In the current digital age, traditional industries have been forced to make business shifts at an incredible speed, as fast as changes in consumer preferences, in order to stay relevant. The Covid-19 pandemic in 2020 accelerated this, as well as the rise of certain industries, while sounding the death knell for others.
Electronic sports, or e-sports, is a relatively new industry where gamers compete at various competitive levels for spectators, both in-person and digital. As the industry grows, skilled players have turned to joining teams and organisations to participate in leagues that mirror traditional sports. Spectators who enjoy e-sports are similar to traditional sports fans who enjoy watching top athletes in their favourite sports, such as basketball or football.
But e-sports are much more than traditional games like basketball’s NBA2k and football’s Fifa. E-sports include popular first-person shooter games and multiplayer online battle arena games such as Riot Games’ League of Legends, Activision Blizzard’s Overwatch and Valve’s Dota 2.
Phenomenal growth
Though e-sports might not be familiar to many, the industry has been blossoming in tandem with the coming of age of its once-upon-a-time young followers, who have since become youths and young adults. The pandemic raging across the world in 2020 also forced people to seek alternative entertainment sources.
The total prize pool for e-sports was US$112 million ($148.9 million) in 2020, from 4,038 tournaments. This already was a big drop due to pandemic limitations. The prize pool in 2019 was over US$235 million, dramatically up from US$61 million in 2015 and US$5.2 million in 2010.
Technology firms are aware of these trends and the industry’s profitability. They try to penetrate various parts of the e-sports ecosystem. One of the most popular streaming sites for e-sports, Twitch, was acquired by Amazon in 2014 for US$970 million. Twitch streamed five billion hours of e-sports in 2016, and hit 17 billion hours in 2020, which is around 95 minutes per day on average for each Twitch user.
Mobile gaming could be another potent source of growth. It has the lowest barriers to entry, with more than 40% of the global population owning smartphones and many popular free-to-play games. Also, the pandemic led to the closure of many of the usual Internet cafes, compelling gamers to seek alternative means of playing games. Mobile games are much more dynamic in regular new content and updates, also due to it being less complex to develop. Game developers are able to roll out their new games, expansion and updates more quickly, satisfying demand for instant gratification.
Ecosystem of e-sports
Players: There are two main routes by which talented players make a career in e-sports. The first is to play professionally. To rise to the top of the game, players develop their skills through extensive practice. They spend long hours playing competitive games against their own teammates or competitors in smaller leagues to hone their reflexes and multi-tasking abilities. When good enough, these players usually get recruited or join teams or organisations to participate in competition leagues or tournaments. Successful gamers can earn more than six figures but usually have a much shorter career than the average professional athlete. Gamers are usually between 16 and 24 years of age. You hardly hear of e-sports “superstars” as old as 39 years like tennis professional Roger Federer.
The second is through streaming. Gamers livestream themselves playing video games, usually in a more casual manner than professional games. Streaming can be extremely profitable, and streamers can be torn between playing professionally and streaming. Successful streamers may not have the best technical skills but they have the personality or soft skills to attract a following. This is important as their followers may donate or subscribe to the content of the streamers. For example, one of the top streamers on Twitch, “Ninja”, had more than 16 million followers as of November 2020 and once revealed he potentially earned over US$500,000 a month through streaming from his Twitch subscribers alone.
Teams: To compete at the apex, professional players join teams for cash prizes. They usually specialise in one specific game. The teams have a large base of followers, both online and in-person. Organisations: The best e-sports players are recruited by organisations, which have several teams specialising in different video games, all operating under the same brand. These organisations are able to leverage their larger fan base to recruit high-profile players. They collaborate with brands for sponsorship as well as merchandise or stream events to generate additional revenue streams.
Leagues: E-sports teams participate in video game leagues where the formats are similar to traditional sports leagues. Both types have regular seasons, playoffs and world championships. There are leagues of various scales, but the top ones bring in the crowds and offer massive prize pools. In 2020, the prize pool for the game, Counter Strike, was a mouth-watering US$15.8 million.
Game publishers: E-sports are competitions through video games where each game is the intellectual property of the game creator. Game creators are collectively referred to as “publishers”. The more commonly known ones are Riot Games, Valve and Activision Blizzard. These publishers build and develop their games, owning all the rights to their games. However, they also need the help of the e-sports ecosystem to help boost their games’ popularity. The next leg of growth for the publishers could be a natural progression to collaboration with gaming platforms and the e-sports community for franchising or media rights, among other things.
Streaming platforms and services: Last year took the industry to a whole new level, particularly for e-sports streaming platforms, thanks to pandemic restrictions on in-person tournaments as the world locked down. Streaming platforms and services include Twitch and Discord — a messaging app for gamers. All enjoyed unprecedented growth in recent years. E-sports US audience numbers are expected to hit 84 million in 2021, overtaking all but the National Football League, and surpassing professional sports leagues such as Major League Baseball and National Basketball League. This should benefit the various streaming platforms.
Platform, infrastructure and merchandise: Tournament platforms are another essential part of the e-sports ecosystem. They are platforms for tournament organisers, participants and their fans to gather and interact. Not only can people take part in online tournaments, they can also create their own tournaments. These platforms are also marketplaces for advertising, ticket sales, licensing, sponsorships and merchandising, providing revenue for various stakeholders in e-sports.
Personal computer, mobile and console gaming
E-sports go beyond personal computer video games. They extend to console gaming. Xbox and PlayStation both rolled out new consoles in 2020, which are expected to anchor growth in console gaming in the next few years with new game titles lined up.
Due to the nature of the expansion series for successful games, personal computer gamers usually stick to the most popular games series, such as Call of Duty and World of Warcraft. Console and mobile games have much more dynamic game rankings due to new releases. Of the three modes of gaming, mobile should remain the fastest-growing segment, with its ease of expansion into a ready large base of mobile smartphone users.
Monetisation strategies
With the inclusion of e-sports in the 2022 Asian Games, gaming companies now have many more avenues for the monetisation of e-sports. These revenue streams mirror traditional media companies’ advertising, ticket sales and share of TV or broadcasting rights. They are on top of any revenue currently derived from event sponsorships, merchandising and game publisher fees.
Advertising: Consumer brands are frequently on the lookout for new advertising avenues. With e-sports viewers spending so much time on their screens, ads shown during livestreaming or in on-demand content are a definite for brands to fight over. Advertising has also been growing in e-sports events and platforms due to the value of the advertising dollar, as such advertising is still much cheaper than advertising in traditional sports. The fan base of e-sports is also slowly maturing into young adults, with greater purchasing power, which might appeal to advertisers or marketers targeting this demographic.
Sponsorships: Gaming and tech e-sports players are not the only sponsors of e-sports teams and events. Lifestyle brands with deeper pockets have jumped on the bandwagon. These brands have moved from initial experimentation to dedicated e-sports budgets, after witnessing the exponential growth of the ecosystem in recent years. The injection of funds for marketing events, leagues and even teams will serve to accelerate the already-fast growth in audience. Sponsorships account for more than 35% of sector revenue and are expected to grow further.
Media rights: Revenue is paid to industry stakeholders to secure the rights to show e-sports content on a channel. With the pandemic limiting the content of traditional sports and entertainment, media rights to flourishing e-sports events and games could become a core revenue stream for the ecosystem in the not-so-distant future.
Franchising: Franchising is a system of league organisation, typically in the US, whereby investors buy league slots and are safe from relegation to lower divisions. The franchise model is expected to create waves in the e-sports industry, with more elite teams and organisations with franchise spots able to tap the growth and potential of the collective fan base of top players, teams and organisations in the league, especially with more rivalry between teams fighting for the top spot. Those without franchise spots might be relegated to secondary events with lower monetary value.
The franchise model means significant revenue to publishers. For example, Activision Blizzard’s title, Overwatch, has spots of US$10 million each for franchising. In franchising, the revenue of the whole league and system is shared between the teams, players, publishers and other parties. With millions of hours spent by audiences on such e-sports leagues and growing, monetising leagues is expected to increase in value over time.
Investing in e-sports
To tap the growth of e-sports, investors can choose companies which are publicly traded after doing due diligence on the risks involved.
Game publishers and developers: Publishers benefit from the growth of the ecosystem as a whole but their risks include staying relevant and ensuring gamers’ stickiness to their games. For now, established franchises of games seem to be taking centrestage, but new games are always being developed to challenge the incumbents.
For instance, apart from Overwatch, Activision Blizzard develops popular games such as World of Warcraft and Call of Duty.
Electronic Arts, also the largest video-game licensor of intellectual property from traditional sports leagues, is riding a fan base that comprises fans of both e-sports and traditional sports.
Hardware: Another way to gain exposure to e-sports is to invest in companies specialising in products for games. These include chipmakers which make graphics processing units, which are essential for gaming hardware. One such chipmaker is Nvidia.
Broad-based services: Investors can also look at broad-based stakeholders across the e-sports value chain. For example, Sea is a leading firm in Southeast Asia that provides platforms for gaming, its own games as well as digital payment services.
Another prominent company is Tencent, the largest gaming company in the world. It owns multiple game developers, of which wholly-owned subsidiary, Riot Games, is its crown jewel. Riot developed the most played game in the world, League of Legends.
Media: Streaming platforms are also beneficiaries of the high demand for streaming content. Huya is one company which derives more than 95% of its revenue from virtual gifting on e-sports platforms while collaborating with the various leagues. Its sister company, Douyu, focuses on content creation. Douyu typically signs on streamers to provide streaming content in return for salaries and a cut of its virtual gifting revenue. Now that DouYu and Huya, both backed by Tencent, have merged, the potential of the new media firm is strong. However, there are current risks for such media firms due to government policies, for example, Chinese regulators’ scrutiny of anti-competitive practices.
Beyond the ‘old’ new trends
E-sports is fast transforming into a mainstream industry, with the age group of its followers now extending to young adults with spending power. The current pandemic has also shifted entertainment choices online, a trend that may become entrenched and irreversible even after the pandemic.
The industry’s prospects, therefore, appear strong, especially for streaming platforms that are not exclusive to e-sports but can potentially stream traditional sports as well.
Investors on the lookout for new trends can look beyond the already widely-known renewable-energy or electric-vehicle sectors to the e-sports industry, with its more than 2.7 billion users.
