Livestream Tipping Clampdown: Bad for the Big Boys, But Worse for Small Fries

The latest rules limiting online tipping by minors are further clouding prospects for an industry already facing tighter regulation

Key Takeaways:

• Newly announced rules will ban minors from tipping their favorite livestreaming hosts and outlaw tip rankings
• Big platforms like Kuaishou have more balanced tipping structures and diverse revenues, meaning they could suffer less from the new policy than smaller rivals

By Ken Lo

Like that livestreaming host you’re watching online? Then leave a tip, no matter how small. Unless you’re a minor, that is.

Tipping has become a pervasive practice in China’s booming livestreaming industry, allowing popular show anchors to earn tens or even hundreds of thousands of dollars each month. But at the same time, some minors with little concept of money have developed a fondness for tipping their favorite online celebrities with large sums that can reach thousands of yuan – often using their parents’ bank accounts.

Government officials worried about such high-tipping minors have stepped up regulatory oversight in recent years, taking a bite out of the income for not only online hosts but also the platforms that take a big cut of their earnings. In one of the toughest moves to date, four ministries joined hands earlier this month by announcing new rules barring teens from tipping livestreaming anchors and outlawing tip rankings.

The agencies, consisting of the Cyberspace Administration of China, General Office of Central Commission for Guiding Cultural and Ethical Progress, Ministry of Culture and Tourism and the National Radio and Television Administration, said they were jointly publishing their opinion to establish effective long-term oversight to curb irregularities in the industry and crack down on tipping behaviors with better precision.

Analysts note the latest squeeze has become the norm for an industry hit by new regulation in recent years, and the new rules are unlikely to add much extra pressure. Moreover, the most popular platforms operators have prepared for such developments. For example, Kuaishou Technology (1024.HK) has shifted its focus from livestreaming to online marketing services, while Inke Ltd. (3700.HK) has found new revenue in social media. Such moves could insulate the companies from taking a bigger hit as their tipping revenue gets squeezed.

The crackdown on tipping dates back as early as in November 2020, when China’s broadcasting regulator released a notice requiring livestreaming platforms to manage anchors and tipping on their platforms on a real-name basis and prohibit teens from tipping. The newer recent opinions have been more comprehensive and specific, including outlawing tip rankings, stepping up management during peak hours and optimizing settings for teenagers.

Virtual gifting and tipping have become an important revenue source for these platforms, accounting for 246.2 billion yuan ($36.8 billion) – or around 70% – of revenue generated on Chinese livestreaming platforms last year, according to iResearch. Tipping was initially meant as a token of user appreciation. But lack of policies to prevent over-tipping by minors has become a cloud over the industry. Many platforms have been fined as a result, forcing them to boost other revenue sources like advertising and value-added services.

Weaning from livestreaming

A case in point is Kuaishou, whose livestreaming revenue last year fell 6.7% to 31 billion yuan, accounting for 38.2% of revenue versus 56.5% in 2020. Meanwhile, its online advertising service revenue nearly doubled to 42.67 billion yuan last year, boosting that source to 52.6% of the total from 37.2% in 2020.

Rival Inke was also highly dependent on livestreaming revenue, but has successfully transitioned from a single-source portfolio to a matrix of products that helped its revenue soar by 85.4% to a record 9.18 billion yuan last year. One of its biggest successes has been newly-developed social media products, whose revenue reached 5.74 billion yuan, replacing livestreaming as its top breadwinner by accounting for 62.6% of total revenue last year. Meanwhile, its livestreaming revenue dropped by 27.9% last year to 2.56 billion yuan.

Tighter regulation aside, livestream platforms have also taken a hit from having to share more of their revenue with their most popular hosts, who often threaten to jump ship to rival operators otherwise. Big platforms like Kuaishou have more than 10 million active hosts, and use their big clout to give those anchors just a 30% cut of the revenue they bring in. But smaller operators lacking such reach can only retain stars by promising more generous cuts.

One such smaller player, Huafang Group, gave 58.1% of its revenue to anchors on its PC-oriented 6.cn platform last year, and an even larger 71.5% to anchors on its Huajiao mobile app, according to its recently filed prospectus for a Hong Kong IPO. With more limits coming for their star actors with growing regulation, such smaller operators are likely to take bigger hits compared to the bigger ones with more diverse revenue.

Small tippers

In terms of user base, Kuaishou raked in 8.83 billion yuan in livestreaming revenue in last year’s fourth quarter. It averaged 48.5 million monthly paying users, equal to just 60.7 yuan per user for the three-month period, much lower than Joyy Inc. (YY.US) and Huajiao’s figures that averaged between 200 yuan to 300 yuan per user. Kuaishou’s tipping structure is also more balanced than other platforms, which makes it less susceptible than rivals to the ongoing restrictions.

The prospectus from Kuaishou’s 2021 IPO shows that during the period from 2017 to September 2020, the top 50 virtual tippers contributed less than 5% of total tips on the platform. Its lower tipping per user reflects the fact that most of its tippers give money to express support for their favorite hosts, rather than trying to compete in tip rankings.

But make no mistake: hosted livestreaming shows are big business in China. Big platforms like Kuaishou and Douyin, the Chinese version of TikTok, can easily have more than 10 million anchors on their platforms. Kuaishou hosts an average of 810,000 livestreaming events per day, eight times the number for Joyy.

Regulators have focused their cleanup efforts on dubious practices like anchors receiving million-yuan tips from teens, and may also be going after popular stars who make a killing on these platforms, said Francis Lun, CEO of GEO Securities. That has put the most popular anchors on high alert. They, too, are making adjustments, such as hawking more e-commerce products, in a bid to minimize the impact of new regulations.

All the industry ups and downs of the past two years have taken a toll on companies’ stocks, many now trading near all-time lows. Kuaishou has a price-to-sales (P/S) ratio of just 2.74 times based on last year’s revenue, hardly what you’d expect for a fast-growing tech stock. But that’s still far better than the 1.06 times for Joyy and 0.27 times for Inke. So, it seems that in this case bigger is better, and so probably is the better diversity in Kuaishou’s revenue.

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