Chinese live-streaming company YY has been profiting on a revenue model that Silicon Valley once lambasted, but now its global spin-off is aiming to take on U.S. rivals live Facebook, Snapchat, YouTube and Amazon's Twitch.

A model once mocked

YY, founded in 2005, is a major Chinese-language social media platform that boasts more than 122 million monthly active users. That's not yet a world-beating number — for comparison, Facebook's Instagram reportedly has more than 700 million monthly active users — but company founder David Li says he's aiming for the top. "When we pitched our model to American investors a few years ago, all of them disagreed," Li told CNBC in Mandarin. "They think that advertisement is the best revenue model and still refuse to admit that there's actually a better model besides that." Started as an online gaming web portal, YY has transformed itself into an entertainment platform featuring music, live game broadcasting, online dating and education. But what makes YY a leading player in China is its live-streaming feature, which helped set off a sensation in the world's second largest economy. On paper, the platform naturally competes with other live-video providers like Facebook, YouTube, Twitch and Twitter's Periscope, but its robust social element has also led to comparisons with apps less focused on live like Instagram and Snapchat. YY's live-streaming app stands out because of its virtual-gifting function: To show their appreciation, audience members can purchase and send pictographs to broadcasters that can be converted into real-world cash. So, for broadcasting activities such as singing, dancing or even eating a pizza, a live-streamer can earn cash-convertible flowers, hearts or Lamborghinis.

That may seem like a small feature, but YY's revenue is mostly derived from the sale of virtual gifts: The company takes a cut of the proceeds, and that's fueled rapid growth for the past few years. The company said its 2016 net revenue increased by 39 percent year-over-year to $1.18 billion, while the company's net profit reached $219 million for a 47.5 percent on-year jump. Statistics from BigOne Lab, a Chinese alternative data firm, show that the top 10,000 active streamers tracked by the firm contributed approximately 44 percent of YY's second-quarter revenue guidance for 2017. "[The 10,000 streamers] collectively generated around RMB 12 million (about $1.78 million) in revenue per day from virtual gifts through May and June 2017," Mu Chen, CEO of BigOne Lab, wrote to CNBC in a note. The data firm also found that the top 1,000 streamers earned 69 percent of the sample's total revenue, while the top 5,000 contributed more than 95 percent of the total revenue, demonstrating the streaming platform's reliance on the most popular streaming stars. Many fear, however, that the company might face a growth slowdown this year, with challenges brought by increasingly intensive competition and tougher regulations from the Chinese government. "Actually, last year [2016] was the year where we saw our slowest growth. In fact, our growth doubled every year during the first nine years of operation and quadrupled during our best year," Li said. "It will definitely be more and more challenging to keep up such an exponential growth rate in the future," he added.

Domestic regulation: The pros and cons

One of the chief concerns for YY investors is that further restrictions from the Chinese government may stymie the industry's growth. On December 1, 2016, China's Ministry of Culture implemented a series of regulations regarding live-streaming platforms in an attempt to improve the overall quality of the content — and prevent lewd material from proliferating. Regulators ordered that streaming platforms and content providers must obtain qualifications, and live-streaming companies are required to censor certain subjects and have the technical ability to immediately end transmissions. Meanwhile, authorities have continued to tighten control this year. In the first half of 2017, China closed 73 illegal live-streaming platforms and imposed lifetime bans on nearly 2,000 live streamers for providing pornographic content. From January to June, more than 120,000 accounts were blocked, according to China's National Office Against Pornographic and Illegal Publications. While many are questioning how stricter regulation would harm platforms' profitability as some streamers may be scared away, Li said he sees it as a positive push instead of a challenge. "As everyone has access to live streaming, there's bound to be some trouble-makers," said Li. "Before, the most we can do is to ban your account right? But you can always create another one. The benefit from such regulations is that we can now use the law to deal with these people." YY, listed on Nasdaq since 2012, saw a year-to-date return of more than 70 percent as of market close on Tuesday. The company reported in its 2017 first-quarter unaudited financial statement that its total net revenues increased by 37.4 percent year-over-year to 2.27 billion yuan ($336 million) in the first quarter of 2017. It said it expected to achieve net revenue between 2.45 billion and 2.55 billion yuan ($362 million to $377 million) for the second quarter, meaning year-over-year growth between 23.7 percent and 28.7 percent.

Bigo: Li's international ambition

Live-streaming apps are booming in China on a scale not yet witnessed in any other market, but it's still a fledgling trend in western countries. Technology giants like Facebook, Snapchat and Twitter have all launched live-streaming services, but few have convinced the market that they have found a path to profitability. Not until February this year did Facebook announce its plan to open up paid live broadcasting to the general public. Facebook's main video rival, Alphabet's YouTube, has been paying content-providers a 55-percent share of ad revenues for years, but the company didn't start providing mobile live-streaming services until earlier this year. That function is still only available for content creators with over 10,000 subscribers. And that's why Li founded Bigo Live in Singapore last year. The platform is largely a clone of YY, and it's an effort to bring the China-tested revenue model overseas in order to grasp market share from Silicon Valley giants. "We estimate that by the end of this year, Bigo will generate an annual revenue of $300 million, which is a very good performance for a start-up," Li said, adding that monetization for the platform came at an early stage. Explaining that he expects users across the globe to be as willing to pay as those in China, Li said the company believes "overseas users have the same demand, share the same human nature, and follow the same social logic."

Greater purchasing power, along cultures more outgoing than China's, might bolster the company's growth even faster than its Chinese counterpart, according to Li. "In overseas markets, users tend to broadcast and socialize more," he said. Data provided by Bigo showed that content creators count for more than 30 percent of all active users. In other words: One out of every three users on the platform is live-streaming his or her content. "We know Instagram and Snapchat's (content creation) numbers are both below 10 percent, around 4 percent, 6 percent or 8 percent," Li told CNBC. "Yet for us, 30 percent of our users are willing to provide content and I think this is a very valuable resource of the community." Since its international debut, Bigo has achieved a user base of 30 million users, with the biggest share of users coming from Southeast Asia, followed by India, the Middle East and Brazil.

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