Being a professional video game player used to frown upon. Not anymore.
Johan “N0tail” Sundstein, a Danish professional Dota 2 player became the top earner in the whole of eSports after leading his team in winning the coveted The International for the second year in a row in 2019. With a total winnings of $6.9 million and counting, a headline grabber is an understatement.
In this ultimate guide, we dig deep into the eSports industry, where we try to answer is it worth investing in eSports.
Additionally, we also explore the eSports business model, ecosystem and the future opportunities in the eSports industry.
Finally, we look at how to invest in eSports. As usual, we highlight the various types of eSports companies to invest in and hopefully answer the fundamental question “Is eSports worth investing in?”
What is eSports?
Simply put, eSports is competitive level video gaming. Often taking the form of organized, multiplayer video games, competitions includes both individual and teams. So, basically similar to sports, but for video games.
For those who are old enough to remember, the catalyst of eSports arguably started in the late 90s / early 2000s, with the introduction of games like StarCraft (a multiplayer command and conquer strategy game) and Counter-Strike (a multiplayer first-person shooter video game), that are still core to the establishment of eSports even today!
In fact, it was not until beginning of 2010 that eSports started taking off. The founding of Twitch (a subsidiary of Amazon), a video live streaming services, in 2011, has not only ignite interests among gamers, but also act as a source of opportunity of video game streamers.
eSports business model
The eSports ecosystem is unique relative to the traditional sports industry. Specifically, eSports’ ecosystem co-mingle with not only the traditional sports associations, but also the likes streaming platforms and content creators to create an even greater experience for both players and audiences.
In general, the business model is somewhat akin to a chicken-and-egg situation. Sponsorship (see below) remains the largest revenue generator for the industry/teams. Consequently, in order to attain sponsorships, the teams must be perform well. For example, LGD Gaming, one of the top eSports team in China, entered a partnership with French football giants Paris Saint-Germain in 2018.
Overview of the global eSports industry
eSports market size/revenue
It is expected that the global eSports industry will generate revenues in excess of $1.1 billion in 2020. While the growth rate may be dented slightly by the coronavirus pandemic, the trajectory of the industry remains robust. In the medium term, research and forecasts suggest that the industry is likely produce mid-to-high-teens growth.
Broadly speaking, the number of global eSports player is arguably the key metric to look in this sector. Consequently, every other key metrics is a function of this input.
There is no surprise that Asia-Pacific has the highest number of eSports players globally, given their affinity towards competitive gaming.
Interestingly, despite registering the largest number of players globally, Asia-Pacific’s penetration (measured as # of players divided by region population) remains the lowest after Middle East & Africa.
In other words, there is arguably greater upside here. To put this in context, a 1% increase in penetration will increase Asia-Pacific’s players by ~42m.
Another key KPI to watch is the audience growth.
The increased utilization in social media and gaming platforms has made eSports more relevant than before, hence the steady growth in audience, both occasional viewers and eSports enthusiasts.
Similar to the market size trajectory, the combined eSports audience growth is expected to grow double-digits, albeit a little more modest.
How do eSports team make money?
eSports teams make money through several channels, such as sponsorships, media rights, publisher fees, merchandises, digital and streaming.
Here is a breakdown of where the industry derives its revenue.
From the pie chart, investors will note that sponsorship and media rights consist of ~75% of the industry’s revenue. We continue this to be the driver for the industry going forward.
In our view, we expect great things to happen for the industry as it matures and evolved over the coming years. As consumers cope with the impacts of the coronavirus pandemic, innovative revenue stream such as digital and streaming should begin to pick up steam. In fact, Overwatch League has already been airing on ESPN, Disney XD and ABC since 2019.
The attractiveness of eSports
In our view, there are three key reasons why we think eSports is an attractive space.
First, the depth and diversity of games. From first-person shooting, to multiplayer strategy games, eSports offer a variety of games catered to different types of gamers. To an extent, unlike traditional sports, the outreach of eSports can stretch much further and quicker to its players, publishers and fan-base.
Secondly, the scalability and flexibility of eSports vs traditional sports. Specifically, once a platform (games infrastructure) has been established, various game modes (hence competitions) can be built upon its structure. The Covid-19 pandemic highlighted the importance of being flexible, which is exactly what eSports represents.
Lastly, continued growth momentum in market size, players and audiences. As discussed earlier in the region penetration, we deduced that despite sheer amount of total eSports audience/players, there are still considerable upside on its penetration ratio. Here’s a table of estimated global following/audiences of more “more” sports that we are familiar with.
A final point to note here is that while eSports may garner following as large as baseball, its monetization per following is only a tiny fraction relative to its traditional sports peers.
The future of eSports
The future of eSports is gaining traction. The increasing investments made by publishers to design games with centre around eSports will further propel the industry. Consequently, we expect to industry to continue to grow in its mid-teens in the medium term.
As with traditional sports, eSports opens up a myriad of business opportunities in the industry. One interesting emerging trend with the robust growth of eSports is eSports betting. Investors may now see the similarities between this and traditional sports gambling.
According to Wiki, the 2018 League of Legends championship drew a viewership of ~100 million, comparable to Super Bowl LIV’s ~102 million viewers.
Consequently, we expect eSports betting, which is currently in its infancy, to gain traction among the traditional betting houses as well as the market matures. Watch this space!
How to invest in eSports?
Given the size of the industry today, pure play eSports stocks exist, but relatively tiny in size. Majority of the large eSports stocks are fairly diluted, ie only a small percentage of exposure to eSports.
eSports investable universe
At the time of writing, these are our eSports investable universe as well as eSports ETFs.
eSports is still in its infancy and bears the risks that are not for the faint hearted. As per usual, investors should be ready to be patient with investing in new and emerging markets.
We are particularly interested with eSports betting as it is complementary to traditional sports betting. Given the demographics today and technology advances, this eSports betting industry has never been more interesting, in our view.
Finally, we expect incumbent gaming/traditional sports betting companies to begin to acknowledge the significance of eSports. Whether it is developing new talents or building out an entire new ecosystem within eSports, there will be ample amount of opportunities within this emerging and exciting eSports industry.
Good game! As they say.