August 12, 2019 | By: Michael Stone, Chairman & Co-founder of Beanstalk
Part Three: eSports
This is the final installment of a three-part series about product categories that have recently re-invented themselves due to cultural, societal, technological and political trends. Categories where the economics intersect with the trends. Part One in the series examined the plus-size fashion category. Part Two examined cannabis. Part Three examines esports.
Hundreds of millions of fans will watch esports streaming online and in arenas in 2019, and revenues are expected to top $1 billion this year. If you don’t know about esports then you have been hiding under a rock. Simply defined, esports is organized, multiplayer video game competition, increasingly between professional players and teams, often as part of leagues, for prize money. Esports has championships, stars and a great many fans. Just like other sports. For one event, hundreds of thousands, often millions, of fans can watch online while tens of thousands attend competitions to watch their favorite players and teams compete in games such as League of Legends and Call of Duty. Events are run by many different organizations, including game companies such as Activision Blizzard; Major League Gaming (owned by Activision Blizzard); Riot (owned by Chinese internet company Tencent) which runs the League of LegendsChampionship Series; and non-gaming companies such as Germany-based Electronic Sports League (ESL). And organizations own teams, such as Optic Gaming, which runs teams of professional players for games such as Call of Duty, Halo and Gears of Wars. Esports players are also becoming celebrities in their own right (often winning major prize money). All of the top 30 players have earned over $1 million – and the top 10 players have earnings between $3 million and $4 million. One star player, Tyler Blevins, better known as Ninja, claims he earns seven figures per month! He has 3.5 million followers on Twitter, 19 million subscribers to his YouTube channel, 11 million subscribers on the online streaming service Twitch. He has appeared on mainstream television programs such as Ellenand has endorsement deals with Red Bull and Uber Eats. He, and other players, earns money not only from prize money but from sponsorships, endorsements and, occasionally, league salaries. The economics – for players, team and league owners, sponsors, broadcasters and manufacturers – are very compelling.
Video games are no longer just about playing with some friends at home. It’s no longer just a networking activity. It has become a national pastime and a for-profit sport. Esports sits at the intersection of gaming and professional sports.
How did it all begin? Given that at its simplest, eSports is about playing video games, one could choose to begin there. Video games didn’t start with kids at home. Scientists began playing games on mainframe computers in the 1950s as part of their research. In 1967 Ralph Baer, who is often considered the Father of Video Games, invented a prototype multiplayer, multi-program video game while working at Sanders Associates that could be played on a TV. The technology was licensed to Magnavox which sold the first video game console box, named Odyssey, in 1972. The commercial success of Odyssey has been debated, however, there can be no debate about its importance as the first true video game designed for home use protected by patents and the beginning of the commercial video game industry. One could draw a direct line from that first simple game - - two squares on either side of a straight line played on a TV screen - - to the millions of fans and players who watch competitions and compete online today. It was the inspiration for Atari’s Pong, first an arcade game and then, in 1975, a home version. Following a lawsuit brought Magnavox against Atari for infringement of the licensed patents, Atari became a sub-licensee of Magnavox, as did many other early video game companies. In 1976 Atari launched the Video Computer System that featured joysticks and interchangeable game cartridges. Following a number of bankruptcies and failed launches in the late 1970s and early 1980s, the industry took a leap forward in 1985 when Nintendo launched its game system. In the 1990s Sega launched its system, and Sony launched PlayStation. With each introduction, the games increased in quality, and game play became more advanced. A little more than a decade ago, Microsoft’s Xbox 360, Sony’s PlayStation 3 and Nintendo’s Wii began the period of high-definition gaming. Shortly thereafter, video games spread to social media platforms, such as Facebook, and mobile devices, such as the iPhone.
There can be some debate about when esports actually began. In 1972, gamers competed at Stanford University on the video game Spacewar. The grand prize was a year-long subscription to Rolling Stone magazine (we’ve come a long way). In 1980 the Space Invaders Championship drew 10,000 participants and a lot of media attention. In those days, people generally competed through word of mouth, and scores were posted in gaming magazines. It was the connectivity of the internet in the 1990s that really jump-started widespread competitive gaming. The internet (at first, dial-up modems) allowed players to compare scores and strategies. Communities of players started to emerge that would eventually transform into esports. In 1990, Nintendo held a “Nintendo World Championship”, a three-day competition across 30 cities in the United States, culminating in a “World Finals.” Post-2000, when high speed internet became available, Blizzard Entertainment’s Starcraft, which could support very high levels of play and decision making, became the basis of competitive play on television in South Korea as part of a professional sports league. Many consider that event to be the birth of esports as we know it today. Other games followed, where teams fought against each other with opposing “heroes” with super powers (these games are called MOBAs, short for Multiplayer Online Battle Arena). As the player base expanded, so too did the technology. And in 2002 Major League Gaming (MLG) was formed to promote video games as a sport. In 2006 Halo 2 was the first game to be broadcast on national TV in the United States for MLG, which began hosting competitions in physical locations as well as online. From there, esports really took off.
The experience, however, couldn’t reach its full potential on TV. A different medium for broadcasting was needed. The live streaming service, Twitch, which focused on video platforms including esports, was launched in 2011. Twitch allowed players to stream themselves over the internet and also to converse among themselves in a chat window. It became the venue of choice to watch competitive gaming via live streaming. Twitch (and others, such as Mixer and YouTube Gaming) became a popular destination for players, which drove even more player activity. And in 2014 Twitch was acquired by Amazon for over $1 billion, with video games being the most popular content on the site. During this time period games like League of Legends inspired a good amount of competitive gaming as did international tournaments such as the World Cyber Games and the Electronic Sports World Cup.
Sponsors made competitive gaming a lucrative career choice for both gamers and developers. More money, better production values and live streaming has continued to make esports even more popular. Among the leading game titles in the world of esports are League of Legends (in the final 2017 competition 24 teams played for a prize pool that was over $4.5 million), Call of Duty (in the World League Championships, 32 teams played for $1.5 million in prize money) and Valve’s DOTA 2. At The International 2017, the world’s best DOTA players competed for the largest prize pool in esports history, almost $25 million, which came mostly from crowdfunding. (DOTA stands for Defense of the Ancients, a MOBA for the video game Warcraft III: Reign of Chaos and its expansion The Frozen Stone.) The total 2018 prize pool was $155.9 million. And Epic Games has already committed $100 million for the first year (2018 – 2019) of its Fortnite competition. On July 28, 2019, the Fortnite World Cup, held at Arthur Ashe Stadium in New York City, attracted over 1 million viewers online. The winner, Kyle ‘Bugha’ Gersdorf, 16 years old, took away first prize, $3 million, the largest payout for a single player in an esports competition. A 13-year old from Argentina came in 5th, winning $900,000. And the oldest competitor, 24, won $1.2 million for second place. Every participant who qualified to play in the tournament walked away with at least $50,000.
Even the investment community has taken note. Teams and leagues are raising lots of angel and venture capital. In 2018 money raised for esports was just shy of $3 billion. In that same year, Cloud9 became the most valuable esports team having raised $50 million in funding with Forbes reporting that the team was worth $310 million. And the investment community includes wealthy individuals from all walks of life, such as Sean “Diddy” Combs, Yahoo cofounder Jerry Yang, former eBay and HP CEO Meg Whitman, recording artist Drake, the NFL’s Pittsburgh Steelers organization and many professional athletes, including Michael Jordan.
In many respects, the industry is evolving into a model that is similar to the major sports leagues. For example, the professional Overwatch League, established by Activision Blizzard featuring the billion-dollar franchise, is a global league with a city-based team system. Activision Blizzard has signed a multi-year agreement with Disney to broadcast the Overwatch League on television. Similarly, Riot’s North American League also set up a franchise system with ten teams, each paying $10 million to be part of the League. Esports organizations feature team owners, contracts and partnerships (just like traditional athletic sports) that provide the money for teams and games. Top teams have names such as Team Liquid, Evil Geniuses, Newbee, LGD Gaming and Fnatic. In many respects, esports is more like professional tennis and golf where players earn their money by winning prize money and signing endorsement agreements, rather than salaries which are prevalent in professional sports like football, baseball and basketball. Licensing and merchandise agreements are already happening as well. For example, Activision Blizzard recently signed a license agreement with sports merchandising firm Fanatics to expand distribution of Overwatch licensed products. In early May, Foot Locker launched a collaboration with Champion Athleticwear offering apparel featuring the names and logos of five leading esports teams sold in select stores and online. And there will be more to come in the licensing space.
And, like other professional sports, the fan base is huge and growing. According to Riot, which runs esports leagues and tournaments for their League of Legends game, the World Championships in November 2018 attracted nearly 100 million viewers for the finals. That’s at the same level as Super Bowl viewership! In 2017, Twitch had over two million unique streamers per month. According to Newzoo, a market analytics company, 380 million viewers watched esports all over the world in 2018, which includes 165 million enthusiasts (i.e., frequent viewers), mainly watching from North America, China and South Korea. Tens of thousands attend competitions in stadiums to watch their favorite players and teams competing. The global esports audience will grow to 450 million in 2019, and it is projected that esports will be viewed by 300 million enthusiasts and 347 million occasional viewers by 2022.
It is projected that esports will generate over $1 billion in 2019, a year-on-year growth of over 25%. Close to 85% of those revenues will come from brand investments such as media rights, advertising, and sponsorship, with sponsorship representing almost half of the total and media rights growing rapidly. In a space not overly saturated yet, brands other than gaming and digital brands (non-endemic brands), such as auto, telecom, quick service restaurants, male grooming and apparel brands, will enter the space at an accelerated pace as companies seek to monetize the exceptionally large (and generally younger) esports fan base by sponsoring events, leagues and teams. Newzoo estimates that the esports market will reach $1.8 billion by 2022 and could even be as high as $3.2 billion. Although North America will continue to be the largest market for esports, China will surpass Western Europe in 2019 as the second largest market.
And if you still don’t think esports is really a sport (something that has been debated for years), consider that over 50 colleges now have varsity esports programs recognized by a governing body named the National Association of Collegiate eSports (NACE). Assume you’re a fan of basketball, a “real” sport. Last year the NBA held a draft for the launch of its esports league based on its basketball-themed NBA 2K game franchise. Over one hundred professional esports players were selected with all the excitement usually reserved for the NBA’s basketball draft. And in the 2018 Winter Olympics, professional gamers played Starcraft II to warm up for the official games. This year we will find out if esports will be added to the official 2024 Olympic program.
The video game category has had several periods in its history when it has re-invented itself, but esports is the video game category re-invention on steroids. Esports is the new way that video games are being played in competitions, where the skills of the best players are pitted against each other to determine who is best. That’s what video gaming has always been about, except now, instead of two or three players playing against each other with joy sticks, the players are professionals – and are playing in front of huge stadium audiences with millions watching online, and for significant prize money, all supported by sponsors and major organizations such as the NBA and the NFL. Culture, societal trends, technology and economics have intersected to create today’s esports juggernaut.
Let’s take a look at the dynamics of esports to understand how and why this has happened. First, and perhaps most importantly, esports is great entertainment for younger generations who adopt video games at a very early age. And they feel like it’s entertainment and sport that they “own.” Also, unlike traditional sports, you don’t need to be a gifted athlete to excel in esports. The professionals who are now competing for big prize money have been playing video games since they were very young and got really good at it. It’s a sport open to anybody. For younger generations, gaming is more popular than movies, music or television. That’s a lot of people who can aspire to be esports players and even more who are, or will, become fans. So, esports is driven by consumer engagement of younger generations, generations who will soon be the largest segment of consumers in the world.
Second, esports has grown as the technology has improved. The evolution of the internet was a seismic change for video gamers. It changed everything. Often, video games and esports were ahead of the technology and were waiting for it to catch up. Where broadcast television couldn’t serve the interests of fans, streaming online made it possible for millions of fans to watch esports in real time. The fan base are digital natives, they don’t recall a time when there was no Facebook, Google or Amazon. Technological trends, which become cultural trends, drive esports.
And, finally, third, the economics for brands is powerful. The player and fan demographic is young men, a bullseye for marketers. Right now, the space is not oversaturated, and brands can become sponsors, endorsers or advertisers with small budgets and reach a very large and growing audience. And those brands that get in now, relatively early, and stay in will have the authenticity that the fan base demands. Lots of brands have already signed up, including Intel, The Coca-Cola Company, Mercedes Benz, Mountain Dew, Red Bull, SAP, Facebook and MasterCard, among others.
You can consider esports either a re-invented category arising from video games or a re-invented category arising from the early days of video game competitions. But, either way, esports has exploded on the scene due to trends supported by the gaming culture of younger demographics, the accelerated pace of change in technology and economics.
Now you know what plus-size fashion, cannabis and esports all have in common.