Esports: A Guide to Competitive Video Gaming

Despite its complexity, the esports industry is experiencing tremendous growth and has established a substantial and diverse global audience. This rapid expansion presents a multitude of opportunities for investors to capitalize on this flourishing market.

Esports, or competitive video gaming, has evolved into a multi-billion dollar industry. It attracts millions of viewers worldwide, with dedicated fan bases and thriving communities. Esports tournaments and championships now rival traditional sporting events in terms of viewership and engagement, with esports athletes achieving celebrity status and lucrative sponsorships. Full review of the best eSports betting platform – Parimatch Review

Introduction

The forthcoming article explores the immense popularity and potential of the esports industry, exemplified by the staggering viewership of the e League of Legends grand finale, surpassing even the NBA Finals. It aims to provide valuable insights for individuals interested in investing in this decentralized and digital sector. Covering key stakeholders, audience demographics, industry dynamics, and investment approaches, the article combines reliable data, analysis, personal experiences, and conversations with industry professionals to offer a comprehensive guide to the world of esports.

What Is Esports?

Esports has revolutionized online gaming into a captivating spectator sport, akin to traditional sports, where viewers watch video gamers compete in virtual environments. The appeal lies in witnessing elite gamers showcase their skills, similar to watching legendary athletes in traditional sports. The industry encompasses a wide range of games, both sports-related and others like League of Legends and Counter-Strike. Players can earn income through streaming or by joining professional organizations to compete for significant cash prizes. Fans engage through social media, live-streaming, and in-person tournaments, supporting their favorite teams. Esports thrives due to various technology platforms, services, events, analytics, and substantial investments. Notably, esports levels the playing field, as success depends on skill rather than physical attributes, leading to a globally engaged fan base.

Esports’ Lay of the Land

Which Esports Games Are Most Popular?

Although the specific rankings of the most popular esports games may experience slight fluctuations on a monthly basis, the top ten games consistently draw significant viewership on the prominent streaming platform Twitch. Currently, League of Legends maintains its position as the most-watched esport globally. It is important to note, particularly for those less acquainted with esports, that the most popular games are not traditional sports-related titles such as Madden or FIFA. Instead, they predominantly fall within genres like multiplayer online battle arenas (MOBAs), where players control individual characters on teams aiming to destroy the opponent’s main structure; real-time strategy (RTS) games, where players construct armies to gain control over a map; or first-person shooter (FPS) games, where players engage in intense combat across various map environments.

Esports Landscape: Involved Parties

The esports industry involves key stakeholders who shape its growth. Here are the major parties:

1. Players: They can either stream their gameplay to earn income through donations, subscriptions, and sponsorships or play professionally in tournaments.
2. Teams: Professional players join teams specializing in specific games, attracting large followings and audiences.
3. Organizations (Orgs): Elite esports teams are recruited by organizations that function as conglomerates within the industry, seeking sponsorships alongside cash prizes.
4. Leagues: Esports teams compete in organized leagues with regular seasons, playoffs, and championships.
5. Publishers: Game publishers have control over their games and influence the esports ecosystem.
6. Additional Elements: The industry includes resources for aspiring pro gamers and fans, professional gaming platforms, livestreaming resources, and betting and item marketplaces.

Understanding the roles and interactions of these parties is crucial in comprehending the esports industry and its dynamics.

Esports Audience

According to Newzoo, the global esports audience reached around 385 million people in 2017, consisting of 191 million enthusiasts and 194 million occasional viewers. By 2020, the number of enthusiasts was projected to grow by 50% to a total of 286 million.

Initially an Asian phenomenon, esports now has a more diverse audience distribution, with Asia accounting for 51% of enthusiasts, while North America and Europe also play significant roles. Fans are highly engaged, spending an average of 100 minutes per session watching esports, with about half of the viewers not playing the games themselves. Furthermore, 60% of esports fans are willing to travel to attend games, tournaments, and see their favorite players in person.

The majority of esports fans are young digital natives, with 65% falling within the 18-34 age range. While predominantly male, women make up 38% of the fan base. Among American male millennials, esports is as popular as traditional sports like baseball or ice hockey, with 22% of them watching esports. In North America, football is only two to three times more popular than esports among male viewers aged 21-50.

Esports Industry Overview and Revenue Breakdown

Current Monetization Strategies

The global gaming market has seen a shift in revenue sources, with one-off sales of packaged home-console software decreasing from 64% to 30%. Esports has opened up new revenue streams such as advertising, ticket sales, and TV rights, leading to a projected revenue of $700 million in the upcoming year, with an expected growth rate of 41%.

Advertising contributes 22% of esports revenue and is projected to reach $224 million by 2020. Sponsorship is the largest revenue driver, making up 38% and projected to reach $655 million. Game publisher fees, merchandise sales, and ticket sales also contribute to revenue.

Media rights revenue is expected to be the fastest-growing, reaching $340 million by 2020. As esports expands, exclusive content deals will drive this growth. Non-endemic brands are recognizing the purchasing power of the esports audience and entering the industry with dedicated budgets.

Overall, the esports industry is expected to continue its revenue growth, reaching $1.5 billion by 2020, with advertising, sponsorship, media rights, and merchandise sales playing crucial roles.

Upcoming Esports Trends

Franchising is becoming mainstream in North America’s esports scene, following a similar model to traditional sports leagues like the NFL, NBA, MLB, and NHL. Riot Games, the developer of League of Legends, has established a franchise model for their North American league, with ten spots available for purchase at a price of $10 million each. Activision’s Overwatch is also in the process of implementing franchising. In Europe, esports is expected to adopt a promotion and relegation model, drawing from the region’s familiarity with that system in sports like the UEFA Champions League.

As franchising becomes the dominant model, elite teams and organizations that secure franchise spots will become revenue-generating powerhouses. However, those without franchise spots will need to find revenue opportunities in secondary leagues or focus on establishing themselves in games that have not yet adopted the franchise model. These non-franchised teams will not have access to substantial revenue-sharing deals offered in leagues like League of Legends, and will instead have to rely on smaller cash prizes and sponsorship opportunities in secondary leagues. Although this consolidation may be initially challenging, it is seen as a necessary step for the industry’s growth and market development.

Broadcasting and media rights are expected to play a crucial role in the growth of esports. As the worlds of media and gaming continue to converge, broadcasting and media rights are projected to become the fastest-growing segment of the esports market. Newzoo research estimates that the media rights sector will grow from $95 million in 2016 to $340 million by 2020.

Publishers in esports hold the intellectual property rights for their games, giving them authority over how other parties can use their software. As the industry has experienced explosive growth, publishers are seeking to monetize broadcasting and sign exclusive content deals. Revenue-sharing agreements between teams, players, and publishers are becoming more common, driving the emergence of franchise models. Publishers will selectively grant broadcasting rights to specific partners and media outlets, potentially leading to increased control over streaming and viewing rights. However, it remains to be seen whether this increased control will face pushback from fans and players who have been accustomed to sharing and streaming content freely.

Regarding virtual reality (VR), while there is excitement about its potential involvement in esports, widespread adoption among the mass audience is unlikely in the next 5-10 years. Although there are VR headsets being developed specifically for esports audiences and some games offer VR support, the user bases of these games are relatively small. VR technology currently faces challenges such as high costs and underdeveloped interactive components. The convergence of VR and esports is an interesting area to watch, but significant adoption is not expected in the short term.

Investing in Esports

Investing in esports is currently an excellent opportunity, but it can be daunting for many investors due to its complexity. However, this complexity also means that there is a wide range of investment prospects available. The future looks promising as different sectors within esports work on implementing strategies to monetize their substantial fan base.

Esports Stocks

Public markets offer a way to enter the esports sector and gain exposure to its potential. Here is a list of publicly traded companies that are connected to and have investments in esports. For instance, Tencent, the owner of Riot Games, holds the rights to League of Legends, the most-played game worldwide. Activision Blizzard is known for developing popular games such as World of Warcraft, Overwatch, and Hearthstone. YouTube has made a significant investment in esports by securing an exclusive broadcasting deal with Faceit, enabling them to stream the Esports Championship Series (ECS) pro gaming league. Sony has partnered with ESL, a gaming tournament organizer, to power Sony Playstation Vue, a dedicated 24-hour TV network for esports. It’s important to note that esports revenues currently make up a small percentage of the overall revenues for these companies. Therefore, while public market investing can provide exposure to the esports space, it may not be the primary avenue for capitalizing on its potential at this stage.

Esports: Private Investing

The majority of esports investments and activities have taken place in the private markets. Various sources, including media companies, angel investors, sports celebrities, professional sports teams, and venture capital funds, have contributed to the investment landscape. However, conventional investors have shown limited interest in the esports industry thus far. The initial major capital influxes actually came from the world of traditional sports, with notable figures like Shaquille O’Neal, Alex Rodriguez, Mark Cuban, Rich Fox, and Jeremy Lin getting involved. Additionally, the NBA recently announced the participation of 17 of its teams in the NBA 2K League, a joint venture with Take-Two Interactive Software.

While venture capital and angel investor participation are gradually increasing, professional investors generally remain hesitant. Investing in a newer industry entails more unknowns and risks than typical startup investments, especially in a unique space like esports. However, the tide appears to be shifting. One concern raised by venture capitalists and angel investors is the volume of investment opportunities within the esports industry. Many are unsure if there is enough deal flow to justify dedicating their time and resources to understand the space. However, the data indicates that there is indeed substantial deal volume.

According to CB Insights, esports and game streaming startups have raised $714 million across more than 100 deals since 2011, and this only accounts for what CB Insights has tracked. On platforms like AngelList and Crunchbase, where startups self-list their companies, there are approximately 2,000 unique listings for esports and video gaming startups. To put this into perspective, established industries such as the Internet of Things (3.4k), big data (4.5k), sports (5.2k), real estate (5.8k), and fintech (10.4k) have comparable or fewer listings. Furthermore, the number of esports and gaming startups is four times greater than the number of startups in the drone industry and twice the number in the Bitcoin space.

While the lack of understanding and knowledge about this emerging industry may contribute to the hesitation among VCs and angel investors, concerns regarding deal flow are unfounded, as there is a significant number of opportunities available in the esports sector.

How to Navigate Esports Investing

Finding the best deals in the esports and gaming industry may require some effort and a reliance on your personal network. Here is a quick checklist to evaluate companies in this space:

1. Build and leverage your personal network: Access to quality deals often depends on your connections and relationships. Networking, actively listening, and learning from industry insiders is crucial. Show respect for the competitive gaming world and its participants to be considered for investment opportunities. Game respects game.
2. Founding team: Assess whether the team not only understands esports and gaming but also possesses the business acumen required to build and grow a company. In a young industry, finding individuals with both qualities can be a challenge.
3. Market size: Evaluate whether the team has used specific metrics to calculate their total addressable market, focusing on their precise market rather than the broader esports market. This demonstrates the founders’ dedication to defining and understanding their target market.
4. Publisher risk: Determine whether the company’s growth is disproportionately threatened by the actions of game publishers. While some level of risk is acceptable, consider mitigating factors. For instance, assess if their growth is reliant on securing a key technology integration contract or if their business can be severely impacted by rule changes set by game developers.
5. Monetization alignment and focus: Analyze the entrepreneurs’ approach to monetization. Be cautious if they list too many potential revenue streams, as it may indicate a lack of focus. Successful founders often have a hyper-focused strategy and pursue specific monetization strategies. Be wary of excessive reliance on “consulting” as a potential revenue stream, as it can be a red flag.
6. Social media awareness: Take note if entrepreneurs overly emphasize their social media followers (e.g., Twitter, Twitch) as market validation or traction. As an investor, challenge this notion, as the best founders understand that a strong social media following is just one aspect of building a successful revenue-generating business. Look for entrepreneurs who prioritize a comprehensive approach to business growth.

By considering these factors, investors can better evaluate companies in the esports industry and make informed investment decisions.

Esports Investing Represents a Lucrative Opportunity

When we observe the global traction of esports, it brings to mind the growth of social media. Companies like Facebook, Instagram, and Snapchat experienced significant user adoption globally, similar to the rise of esports. However, these social media platforms took time to develop effective monetization strategies. Today, we see that these companies have reached billions of dollars in value.

I view this as an analogy for the global adoption of esports. Despite having an audience of 385 million, esports currently generates only around $1 billion in revenue. This is why I believe that esports has the potential to be one of the best investment opportunities in the coming decade. From an investment standpoint, although esports is centered around competitive gaming, it ultimately presents an investment opportunity in the digital media and entertainment space. The challenge and opportunity lie in monetizing the user and viewer base, which is still in its early stages of development. The chart below illustrates the surprising increase in daily minutes spent on video gaming compared to platforms like Facebook, Snapchat, and Instagram. Esports is the most technologically driven sport the world has ever witnessed, and there is a strong possibility that it will surpass traditional sports in the next 5-10 years.