• ETF Insights

    Investing in Esports: Exposure to Disruption

    11 March 2019
     

    Esports continue to drive headlines around the world, as revenues and prize pools grow to new heights.  According to Newzoo’s recently released 2019 Global Esports Market Report, esports revenues exceeded $860 million in 2018 and is expected to grow to $1.7 billion by 2022. Newzoo also reports that the total prize pool for esports matches exceeded $150 million in 2018.

    As these statistics indicate, video gaming and esports represent a fundamental paradigm shift in how people use entertainment and technology to interact with each other. Esports and online video game are a long-term disruptive force in the traditional media, entertainment, and technology industries. Activision Blizzard is one of the worldwide largest companies in the gaming industry and owner of the professional Overwatch esports league. Bobby Kotick, CEO of Activision Blizzard, in a recent a16z podcast discussed how this happened and shared his perspectives how what drove gaming to become an entertainment and cultural phenomena.

    Video Games as a Service

    Over the last decade, video game companies have begun releasing games under a new revenue model that helps maximize the longevity and earnings power of new games. Rather than a one-time transaction, publishers are moving towards an ongoing subscription-based model with a much longer time horizon of purchases from a single user.

    In the traditional business model, known as “game as a product”, a video game publisher develops a game and then sells it to the consumer for a single, revenue-generating fee. After the consumer buys the game, the video game publisher has to develop another video game or add-on to generate additional revenues from that consumer.

    In the mid-2000s, video game publishers began testing the “game as a service” model.  In this model, the consumer bypasses the initial cost of purchasing the game, and then pays ongoing fees to continue playing the game and accessing content. There are a number of different ways the video game publisher can generate revenues under this model, including game subscriptions, micro-transactions, and season passes.  While the transaction fees in the service model may be smaller, the publisher opens the door to an indefinite purchasing lifespan from each consumer, which can increase the total revenues generated from a single game.

    Fortnite: A Free Game with Record-breaking Revenues

    Fortnite stole the show in 2018, earning $2.4 billion for the year—the highest annual revenue of any game in history. Fortnite is free to play, generating the majority of its revenue using the game as a service model.

    Crucially, an actively engaged online community sprang up around Fortnite, centered around online streaming websites like Twitch and YouTube.  The most-watched Twitch streaming channel was held by Tyler “Ninja” Blevins, who garnered roughly 226 million hours of views throughout the year.  Across Twitch and YouTube, viewers watched more than 1.6 billion hours of Fortnite gaming, according to the Newzoo report.

    Other tech and entertainment conglomerates have recognized the scope of the phenomenon. Netflix, in its last quarterly report released in January 2019, directly referenced Fortnite, stating, “We earn consumer screen time, both mobile and television, away from a very broad set of competitors.  We compete with (and lose to) Fortnite more than HBO.”

    The 1.6 billion hours of Fortnite streaming represent a shift away from traditional TV and entertainment, and towards the next-generation entertainment ecosystem. Unsurprisingly, demographics play a huge role in this. Esports enthusiasts are, on average, around 30 years of age. These are younger consumers (adults with purchasing power) who have grown up online and playing video games. Large numbers of this demographic are turning away from traditional media channels in favor of online video game streaming.

    Over Half of Global Game Revenues Come from Mobile

    Game Hours Watched* (Millions) Game Type
    Fortnite 1,636.8 Game as service
    League of Legends 816.1 Game as service
    PUBG 617.7 Game as product
    Hearthstone 306.2 Game as service
    Dota2 296.9 Game as service

    *Represented by total hours watched on YouTube and Twitch in 2018

    Consumer Turned Creator

    At the crux of the esports and online video game phenomenon is the rise of the online streamer. Video game enthusiasts have transformed from passive content consumers to active content creators. Online streaming has a low cost of entry, and social media streaming websites allow anyone to create a username and post videos. Twitch currently generates 140 million unique viewers per month. On average, there are 15 million people who are considered daily active users (DAU). There are also 2.2 million monthly broadcasters. These are people who are posting their own videos to the website (as opposed to just watching and commenting).

    In the traditional model, the media and entertainment is passively consumed, whether that’s people watching TV on the couch or a movie in the theater. Advertisers and brands pay money to pitch their product to those consumers. Online video gaming and streaming is a completely different environment.  Users are interacting with each other, posting their own videos, and following others with similar tastes and interests. It is an active environment, with consumers assuming the role of content creators. In Twitch’s case (and within the broader context of social media), this has taken on a snowball effect.  Millions of people are interacting with each other and their content, and the viewership and participation statistics have skyrocketed over the last few years.

    The move away from passive entertainment consumption best exemplifies the broader paradigm shift that’s occurring across the tech and entertainment industry. With video games and esports, a young demographic has effectively cut the cord from traditional entertainment channels. The rise of online streaming websites has given consumers the outlet to create their own videos, and fostered an actively engaged community of users that coalesce around different games and activities. Going forward, we expect to see video game companies and the broader tech and entertainment industries more efficiently monetizing their platforms and investing in the long-term future of this evolving industry.

    IMPORTANT DISCLOSURE  

    Source for all data points unless otherwise noted: Newzoo Global Esports Market Report 2019