The Explosive Growth of Esports: Will This Sector Take Over?
🧠 My Takeaways
- Esports is the fastest growing sport. The global Esports market is currently worth $1.08B and is expected to reach $1.62B by 2024
- At present, sponsorship accounts for over 55% of all Esports revenue
- In 2018, over $2.5B was invested by venture capital into areas such as game development, event organizing, media platforms and consumer products
- New business models, growth in mobile and a rise in casual viewing are key trends shaping the industry
- AI, security, insurance, user generated content, betting and emerging technologies (5G, AR/VR, blockchain) will define the future of Esports
- Combating issues such as “gaming addiction” will be key to advancing the industry
Esports is considered the world’s fastest-growing sport. It’s no longer considered a phenom occurring in the basements of the unemployed youth. With total viewership expected to grow at 9% CAGR Year on Year (YoY) between 2019 and 2023, Esports is mainstream . According to Deloitte, in 2018 the Esports sector received a total investment of $4.5B (with venture capital investments accounting for over 50%) a CAGR of over 100% between 2014 and 2018.
According to Newzoo, the global Esports audience was projected to grow to 495m in 2020, a YoY growth rate of 12%. With its diverse ecosystem, digital platforms and accelerated growth, Esports holds significant promise for a multitude of investment and monetization opportunities.
In this piece, I will introduce readers to the Esports industry, discuss trends and provide insights into areas that I believe hold significant promise for those keen to further explore the world of Esports. My insights are based on findings from third party reports, expert interviews (VCs and Industry Analysts) as well as my personal views.
What is Esports?
The Esports ecosystem is made up of both software and hardware companies developing technologies that enable video games to be played on computers/consoles by professional gamers. Such technologies include: broadcasting & streaming services, marketing for competitive gaming, communication & social tools, game developers and publishers and professional grade gaming hardware. Non-technical areas include events & tournaments, organisations and teams.
Genres in Esports
Just as traditional sports fans enjoy watching top athletes perform, the same can be said for Esports. The industry comprises the following genres:
Most Watched Games on Twitch
Who Are the Key Stakeholders in Esports?
🎯 PLAYERS
Just like any other sports — becoming a top tier athlete requires significant commitment. Players rise through the ranks by specialising in a specific game. Players also hone their skills through competitive play in areas such as quick reflexes and multi-tasking abilities.
There are two career paths available to talented Esports players:
- Streaming: Gamers who livestream themselves as they play are referred to as “streamers.” Streaming can be profitable for many streamers. Not all streamers have the skill to play professionally. Some streamers have streaming personalities that viewers find entertaining to follow, donate to, and subscribe to. For the streamer, this not only creates a strong fan base but also proves to be a significant revenue stream
- Playing Professionally: Those who rise to the professional level compete in tournaments all around the world against the best teams. Throughout, they build a fan base for themselves, teams and organizations they play for (analogous to Cristiano Ronaldo having a following whether he’s at Real Madrid or Juventus). Successful pro gamers can earn millions. Esports players tend to retire early (mid 20s) and may choose to remain within Esports (through coaching, starting their own team etc.) or end their involvement with Esports entirely.
🔨 GAME DEVELOPERS / PUBLISHERS
In Esports, the game creators (aka. Publishers) own all the intellectual property rights to their games and as such, are highly influential in the ecosystem. In 2017, Riot Games announced franchising and revenue sharing possibilities, which would allow for select players and teams to participate in the upside, further underscoring the influence of Publishers in the ecosystem.
📊 LEAGUE ORGANIZERS
Esports teams compete in their video game’s respective league, where just like regular sports there is a regular season, playoffs, and world championship. League tournaments are run by companies such as Major League Gaming (MLG) or the Electronic Sports League (ESL). Leagues include North America League of Legends Championships Series and the Call of Duty World League (organized by MLG).
👥 ORGANIZATIONS
Organizations have several teams that specialize in their respective video games but operate under the same name (e.g., Cloud9, NRG, Optic or Fnatic) — just as an NCAA college or university competes in football, basketball, and hockey all under the same umbrella organization (the college or university). Think of an organization as an elite conglomerate of teams playing a variety of video games. Organizations seek out sponsorships with brands to access additional revenue streams outside of cash prizes. This is to a large extent determined by the following and successes of the underlying players and teams tied to the organization.
🏁 ESPORTS CONGLOMERATES
In addition to providing teams to compete in Esports competitions, conglomerates provide a wide range of high value services to existing Esports brands and those interested in tapping into the fast growing esports market (e.g. Rekt, Gfinity). Services include organizing events, media services, influencer marketing, fan monetization etc.
🎮 ESPORTS PLATFORMS
In addition to the above, there are a myriad of other marketplaces, resources and technologies that are part of the ecosystem, they include:
- Professional Gaming — Platforms and Infrastructure: Tournament platforms (e.g. skillz, challengermode, FACEIT ) and communication tools (e.g., Discord).
- Betting and Item Marketplaces: Esports gambling, fantasy (with pro-esports athletes), and item marketplaces for in-game customization.
- Broadcasting and Livestreaming Resources: Streaming platforms (e.g. Twitch and StreamElements), streaming services, game highlights, and esports analytics
- Aspiring Pro Gamer and Fan Resources: Includes everything from news sources, industry statistics tracking, coaching, and skill improvement tools.
Esports by the Numbers
🌎 AUDIENCE FORECAST
According to Newzoo, the Esports audience will grow to over 645 million globally by 2023 with “Esports Enthusiasts” accounting for 45% of the total.
“Esports Enthusiasts” watch professional Esports content more than once a month. The total number of global occasional viewers will hit over 350 million by 2023. Occasional viewers watch professional Esports content less than once a month. Factors such as urbanization and advances in IT infrastructure, coupled with explosive mobile titles such as PUBG Mobile and Garena Free Fire are driving the growth in audience and awareness numbers across emerging markets such as Latin America, the Middle East, Africa and Southeast Asia.
💸 REVENUE FORECAST
By 2023 Esports revenue is projected to reach over $1.5 billion with China accounting for the largest proportion. The world’s fastest-growing esports revenue stream is digital revenue with a projected CAGR (2018–2023) of 72.4%. Digital revenue, is the revenue generated from digital sales of in-game items that utilize team IP or signed player likeness.
💰REVENUE STREAM
Despite holding such a significant share of Esports revenue, sponsorship is expected to continue to grow. Media rights (i.e. revenue generated through media property including all revenues paid to industry stakeholders to secure the rights to show Esports content on a channel or copyright costs to show video content or photos of Esports competitions) is the industry’s second largest revenue stream and accounts for 17% of global revenue. Merchandise and tickets sales account for 11% of the Esports market. Digital and streaming is the smallest but fastest growing revenue stream.
In light of restrictions on social gatherings, we can expect to see significant growth in streaming revenue going forward. Streaming revenue is generated through professional players or signed streamers streaming — either on their own channels or on team channels. Streaming revenues are also made up of revenues generated from Esports teams’ own content broadcast on 3rd party video platforms.
“ Factors such as urbanization and advances in IT infrastructure, coupled with explosive mobile titles such as PUBG Mobile and Garena Free Fire are driving the growth in audience and awareness in emerging markets ”
5 Trends That Excite Me
1. 🚀 THERE IS LIGHT AT THE END OF THE “COVID-19 TUNNEL”
With COVID-19 restrictions still impacting air travel and large gatherings, the major Esports events are still facing great challenges. Many tournament organizers shifted to online settings for their competitions which allowed them to maintain momentum. However at the same time, the shift to online caused organizers to lose on certain revenue streams such as tickets and merchandise that would have been sold on the arenas.
Competitive integrity is somewhat challenged by an online setting. For example, in games where every millisecond counts, a sudden increase in latency could be the deciding factor of a match, or even of a championship. Some organizers are trying to overcome these obstacles by creating safe environments for players participating in the tournaments with the so-called “bubble” concept. By isolating the players participating in the competitions, the organizers can ensure their safety and the safety of the operators working at the events.
As the vaccination rates rise in multiple countries, we can expect to see live events returning to the table, and fans will be able to enjoy the world’s best competitions in person again.
2. 📈 MOBILE ESPORTS CONTINUES TO GROW
Mobile Esports has been in the making for quite some time now, and this year we see yet another huge leap over the previous year on mobile esports viewership on mobile platforms. Titles like PUBG Mobile, Garena Free Fire, Mobile Legend, and the recently released Wild Rift, are booming in many markets. Mobile’s accessibility has empowered and engaged younger audiences in addition to gamers in growth markets, where expensive gaming PCs or consoles may be out of reach. Many organizations are entering the stage and we are seeing great examples, such as the India-based Mobile Premier League, which is creating a platform for players wishing to compete in mobile esports.
3. 🎓 COLLEGIATE ESPORTS IS MAKING SERIOUS INROADS IN COLLEGE SPORTS
In the wake of the pandemic, many college sporting events have been cut short or cancelled. For some programs, such as Northwood University, their Esports program is the only part of the athletic department currently operating. The ability for students to compete remotely in Esports competitions, such as the Maui Esports Invitational, has shone a spotlight on the potential of collegiate Esports.
Not only will more colleges invest in their own collegiate Esports programs, more professional Esports organizations will partner with universities. By building relationships with these schools, organizations can foster strong relationships with their target market and even identify potential interns and employees. Cloud 9 has partnered with multiple universities and their Esports programs across the country, holding seminars on careers in Esports and more. Collegiate Esports can also serve as a talent pipeline — three collegiate League of Legends players were signed to LCS teams this year. In addition, major networks such as ESPN have entered the fold creating platforms for national exposure with the launch of the College Esports Championship.
4. 👾 RISE OF CASUAL VIEWERSHIP
In the second half of 2020, Twitch viewership was dominated by casual gaming. Games such as Fall Guys, Among Us, Animal Crossing and Minecraft all had explosive years on the platform. For example, between July 2020 and August 2020, Among Us experienced a 650% growth in total hours watched- jumping from 4m to 30m. Fall Guy’s first month on Twitch had 106m hours watched, making it the third most viewed game in August. Just Chatting, a Twitch category featuring no gaming at all, simply a streamer interacting with their audience, was the most watched category on Twitch in 2020.
Unlike Esports content, which is driven by high stakes competition and quality gameplay, games such as Among Us drive viewership through the personality of the streamer. Gaming fans are just as willing to tune in to see their favorite streamer have fun with a game as they are to see the same streamer dominate in Fortnite. Games such as Fall Guys and Among Us demonstrate the future of Twitch and Esports. Fast, fun game play that quickly changes pace and progression creating easy to narrate, digestible games.
5. 🔥 NEW REVENUE MODELS
In Esports, organizations earn revenue through eyeballs, i.e. the more eyeballs an organization has, the more it can charge brands to sponsor their teams, streamers and content. For example, TSM charges brands such as Geico to promote the insurance company in its videos, Twitch streams and more. This income is often supplemented by sales of merchandise.
Restricted travel and reduced in person appearances have impacted sponsorship revenues. In some cases, some organizations have failed to meet their contractual obligations. For organizations part of the CDL or OWL, 2020 was supposed to be the year organizations could generate revenue from ticket sales, food and beverage, as teams hosted competitions in their home markets.
Offering subscription packages is a new revenue model that Esports organizations are exploring. For example, Team Liquid, with Liquid+, and Cloud 9, with Stratus, offer membership subscriptions tailored to super fans. These subscriptions include exclusive merchandise, private seminars with organization leadership and more.
According to Luca Chiovato (a Newzoo Market Analyst), to diversify revenue streams, Esports organizations are venturing into new spaces. Outgrowing a strictly competitive nature, these teams are evolving, positioning themselves as lifestyle brands or moving towards content-creator strategies.
Organizations such as 100 Thieves, or the Brazilian Esports organization LOUD, perfectly embody this strategy. On top of having competitive rosters for major Esports, they have also developed an apparel line of everyday outfits and have signed content creators as a way to engage audiences. Moreover, we are seeing teams signing not necessarily Esports pros, but also chess players and musical artists. Looking ahead, we can only expect this trend to amplify as organizations continue to build out more robust business lines, facilitating an even stronger and healthier Esports market.
🤔 OTHER NOTABLE TRENDS
- Industry consolidation amongst Esports organizations
- Continued growth in participation amongst celebrities and athletes
- Asia remains No.1, with China remaining the largest market and South East Asia boasting the fastest growing region
Areas of Opportunity
The future of Esports looks bright. Below are my top picks in terms of opportunity:
1. 🤖 ARTIFICIAL INTELLIGENCE
a) Strategy & Skill Development — As more leagues, teams fans, and players emerge, as the size of prize money grows,, the stakes become higher for organizations and teams. For teams and players to be at their best, utilising the best tools to hone their skills and improve their performance no longer becomes a nice to have but a must have. Companies such as Gosu AI and Falcon AI are leading the charge.
b) Fan Engagement & Monetization — Esports audiences are expected to grow 8% (CAGR) between 2019 and 2024. Teams and sponsors will need to understand these new audiences extremely well and find ways to not only engage but to also monetize them.
2. 🔢 DATA ANALYTICS
Insights derived from data analytics are being used by organisations across the Esports value chain. Teams such as Cloud9, Team Liquid, and Astralis have partnered with Microsoft, SAP, and Newzoo, respectively, to use data to develop gaming strategies, attract investment, and reach larger audiences. Organisers, such as DreamHack and ESL, have teamed up with Nielsen for sponsorship valuation and media measurement. Game-specific platforms are also emerging.
3. 🚨 SECURITY
More than two-thirds of Esports executives believe match-fixing is a threat to the industry’s legitimacy and growth, according to a 2019 survey by law firm Foley & Lardner and the Esports Observer. Match-fixing incidents in games such as CS: GO, League of Legends, StarCraft II, and Overwatch have tarnished the industry. Over the coming years, organisers will tackle match fixing by investing in fraud identification technologies and addressing vulnerabilities.
4. 👍 INSURANCE
With the dawn of a new digitally competitive age comes a multitude of risks and exposures that all involved need to be aware of (such as breach of contract, intellectual property rights infringement issues, data collection, privacy and security, network disruption and responsibility for user generated content). Exciting areas of opportunity for insurers (both incumbents and new entrants) include Esports Team insurance (offerings such as Disgrace Insurance, Keyman insurance and Equipment damage), technological failure (including Cyber and Network liability), event cancellation and event liability to name a few.
5.💥 COMMUNITY GENERATED CONTENT (GCC)
The explosive growth in live streaming will bring more opportunities to harness community generated content and monetise fandom. Thanks to the pandemic, streaming platforms such as Twitch are experiencing record numbers in viewership and engagement. According to Twitch Tracker, the total number of minutes watched so far this year is up 40% while the total number of unique creators streaming is up 39% , expect this trend to continue. The success of titles such as Fortnite and companies such as Roblox and Manticore games provide a glimpse into the future. GCC will do for Esports what open source has done for software.
6. 📲 EMERGING TECHNOLOGIES
Technologies such as Platform Convergence, 5G, AR/VR/MR and Blockchain will define the future of Esports. 5G’s low latency high bandwidth capabilities will allow for a better cross platform competitive experience. With the arrival of untethered VR headsets and new games, a fresh market for VR Esports is emerging. HTC (Vive Focus Plus headset) and Facebook’s Oculus, with the Quest, are major players in this area. AR/VR also enables next gen interactive spectator experiences. Improving the trust factor in Esports between parties, for example smart contracts ensuring organizers pay developers for the use of their games or securing in-app purchases using secure blockchain networks (digital signatures can assure consumers about their purchases) are examples of use cases for blockchain in Esports.
7. 🎲 ESPORTS BETTING
The pandemic has been a catalyst for the growth in Esports betting. Disruption to traditional sports saw gamblers shift spend away from traditional betting to Esports betting. According to PR Newswire, in 2020 Esports betting websites were expected to rake in $1.8B a small fraction of the $443B that the global gambling industry is estimated to be worth. This leaves significant room for growth. Esports betting company Luckbox has seen its turnover grow nearly 13x since 2019. In addition, deposits have risen 10x over that same period.
💭 Final Thoughts…
Although the future of Esports looks very promising, there are two hurdles that need to be overcome. Firstly, gaming is addictive and hours of continuous play or viewing without mobility can be harmful to one’s health. The industry needs to tackle this challenge or face strict regulation from governments. Secondly, the level of investment into the industry from sponsors, fans, VCs, governments needs to be sustained.
I for one am bullish on the industry and looking forward to the next 5 years!
If you have any comments, questions or would like to discuss further reach out: twitter @kuuhgn or on LinkedIn , would love to discuss !
A special thank you to my wife and son, Malte Barth (Founding General Partner at BITKRAFT Ventures @mabarth), Anthony Palma (Principal at Grfiffin Gaming Partners @anthonyrpalma) Alina Geosanu (Newzoo games and esports data company), Luca Chiovato (Newzoo games and esports data company)
