ESPORTS: The Future of Entertainment
The esports industry has grown rapidly with technological advances driving the industry forward with an expected 495 million people globally in the esports market.
There is a lot of buzz around esports these days, particularly caused by headlines around the recent acquisition of Mobile Legends’ game developer Moonton by Nuverse, the gaming arm of Bytedance. The acquisition values Moonton at $4 billion and the deal comes as Bytedance is positioning itself as the competitor to Chinese tech conglomerate Tencent, which operates Honor of Kings and League of Legends, both cash cows for Tencent.
So why the $4 billion valuation?Well, Mobile Legends attract around80 million players worldwide every single month with over 300,000players live at any second. Its revenue hit $500 million in 2019 and although its 2020 numbers have yet been disclosed, we can expect that it is huge given the impact of lockdowns and stay-at-home notices. And this deal only represents a tiny chunk of the overall esports industry.
For non-gaming geeks out there,Mobile Legends: Bang Bang is a5-vs-5 MOBA (multiplayer online battle arena), similar to the likes of League of Legends and Arena of Valor. In fact, the game is so similar to League of Legends that Riot (a subsidiary of Tencent) actually filed a lawsuit against Moonton in 2017.
While that case was dismissed in theCentral District Court of California, Tencent filed a separate suit against Moonton’s co-founder, Watxon Xu, who was previously a senior ex-Ten-cent employee, for violating a non-compete clause. Tencent won a settlement of $2.9 million
So, What is ESPORTS?
While the exact definition for esports will vary depending on who you ask, the term “esports” generally refers to the idea of playing video games competitively. Although still dominated by developed countries like China, USA and SouthKorea, esports are played worldwide.
Despite slower adoption in Indonesia, esports were featured at the 2018Asian Games as a demonstration sport, featuring Arena of Valor, Clash Royale, Hearthstone, League of Legends, Pro Evolution Soccer, andStarCraft II. The Youth and Sports Ministry and the Indonesian Sports Council (KONI) has also announced its recognition of esports as a sports field in August 2020, allowing video games to be contested in official competitions.
The esports industry has grown rapidly in the last few years and now includes countless different titles, several genres, multiple types of gaming devices, and varied structures to competitive play. The core of the industry includes different gaming teams/star players, game developers, tournament organizers, streaming platforms, and esports fans. As they do with traditional sport clubs, brands would then sponsor these teams and investors would come in and help them grow in the hopes of making a significant profit in later years.
Technological advances continue to move the industry forward, culminating in the introduction of video streaming/broadcasting technology, which has had a tremendous impact on esports, and gaming more broadly, leading to today’s manifestation of the competitive gaming industry. Esports viewership is expected to grow to 646 million by 2023 (351 million occasional viewers and 295 million esports enthusiasts). This represents a 10.3% CAGR from 2018-2023.
The first esport-related event was likely held in 1972 at Stanford University, in which players competed in a PC game called Spacewar, a decade after the game was invented. Today, esports games are conducted through PC, console games, and more recently mobile devices. The rise in PC gaming saw the advent of the first esports leagues but mobile gaming, along with the help of the internet, accelerated the growth in esports as they allowed more gamers to compete with more accessible means, even without being in the same location. As gaming devices continue to expand, it can be expected that there would be new esports games in the augmented/virtual reality space as well although only time will tell when this would happen.
The ESPORTS Ecosystem
The esports industry consists of several different fields for income and each income varies by the type of organizations, team, and the game itself. Generally, when it comes to esports organizations and franchises, the money comes from sponsorships, advertising, ticket sales, merchandising, and media rights. However, each company involved in esports has its own role to play in boosting the esports industry. Today’s esports ecosystem is made of the following organizations.
Developer Tools
These companies are responsible for making engines, software, analytics, and development tools that support game developers in creating their products. Notable companies:
IMPROBABLE
UNITY
UNREAL ENGINE
Game Developers and Publishers
The esports industry would not exist without game developers/publishers, who are responsible for developing various new games and bringing them to market. Within the esports industry itself, there are multiple genres of games: first-person shooter, multiplayer online battle arena, collectible card games, fighting games, racing games, and many others, with the first two genres dominating the space in terms number of players, number of audience and size of prize pools.
Although most games are accessible to players for free, game developers typically offer in-game purchases, such as in-game skins (the way your in-game character looks). Some games have even added purchasable skins to make characters look like members of professional esports teams. These purchases accounted for more than half of Activision-Blizzard’s 2017 revenue, adding up to about $4 billion.
Some of these game developers and publishers also host and produce coverage for some of esports’ largest competitions, such as Riot Game’s LCS or Valve’s Dota 2 International. The publishers can also license their games out to external league organizers and streaming platforms. There is now an increasing incentive for any video game publisher to turn their new competitive title into an esport, with the benefits including extraordinary exposure both online and off, and cascading revenue that can be generated from competition-themed in-game content (the so-called “free-to-play” model).
Notable companies:
ASIA INNOVATIONS
ROBLOX
MOONTON
PEAK
Distribution Platforms
In the video game industry, digital distribution is the process of delivering video game content as digital information, without the exchange or purchase of new physical media such as ROM cartridges, magnetic storage, optical discs, and flash memory cards. Instead, these platforms provide players access to games through platforms through digital download or subscription-based options.
Notable companies:
STEAM
PLAYSTATION STORE
GOOGLE PLAY STORE
APPLE ARCADE
Access Point
Access point companies manufacture an electronic or computer device that outputs a video signal or visual image to display a video game that one or more people can play through some type of game controller. Some companies, like Nintendo and PlayStation, specialize in a niche gaming device, while others like Razer create generic multifunctional devices such as Razer. Razer's products are specifically targeted at gamers but can be used for day-to-day tasks. Their products include gaming laptops, gaming tablets, and PC peripherals such as mice, audio devices, keyboards, mouse mats, and game pads.
Notable companies:
PLAYSTATION
NINTENDO
XBOX
RAZER
Players
Clubs typically pay their players a fixed amount of monthly salary. InIndonesia, the amount ranges from minimum wage to hundreds of millions of rupiah a month depending on skills and popularity. But the real money is in the game winnings; Top esports players earn as much money from winnings as top golf/tennis players. These prize money serves as a bench-mark of personal accomplishment for individual teams and players and, in some cases, are a form of financial stability. The top 5 highest-earning players in the world currently include:
Since broadcasting game sessions is a natural part of their career, players often provide advertising space on their streams for teams and brands.Players can later evolve their content creation skills to become commentators, analysts or even community developers for both the publishers and third-party tournament organizers. One of the top Mobile Legends players in Indonesia, JessNoLimit, left his team EVOS Esports in 2019 to pursue amore active role as a gaming Youtuber. He currently has over 20 million subscribers and makes approximately IDR 200 million to IDR 4 billion a month depending on his ads performance.
ESPORTS Talents and Sponsors
A typical esports club runs multiple teams and supports the performance of these players, from providing housing and training rooms, to managing their brand content. The top clubs in the world even offer their players sport psychology trainers, personal social media managers, and even professional chefs. In exchange for these services, they get a chunk of the players’ winnings and the number can be huge. In 2019, the DOTA 2 International competition had a prize pool of $34 million and the Fortnite World Cup Finals had $30 million. Some of the biggest teams in the world, such as Team Liquid and OG, have made over $30 million in total through their winnings alone.
In addition, sponsorship overwhelmingly makes up the bulk of esports team revenues, with brand activations on jerseys, in-stream promotional content, and hardware exclusivity deals, comparable to a soccer team only using Nike or Adidas shoes. These esports organizations also sell merchandise. Fans can go to their favorite team’s website and buy all kinds of apparel and other accessories.
ESPORTS Sponsors
Brands and investors come to finance this ecosystem by sponsoring either: a player (e.g. Nike with Jian “Uzi” Zihao), a team (e.g. Gillette with Team Solo Mid), a league/tournament (e.g. Toyota and the Overwatch League), an event organizer (e.g. Intel and ESL), or even a publisher (e.g. NFL with Epic Games on Fortnite Battle Royal).
Each sponsor that funds teams typically provide finances, gaming equipment and team attire. Recently, Team Liquid’s jerseys have featured logos from brands such as Monster Energy and Honda, while Cloud9’s jerseys feature logos from the likes of Red Bull, BMW, AT&T, and even Microsoft. This concept basically uses the team’s jerseys as an easy advertisement for its sponsors, much like how professional soccer teams do.
As for other ways to advertise products and services, players would also promote their own discount codes for sponsored products while they stream their games. In exchange, the streamer will receive a cut of the purchase and the company receives another customer through the transaction. Esports organizations, however, do not receive revenue from individual player’s streams.
ESPORTS League Platforms/Tournament Organizers
Just like any other sport, organizations make money from ticket sales, with live events attracting on average 10-15 thousand people per game.However, most of the people watching are doing it online and depending on the event, attendance can reach absurd numbers. At the 2017 League of Legends World Championship in Beijing, the estimated crowd size was about 80 thousand people with another 90 million watching online. Since esports teams do not have their own stadiums to compete at, these events are held at neutral locations. As a result, teams and organizers must share the ticket revenue.
Notable companies:
IESF
ESFORCE
PLAYVS
ESPORTS Broadcasting
While there are those that purchase tickets and watch esports teams go at in person, most viewers watch the events online. Esports organizations then must negotiate deals with broadcasting networks or streaming services to be able to reach cable or online viewers. Some of the bigger leagues, like the League of Legend league, are big and popular enough to land network deals. However, most organizations must sign contracts with online streaming services to get their events broadcasted. The most popular streaming service for these contracts is Youtube and Amazon-owned Twitch. The League of Legends World Championship in 2019 was a record-breaking esports event, boasting over 100 million viewers. Most of these fans tuned in via streaming services like Twitch and YouTube. In comparison, the Super Bowl that same year had 100.7 million viewers across the NFL’s digital properties and CBS.
Notable companies:
YOUTUBE
MLG
TWITCH
ESPN
Streaming and Social
Streaming services like Twitch allow streamers and organizations to make money from donations from as low as $2 to thousands of dollars. Fans can send money to their favorite channels where they see fit. The channel can receive a donation through either PayPal or by “cheering,” which is with virtual Bits that can later be exchanged for money. Twitch also offers subscription plans to viewers, giving fans benefits, such as ad-free viewings and exclusive chat options. In September 2020, there were over 7 million streamers active on Twitch with over 1.5 million hours of view content by fans. The numbers for both hours watched and hours streamed each month almost doubled from 2019 to 2020.
There are also social media apps like Discord that connect gamers to gamers and allow them to converse while playing desktop games through apps that would not eat up a lot of computing resources and slow down their performance. Similar to Slack, they enable users to communicate with voice calls, video calls, text messaging, media and files in private chats or as part of communities.
Notable companies:
ESPORTS Funding
Historically dominated by large incumbents and gaming-centric investors, the gaming industry has been evolving in recent years, well before COVID-19 tailwinds. Increasing investor interest in gaming stems from continued growth in the global gaming industry that surpassed $150B+ in 2019, at 10%+ expansion YoY. For the first time, the gaming market grew to be larger than music and video combined, becoming one of the most lucrative form of entertainment.
Backing game developers and publishers has often fallen outside of the scope of generalist VC funds given the binary nature of outcomes in backing specific gaming/content titles, in the scheme of broader VC portfolio construction. However, in recent years, the sector has seen increasing interest from traditional venture funds such as Andreessen Horowitz, NfX, Bessemer, Greycroft, the Raine Group, Incubate Fund, Korea Investment Partners, Khosla, FirstMark, Lux and more. Beyond fundraising figures, the sector is maturing in terms of mega-rounds and exits, beyond gaming developers and publishers, and in areas such as infrastructure, developer tools, distribution, and communications platforms, although the bulk of financing rounds remain clustered around the seed stage. Below is a highlight of later stage notable VC-backed fundraising success stories:
EPIC GAMES
Epic Games is a video game and software company.
Total Funding: $3,4B
Total Valuation: $17,3B
Investors: Blackrock, Lightspeed Venture Partners, Tencent Holdings, Kleiner Perkins
DISCORD
Discord offers an all-in-one voice and text chat for gamers.
Total Funding: $480M
Total Valuation: $7B
Investors: Tencent Holdings, Time Warner, Index Ventures, FirstMark
SCOPELY
Scopely is an interactive entertainment and mobile games company.
Total Funding: $1B
Total Valuation: $3,3B
Investors: Blackrock, Anthem Venture Partners, D1 Capital Partners, Battery Venture
NIANTIC
Niantic builds AR platform for current and future generations of AR hardware.
Total Funding: $470M
Total Valuation: $4B
Investors: Google, Nintendo, Pokemon, Samsung Ventures, Battery Ventures
Aside from the latest M&A of Bytedance and Montoon, other gaming-related companies are also booking successful exits:
SEA
Sea’s subsidiary Garena is an online game development and publishing company
Exit Details: $4B IPO NYSE:SE Oct 2017
Current Valuation: $109B
Investors: Tencent Holdings, GDP Venture, Cathay Financial Holding, General Atlantic
UNITY
Unity provides multiplatform tools and services to developers of interactive content.
Exit Details: $13.6B IPO NYSE: U Sep 2020
Current Valuation: $27B
Investors: Sequoia Capital, Silver Lake, Bienville Capital, D1 Capital Partners
RAZER
Razer offers financial services, electronics, and gaming hardware.
Exit Details: $4.4B IPO HKG:1337 Nov 2017
Current Valuation: $23,6B
Investors: Horizons Ventures, Accel, Intel Capital
SKILLZ
Skillz is a marketplace platform for competition-based mobile games.
Exit Details: $3.5B IPO NYSE:SE Oct 2017
Current Valuation: $7B
Investors: Franklin Templeton, Twitter, Wellington Management, WestCap
TWITCH
Twitch is social video platform for gamers to broadcast, watch and talk about video games.
Exit Details: $842M Acquired by Amazon2014
Current Valuation: N/A
Investors: Bessemer Venture Partners, Thrive Capital, Y Combinator
PEAK GAMES
Peak Games is a mobile tech company that designs and develops casual puzzle games.
Exit Details: $2B Acquired by Zynga 2020
Current Valuation: N/A
Investors: Endeavor Catalyst, Earlybird Venture Capital, Hummingbird Ventures
What Can We Expect Next?
According to Newzoo, the global esports industry will have a 15.7% YoY growth, while the total esports audience will grow to about 495 million people, indicating a 11.7% YoY growth. Overall gaming consumption has spiked rapidly since the coronavirus pandemic started, especially with more people staying at home with limited options for leisure activities. Verizon saw a 213% increase in gaming-related traffic vs baseline in mid-2020, only behind traffic of work-related collaboration tools. According to NDPGroup, the gaming sales in the US rose by 37% YoY as of August 2020, to $3.3 billion. In Australia, sales of gaming consoles also soared by 285.6% in a one-week period during March 2020 as the COVID-19 pandemic took hold.
While time will tell where levels will normalize post-pandemic for the gaming industry, the immediate increase in penetration last year provides promising market conditions for the gaming companies of today. Once the pandemic is over, the Overwatch League and Call of Duty League will start to reap the benefits of hosting home tournaments through their city-based team models. With rising deals, like the one the Overwatch League made to air on ESPN, Disney XD, and ABC, esports will continue to thrive. With that comes more attention and more viewers, and more viewers means more money to be made in the industry, and that simply means more investors.