(Bloomberg Gadfly) -- It may turn out that delivering live gaming to Chinese audiences is a more lucrative business than streaming young women dancing provocatively.
YY Inc., which gets most of its revenue from live content, plans to spin off its Huya Broadcasting business and list it in the U.S., Bloomberg's Lulu Chen reported.
YY has two major businesses: Huya, which mostly streams video gamers doing their thing, and YY Live, which features entertainers, often young women, doing their thing. Huya has the potential to be a hot IPO if its financials keep on their recent trend.
So far Huya hasn't been making money, and it's a drag on YY's bottom line. Yet operating losses have narrowed -- from 170 million yuan ($26 million) in the third quarter of 2016, to 14.1 million yuan in the same period last year. The division's operating-loss margin has followed a similar trajectory, bringing the business close to breakeven.
YY Live's operating margin, on the other hand, has been shrinking, despite solid top-line growth. This indicates that instead of leveraging economies of scale, YY has managed to juice revenue only through a large marketing boost. Advertising costs tripled in the September quarter from a year earlier, to 228 million yuan. That's equal to 9.1 percent of sales, up from 3.8 percent.
Such an outlay does seem necessary as YY battles a slew of rivals, from U.S.-listed Momo Inc. to upstarts such as 17Media. I foreshadowed such troubles for Momo back in August, and the stock has continued to dive since then.
Meanwhile, Huya's marketing budget has barely budged in the year through Sept. 30, even as quarterly sales climbed 196 percent.
A major hurdle for Huya, though, may come from the costs involved in getting that gaming content out to consumers, including paying creators and covering bandwidth. While gross profit moved into the black a year ago, gross margins have remained stubbornly thin at 12.6 percent, compared with a robust 45 percent for YY Live.
With enough traction, it's possible Huya will be able to boost gross margins by limiting the rate at which these costs increase. Yet it's not managed this over the past year and management will need to address the issue in any IPO roadshow.
One thing is certain, though. In China's fiercely competitive live-streaming business, investors are always up for the new game in town.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.
To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net.
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