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.