While many of our readers may not have attended a live event to watch others play video games, there are a fast growing number of spectators who do. eSports is increasingly becoming an area in which video game publishers are trying to gain a foothold. The term eSports refers to competitive video gaming – that is, competitions staged in the virtual world of a video game. These tournaments are not constrained by genre, and span the sports, first-person shooter, and multiplayer online battle arena (MOBA) categories, among others. The world of eSports presents opportunities for game developers, publishers, and advertisers, let alone interesting, innovative ways for us to consume digital content.
Deloitte Global estimated that the eSports industry generated $500 million of revenues in 2016, an increase of 25% from 2015. At present, a popular eSports event is capable of attracting live audiences of 40,000 people, as well as tens of millions of people watching the event over the Internet, primarily through streaming services such as Twitch and YouTube.
Source: Forbes and Deloitte Global
Riot Games’ League of Legends (LoL) World Championship (n.b.: Riot Games is owned by Tencent) is one of the largest eSport tournaments, and the scale of this event is nothing short of mind-boggling (see the picture above of the 2015 World Championship for a sense of the scale). The League of Legends 2015 World Championship had an estimated 36 million viewers tune in to the finals. For comparison, Game 7 of the 2016 NBA Finals achieved approximately 31 million viewers, and the 2016 MLB World Series final had around 40 million viewers. With audiences on par with major league sporting finals, eSports tournaments present some interesting monetization opportunities (note that although the viewership of eSports rivals other sports categories, revenue dollars of eSports are much lower due to less events being held).
Players that participate in eSports tournaments can earn millions of dollars. The prize pool for the LoL World Championship is more than $5 million, dwarfed only by The International Dota 2 Championships which had a $20.8 million prize pool in 2016. In 2015, the prize money of all eSports events was $61 million, an increase of 70% year-on-year. This growing prize pool has the effect of attracting more gamers to the tournament, as well as making it harder for rival tournaments to compete if they are unable to offer similarly lucrative prizes.
Game developers and publishers
Game developers and publishers of video games require good content to achieve the requisite critical mass for a successful eSports league. For example, League of Legends was designed as an eSport game from the very beginning. Its rule-based structure, 45-60 minute rounds, and teams of five players, are conducive to eSports tournaments.
However, the key question for publishers is this: is eSports a profitable opportunity? The answer is somewhat unclear as the publishers don’t disclose what revenue and profits they garner from eSports. TTWO CEO Strauss Zelnick said during a 2016 investment conference that “it’s a money-making opportunity [eSports] right now for one company and one game, League of Legends, and for the rest of us, it’s a marketing opportunity”. At the same time, Riot has said they don’t make money and that eSports is a loss leader, although there is an obvious incentive for them to avoid transparency. If the teams and players competing in Tencent’s tournament were to know how much Tencent was making, they may use that information to bargain for a greater share of the overall economics.
Despite not knowing the exact economics of eSports, we do know that it is an area many video game publishers are expanding into. Recently, Take-Two Interactive (Nasdaq: TTWO) announced the NBA 2K eLeague, an eSports competition launched in partnership with the National Basketball Association (NBA) that is set to debut in 2018. This is the first official eSports league operated by a U.S. professional sports league, and it will consist of teams operating by actual NBA franchises. For example, you can play as your favorite LA Lakers player in a competition that is being sponsored and operated by the NBA.
The tournament will be a drawcard for new players and will help keep players from defecting to competing basketball video game franchises. This is a particularly important point as Electronic Arts (Nasdaq: EA) is launching a revamped console version of its NBA game later in the year.
Publishers can get more attention for their games via these large scale events; it’s a form of marketing and promotion. However, perhaps the greatest beneficiaries from these eSports events are advertisers.
Online advertising is the quickest growing revenue segment within the eSports category, increasing 99.6% year-on-year in 2015. Furthermore, average annual revenue per eSports enthusiast was $2.83 in 2015, a number that is expected to increase to $3.53 in 2016 according to Newzoo.
One of the key reasons that brands and advertisers are attracted to eSports is the coveted demographics of eSports fans. Nielsen, a research firm, estimates that 57% of U.S. eSports fans are Millennials (i.e., in the 18-34 age bracket) and live in households with strong spending power ($64,900 mean total household income). Furthermore, as the below infographic demonstrates, eSports fans have more favorable demographics than U.S. gamers overall.
Source: The Nielsen eSports Report
The Montaka team constantly monitors broader trends such as eSports and how they may present opportunities and risks for our portfolio holdings, as well as other companies that are exposed to these themes.
The Montaka Global Fund own shares in Tencent (HKEX: 700 HK) and Take-Two Interactive (Nasdaq: TTWO).