This post originally appeared on LinkedIn Pulse on March 2, 2017.
In 1999, I was in my junior year at Rutgers University and was eager to break into Wall Street. Being a young and hungry kid, I took on a very demanding internship during the school year at a highly regarded boutique investment bank, which ultimately paved the way for me to join the firm after graduation. Back then, a typical workday for me ranged between 15-18 hours. In order to keep some sanity, my team and I would take 30-60 minute breaks to play video games like Quake, Diablo, and Tekken (yes, we played PC & console games).
While those games were fun, our undisputed favorite was the first-person shooter (FPS), Unreal Tournament. What generally started out as a few large multiplayer last-man-standing battles, almost always ended up being 1-on-1 grudge matches that we all watched. To do this, we joined the game from our respective computers and then kill ourselves, without respawning, to stay in spectator mode and see the battle unfold. In true Wall Street fashion, there were many that watched simply because they had money riding on the outcome, irrespective of whether they gamed or not. Looking back on it now, I realized that was the first iteration of what is now known as eSports.
A Large, Growing and Highly Sought-after Audience with a Hunger for Content
Over the last few years, many have scratched their heads trying to understand the appeal of watching someone else play video games. While there are a variety of reasons people spectate, it is undeniable that eSports has a large and highly sought after audience. Today, eSports has a global fan base that is estimated to be over 200 million, which is expected to grow to over 300 million by 2019 (sources: SuperData Research and Newzoo), an impressively large stat by anyone’s measure.
From an engagement perspective, EEDAR estimates that roughly 80% of all eSports fans spend an hour or more per week watching game play, while over 30% watch four hours or more. Aside from the sheer size and impressive engagement of the fan base, marketers and brands have been eyeing this group for some time, as it is not only global in nature, but also comprised of the elusive millennial demographic. In general, eSports fans are mostly male, married, and millennials with a disposable income.
Potential for Improved Monetization
On a global basis, eSports is estimated to have generated between $460M to $890M in revenue for 2016. While that may seem like a decent sum, albeit a wide range, it is actually quite small given its audience size. When you double click on those estimates, you will see that eSports only generates about an average of $3-4 in revenue per fan, which is a far cry from the $15-20 for basketball and ~$60 for football. The reason eSports falls short on revenue relative to traditional sports is largely due to the lack of TV broadcasting deals. While there have been attempts at putting eSports on TV over the last decade and a half (e.g. World Series of Video Games on CSTV, and Major League Gaming on USA Network and G4), none have really been met with much success. Most of those failed attempts at TV were largely due to microscopic production budgets and executives pandering to a mainstream audience, rather than focusing on core eSports fans. As such, the eSports industry quickly realized it was simply easier and cheaper to grow a following online.
Today, things appear to be changing as the eSports category becomes more mainstream in its own right. Cable networks, like ESPN and TBS in particular, are experimenting with eSports again and this time with production budgets that are starting to resemble those of traditional sports. Networks now understand they need to be catering directly to the core fan base, rather than trying to make it palatable to “mainstream” viewers. The results of these efforts are promising viewership numbers. Case in point, TBS’s airing of the ELEAGUE generated an average viewership of around 256K, which is on par or slightly higher than the average for MLS and are beginning to nip at the heels of the NHL. That becomes more interesting when you consider that there was little in the way of advertising. Rick Fox, retired NBA player and owner of eSports team Echo Fox, predicts that eSports will be bigger than the NHL within two years. In many ways Fox is already correct as ELEAGUE recently announced that their Major Grand Final had over 3.6M multiplatform viewers, which is ~60% higher than the 2.28M multiplatform viewers for the 2017 NHL All Star game. Ironically, both were aired on the same exact day.
Aside from TV, the industry is also experimenting with other types of distribution agreements. In December 2016, Major League Baseball’s video streaming company (BAMTech) inked a deal worth $300M (minimum) with Riot Games to stream their League of Legends competition through 2023.
Startups and Capital Have Flocked to the Industry
When I first started following the industry in 2014, I did a search for eSports companies in databases like CB Insights and PitchBook, among others. Those searches were only able to produce about 10 companies in the space, of which 6 were active capital seekers. Today, those same searches produce over 100 eSports companies. According to our calculation, those companies have raised 96 rounds of funding, totaling over $770M in capital since 2010. Reasons behind the surge in the number of eSports startups? First, online streaming site Twitch Interactive was able to raise large sums of money at pretty lofty valuations. Second, eSports viewers grew at a rapid rate. At the end of 2013, it was reported that Twitch had ~45M monthly unique viewers, which was up ~125% from the prior year. From an industry perspective, Newzoo and SuperData Research estimated overall 2013 eSports viewers were roughly 70M, doubling the prior year’s total. And third, Twitch was acquired by Amazon for just under $1.0B in September 2014.
While these are all positive signals for the industry, I do believe the rush to take part in the seemingly lucrative fundraising trends, as well as those looking to claim share of the vast number of viewers, caused some segments within eSports to become overloaded. Thus from an investment perspective, careful diligence is necessary as not all boats rise equally, and some not at all.
When I look at the industry, I bucket startups into eight categories:
Enablers – This category consists of technology enablers (including capabilities such as cloud-based streaming and virtualization to video capture and sharing) and game publishers who aim to bring eSports content to the masses.
Fantasy & Betting – Companies that facilitate real-money, prizes, and virtual currency wagering on eSports tournaments and fantasy leagues.
Streaming – Platforms and online channels that broadcast professional eSports events, including tournaments and entertainment content.
Data & Stats – Companies that provide statistics on professional players and teams to aid in predicting the outcome of tournaments, as well as for general fan enjoyment.
Produced Content – Companies that create and produce eSports video content, but don’t necessarily broadcast live events. Content can typically take the form of news, entertainment, or ESPN Sports Center style wrap-ups.
News & Social – Sites that provide eSports and gaming related news, product reviews, and calendaring. This would also include social media sites focused on eSports and gaming, where news and reviews happen organically among gamers.
Organizers – Companies that organize live in-arena or online eSports tournaments, teams, and/or leagues. This would also include sanctioning bodies that try to govern the eSports industry in particular regions or leagues.
Misc. – A category that contains companies that generally do not leverage any type of proprietary technology but provide services. This includes companies that specialize in market research, marketing & branding, consulting, sponsorships, and gaming tutoring and training.
As I look at these eight categories, I believe Enablers may have the greatest upside potential (especially game publishers) since the other categories feed off of their success to a certain degree. Enablers are also attempting to take a more active role in tournaments because they are effectively a marketing tool for their games, which also means they are tied to their brand. This was evident with Activision Blizzard’s acquisition of Major League Gaming in January 2016. Furthermore, publishers exert a great deal of power and influence in the eSports world. Through software updates and patches, publishers can easily insert new features, styles of play, tournament rules, and streaming options that have ripple effects throughout the eSports community. Non-publishers in eSports assume a degree of ‘platform risk’, similar to how several social media startups relied on access to Twitter or Facebook APIs only to have those larger companies alter their platforms and essentially cut them off.
Aside from Enablers, there are also opportunities in the Produced Content category, especially as traditional media companies look to attract the millennial generation who appear to be cutting the cord at an accelerating rate. Late last year, Warner Bros. announced its intent to acquire Machinima, which lends credence to this notion.
There are also compelling opportunities within the Streaming category for truly innovative and transformative players looking to differentiate themselves beyond temporary and/or marginal improvements in lag, or the segmentation of streamers into premium and non-premium. For example, video solutions that render game environments for VR provide unique 360-degree fields of view that can enhance the spectator experience and give fans a new perspective on game-play.
Whether you agree with my outlook on the industry, investment dollars continue to pour in, making it a very exciting time for the eSports industry.