Considered China's third-largest game-streaming company, Bilibili has long walked a tightrope to keep the nation's biggest tech companies happy. But to keep growing, it will have to face off with China's entertainment powerhouse, not to mention one of its own investors: the mighty Tencent.

It may be a relative unknown in the U.S., but Bilibili is used by just about every Gen Z Chinese person with an internet connection. A diehard anime fan with a degree in programming named Xu Yi founded it in 2009 as a website for anime video and relevant user-generated content, named after a popular character in a Japanese manga series. After a few years, Bilibili had become not just the country's leading anime community, but its leading video platform, a kind of YouTube for China. Since then, it has diversified, hosting all kinds of entertainment content: lifestyle vlogs, documentaries, movies — and gaming.

Now, after a $4 billion IPO on the Nasdaq in 2018 and an upcoming $2 billion secondary listing in Hong Kong, Bilibili is flush with cash, and its component pieces are beginning to form a closed circle, allowing different products and services to feed traffic and revenue to each other. In other words, it's on the cusp of being something not just big, but huge — large enough to threaten Tencent at the apex of Chinese entertainment technology and trigger the tech giant's defensive instincts.

"Should Bilibili keep expanding and become a larger player, their relationship with Tencent will surely deteriorate," Charlie Chai, vice head of research at the Shanghai-based equity research company 86Research, told Protocol.

Bilibili's big break

Bilibili's ascension began when it figured out that mobile gaming was the best way to monetize its anime fans' loyalty. In 2014, the company successfully distributed a game by miHoYo, the Chinese company that, in 2020, released the worldwide hit Genshin Impact. Bilibili's biggest break came in 2015, when it obtained the Chinese licensing rights to Fate/Grand Order, or FGO, an immensely popular game derived from a Japanese anime franchise that at one point contributed to over half of Bilibili's total revenue. From the day Bilibili listed on the Nasdaq in 2018, mobile gaming has consistently been its biggest source of revenue. Some users call FGO the game that made Bilibili's Nasdaq listing possible.

But there's more to gaming than mobile. Bilibili embraced its early successes by expanding aggressively into other areas, notably esports and livestreaming. "You can say [Bilibili] has done vertical integration," said Zeng Xiaofeng, vice president at Niko Partners, a gaming analytics firm focusing on China.

It founded an esports club, Bilibili Gaming, in 2017, which is now home to a number of professional teams in China, winning top places in national tournaments. The company also manages tournaments, like the esports Shanghai Masters it launched in 2019. It spent a whopping sum of 800 million RMB (about $123 million) in 2019 to purchase the exclusive broadcasting rights to League of Legends tournaments. And its Bilibili esports livestreaming platform is now third only to that of Huya and DouYu, both of which have heavy investment from Tencent.

Investors have noticed. In January, its esports subsidiary received 180 million RMB (about $28 million) in its first round of funding. Zhang Tao, the CEO of one of the investors, Chengdu B-Ray Media, told Chinese press that "Bilibili esports has set foot in all levels of the industry value chain." All three investors in Bilibili esports have state backing; first- and second-tier city governments see esports as the next opportunity to attract young talent and stimulate economic growth.

Beware a Chinese tech titan scorned

Bilibili has so far managed to walk a careful line between China's behemoths. Tencent thrice invested in Bilibili, but just when everyone started to think of it as a Tencent associate, Alibaba declared a plan for strategic cooperation with Bilibili too. Currently, Tencent and Alibaba respectively own the second-largest stake (12.6%) and fourth-largest stake (6.8%) in Bilibili.

Bilibili isn't the only company performing this kind of balancing act — this is life as a yaobu gongsi (腰部公司), literally a "waist-level company," a term that refers to companies that aren't tiny, but aren't yet titans; big enough for the nation's tech giants to consider valid opponents without seeking to crush them in the marketplace. In this way, it's not unlike Q&A site Zhihu, video-sharing app Kuaishou and ecommerce company Vipshop. Each is valued at billions of dollars and is a household name.

Many yaobu companies — like Xiaohongshu, which has replaced Instagram in China, and Didi Chuxing, the unrivaled rideshare leader — take investment from competing giants. They are too big to be bought out, but they're still dwarfed by Alibaba, Baidu and Tencent.

If non-titans fail to tread carefully, their larger peers can make life very difficult. In 2013, Alibaba famously decided to block Mogu, an ecommerce challenger, from connecting to its website. Mogu has never really recovered. More recently, ByteDance had the nerve to ascend from China's second tier into its first, resulting in a ferocious reaction from the top dogs, especially Tencent. Tencent-owned WeChat has blocked its users from accessing almost every ByteDance product. "ByteDance and Tencent's relationship went sour because they had some historical clashes, and it gradually reached the point of no return," Chai said. "It's a deliberate choice [by ByteDance]."

By contrast, Bilibili is trying to walk the line. ("Bilibili has chosen not to offend anyone," Chai said.) The company did not respond to Protocol's request for comment. In October 2018, Bilibili and Tencent announced an anime streaming collaboration. Bilibili's CEO Chen Rui commented, "Bilibili needs more powerful partners to achieve the goal [of promoting Chinese anime], a goal that's shared by Tencent." Just two months later, Alibaba became Bilibili's partner in ecommerce, and Chen Rui released a similar message: "On a platform as large as Taobao, the creative and quality content produced by Bilibili users will be seen by more people."

The final mile

However careful it has strived to be, Bilibili is at a tipping point where it could soon become a giant itself. It's diversifying its product and reaching into sub-industries the tech titans have traditionally controlled, including social media, ecommerce and even online payments. Its future likely depends on how it can continue to navigate the dynamics of competing alongside the existing mega-players.

Any fallout could be painful. Because Tencent owns or operates several blockbuster games in China — League of Legends, Honor of Kings, PUBG — as well as platforms Huya and DouYu, it can throw its weight around in the gaming sector. This is why Alibaba's own esports championship doesn't involve any Tencent-owned games, and creators on ByteDance's short videos platforms are banned from streaming Tencent games.

"There's definitely a monopoly in this industry," said Zeng, the gaming analyst, "and it's a powerful monopoly by Tencent." That power can backfire: The merging of Huya and DouYu, brokered by Tencent, is currently under an antitrust investigation.

Contacted by Protocol, Tencent's spokesperson said: "We take an open-platform approach and partner with different category leaders to create value for users, as well as generating synergies with our core businesses."

There are signs of potential further friction. Tencent is reaching deeper into the anime world, Bilibili's core industry, taking back franchises it once leased to Bilibili to broadcast. Meanwhile, Bilibili is moving into the traditional entertainment production industry — arguably Tencent's home court — by investing in heavyweight films, TV series and even a New Year's Eve gala that younger Chinese viewers might enjoy (in contrast to the more staid, if slickly-produced, CCTV special). And in January, Bilibili reportedly registered a domain for, and recruited developers to, its own payment system, an area in which Alibaba and Tencent are some of the world's most powerful companies.

Early signs suggest that could all be straining Bilibili's thus-far cordial relationship with Tencent. Especially when it comes to livestreaming, Bilibili is now seen "not as a useful partner, but a disobedient opponent," an anonymous Tencent employee, told Chinese media outlet Ran Caijing.

Bilibili has tried to talk nice, but its actions have spoken louder than its words as it cements a reputation as a major player in China's entertainment industry. The only thing that now stands between it and greater success is Tencent. This last hurdle will be the highest.