger deal/s to the authorities. In 2021, many Internet giants and famous companies are fined for not reporting mergers to the authorities, with the maximum penalties rising to RMB 500,000.
However, since the Antitrust Law was promulgated in 2007, the maximum fine has since been deemed too low compared to the benefits of the establishment of a monopoly. Therefore, in 2020, the Chinese government published the draft of the new Antitrust Law, stipulating that the aforementioned punishment will be raised to represent 10% of the annual sales of the company. Consequentially, even though the merger between Huya and Douyu was blocked, the initial merger procedure still complied with the laws and the relevant parties will not be fined for failure to report.
With the rapid growth of Internet companies in China, the issue of monopolies is becoming more and more important in new markets related to the Internet. The plan of promulgating the new Antitrust Law, punishment for not reporting mergers and the blockage of mergers all show that China is encouraging companies to establish a competitive market.
