Initial Industry Overview: esports
What you are about to read is my initial crack at trying to break down an entire industry. I picked esports because it is a vertical that I have generated a lot of interest in over the past several months and I couldn’t quite figure out why. I am not a big “gamer” and I don’t particularly follow a lot of these trends, but I was being drawn to it. So in order to further understand it, I attempt, here, to break down the industry into a couple of key sections. This probably is not the best breakdown, but it’s a start.
First, let’s define esports as an industry. Esports, broadly, is a form of competition that focuses on video games at the center of it’s structure. Much like the traditional sports industry, esports is centered around organized teams competing against other teams. It used to be largely comprised of individuals playing in tournaments, but that has changed recently, resulting in increased stability. It is important to note that when someone is talking about esports, they are likely discussing professionals being paid to compete. I have found that anyone who is playing a popular game online against a bunch of amateurs and not getting paid is just a gamer. However, as you will see, a lot of the trends that are impacting esports impact the video game industry as a whole. And gaming revenue isn’t just built off of the back of professional competition - popular streamers, game reviewers, influencers, and other like-minded individuals have a major impact as well.
So how big is this industry? Global esports revenues are expected to reach $1.1 billion in 2019, according to Newzoo, a gaming industry analytics firm. These revenues are being generated via advertising, sponsorships, and media rights deals. A report from PWC projected worldwide esports revenues of $1.58 billion by 2022—an 18.4% CAGR. A breakout of those revenues from 2018 can be found below. For frame of reference, the National Football League - the most lucrative sporting association in the United States - generates ~$15 billion in revenue per year. That’s not really an apples-to-oranges comparison because the NFL is only one league and it’s only really in America, but it does provide a sense of scale.
The best way to view esports is as a media-centered industry. Revenue is largely driven by eyeballs: through advertising, media rights, and sponsorships. While the industry is predicated on the development of interesting gaming / technological revolutions, there are also some interesting ways in which attention is getting monetized, beyond the semi-obvious listed above. For more detail on that, a detailed primer on how streamers (influencer-like gaming stars who actually play in the games and compete) make money can be found here. There is room for innovation, but most growth so far has come from increased interest in various events.
The biggest source of growth for this industry in the past several years has been through sponsorships. Economically aligned organizations have selected to sponsor a variety of different avenues in esports, including events, teams, and individuals. What makes some of these sponsorships very compelling is the internet-native nature of some of these entities. Individuals are sponsored not just because they are especially talented, but because they are influencers for an aspirational kind of lifestyle. Also, unlike traditional athletes, esports stars are more readily accessible to fans and can show off more personality. It is easier to grow attached to an esports star because a fan really feels like they know that person. Much like how there is opportunity for instagram influencers to be more effectively monetized, there is likely a big opportunity to capture economic value behind esports competitors. These are young entrepreneurs who are want to make money and are looking for the tools to do so.
Broadcasting of events is largely dominated by big, semi-established players, such as Twitch and Youtube Gaming. What’s unique about these platforms, unlike traditional sports, is that they primarily livestream events on the internet and allow fans to interact with gaming events and esports stars. Nearly all of the esports broadcasting activity occurs online, which creates a more digitally conscious fanbase. Even the new disrupters in the space, such as Mixer, are built by behemoths like Microsoft. Much like traditional media distribution, it is really valuable to own the “pipes” that deliver the media content. As a result, it’s a very competitive market that requires some significant capital needs.
Twitch currently captures ~80% of live-streaming viewership in the United States and has more than 15 million daily viewers. To put that in perspective, approximately 16.7 million people, on average, watch an NFL game. Again, this is not an apples-to-apples comparison, but it does show that Twitch’s numbers are legit. But Twitch doesn’t just stream one game at a time. It has a bunch of different channels that twitch users can view that show a variety of different types of games and even more streamers. Twitch is the biggest player in this space, but there is a race with capital to produce similar streaming platforms. Twitch is owned by Amazon and worth well over $1 billion at this point. A good Twitch streamer can make up to $20 million in revenue annually if they have a large enough following.
But America is not the only place in the world that has a large appetite for esports and its streaming platforms. Asian countries, have demonstrated a significant interest in esports and streaming platforms. China represents approximately 1/3 of esports viewership globally, and that ratio is only expected to grow more over the next several years. In all of Asia, there are approximately 89 million esports viewers, which represents about half of all esports viewers in the world. There are two major players in China that are on the rise, including Huya and Douyu TV. Douyu has raised $775 million via a US IPO in 2019 and Huya has raised $427 million through equity offerings in a similar manner. These are well-capitalized behemoths that are eating up the streaming world in China.
One problem (and potential opportunity) with esports is the sheer number of different games that viewers are tuning into. You just read about how many different people are watching Twitch and streaming various esports into their homes, but the real trick is understanding how many people are watching single games and tournaments. As such, in the past, esports were fairly unorganized and represented a wide array of different games to view. But more recently, structured esports leagues have started sprouting up, creating a more centralized infrastructure for the industry, allowing more structured interest in each game / event. It used to be that tournaments and leagues were set up so that game publishers could advertise their games, but more recently, leagues that are more focused on actually providing interesting content and being a monetization vehicle in-and-of itself.
One such example of a league creating its own marketplace is the Overwatch League. The Overwatch League (OWL) is structured more like a traditional professional sports organization, with city-based franchises, salaried players, and live arena-based events. This league is paid for via traditional ad revenue, like normal sports leagues. However, unlike traditional sports leagues, this one has a more global reach, with teams based in the US, Canada, Europe, China, and Korea. This allows for a more global advertisement reach and a more consistent, unique fan-base. OWL also owns the intellectual property of the game it distributes, allowing for more control and alignment of the product that gets produced. This is also what allowed OWL to sell franchises into its current league. Each OWL team has salaried players on staff, which provides a more stable lifestyle for players, who used to get paid primarily through individual tournament winnings. These players can now focus on training and building/monetizing their brand, and not have to stress about making a paycheck each week. Generally OWL has provided increased stability to players and content, which makes it a more easily accessible product for consumers.
So while there are some interesting traditional revenue streams for esports, as it builds more structure and leagues like OWL continue to pop-up, there are also some ways that esports can innovate. And since esports viewers are typically streaming, instead of watching on television, there is increased opportunity for capturing interactive engagement with fans and gamers.
So where does the investment opportunity lie with esports (and gaming in general)? It’s hard to pick a spot directly, because the entire industry is still so young and nascent, but I do think there are a couple of key areas to focus on. For starters, purchasing or investing in a team has a ton of upside. But, at this point, buying a team is no longer an insignificant check - you probably need to have deep pockets to take advantage where appropriate. And much like traditional sports, there are only so many eyeballs to go around, so it’s not like there are infinite leagues to be created. Inversely, it does feel like there are infinite games to be played, so maybe that intuition is misguided. And while it might seem the most interesting to invest in game creators, the content creation business model can be very tough and unpredictable.
I think a bigger area of opportunity is likely in the “picks and shovels” category. While there is plenty of money being poured into the actual development of the sport, there is still plenty of innovation to be created surrounding the facilitation of the overall esports experience - from improved advertising, communication, and brand integration to more effective software for streamers and budding esports stars.
One trend to keep an eye on in esports is the player nutrition and enhancement category. While current attitudes lend toward thinking that esports competitors don’t need to be world-class athletes in order to win, more and more research is showing that an esports pro could really benefit from more strict diet and exercise, much like a traditional athlete. So any technology that can enhance the tracking and understanding of an athlete’s diet and physical fitness should gain traction in this market. And this is something that should be particularly interesting for esports, because the margin for error is so low that pros are potentially willing to pay a lot for an edge. But physical fitness isn’t just for looking good - it’s important to help develop strong mental acuity. So anything that can provide increased focus and mental awareness could be an interesting opportunity as well.
There will also be better areas of opportunity for fan engagement, beyond just streaming. For instance, with the growing acceptance of gambling (both socially and legally), there is going to be increased demand for gambling access and media across all sports, and I think esports will be especially ripe for this kind of opportunity. Esports live-betting and esports fantasy both have an opportunity to be as big as they are in other sports, if not bigger. Fan engagement is more at the center of esports than it is other competitive endeavors, so being emotionally invested in a player or team should, in theory, be more easily accessible for an esports fan. It would follow that these fans could be more readily available to become financially invested as well.
Beyond just gambling, esports-related financial transactions are going to be a particularly interesting space to follow. Financial transactions are already inherent in the esports community, as streamers collect money digitally while they are playing from all different sorts of friends and characters. This will likely continue to mature as more people start paying attention to esports, viewership grows, and more streamers look for ways to monetize their efforts more effectively. Right now, the financial transaction technology in place for Twitch streamers is pretty basic. Whenever more money flows through a system, it needs to be more sophisticated and also opens up the door for increased financial opportunity.
Much like the early days of the internet, the advertising model that dominates the esports genre has worked well to expedite initial growth. In fact, the trends of the early internet could be indicative of a lot of what’s to come for esports. Right now, a niche, rapidly growing audience is being monetized via advertising revenues and eyeball attraction. But as technology and data-aggregation methods continue to expand, there should be more unique opportunities all around. The space has a ton of opportunity and I am excited to continue to watch it grow and mature.
Editor’s note: this is an early look at trying to understand the esports industry. I welcome any feedback or critiques on any of the opinions or thoughts contained herein - I still have a lot to learn in this industry!