The current COVID-19 crisis has seen traditional sports turning to the virtual world to stream closed events to crowds at home – including the eNascar iRacing Pro Invitational Series.
That boom in stay-at-home audiences has seen some refer to online gaming as the ‘biggest threat to internet bandwidth’. In March, gaming platform Steam recorded 20 million players online at the same time for the first time ever1, while IEM Katowice, an annual competition for ‘Counter-Strike: Global Offensive’, became the most-watched non-major tournament of all time2.
But where did it all begin, and why is esports coming through as a high conviction investment theme? Launched in autumn 2019, the latest edition of the Call of Duty (COD) video game, titled Modern Warfare, took USD600 million in its first three days.
The game itself is only one avenue by which revenues are generated. Previously, it would have been unthinkable that people would pay to watch others play video games, but the streaming of video games has exploded, thanks in large part to the rise of Twitch.
On the Twitch platform there are two types of streamers. Entertainers, who play a number of different games with the primary purpose to entertain, and professionals, who have driven their popularity by being successful in the realm of competitive gaming, also known as esports.
Breaking into the mainstream
The increasing professionalisation of the field has been matched by a growth in mass audiences, with global viewing figures expected to hit 495 million in 2020, a year-on-year rise of 11.7 per cent.3 Games such as Call of Duty seek to actively promote esports and streamers, as they help develop a community around the game and keep it relevant in an increasingly diverse industry of video games.
Ed Cave, Relationship Manager at HSBC Private Bank and Chairman of the Video Game and Esports Working Group at HSBC Group, has seen growth in the number of investors looking to take advantage of opportunities in this digitally native industry:
“In the past five years, the esports industry has professionalised and broken into the mainstream. Events are now held across the globe in venues such as Madison Square Gardens and Wembley Arena. Insomnia now takes place at the NEC Arena, Birmingham, attracting 68,000 visitors a year.”
The wide-ranging market is structured such that the companies who develop and publish games are at the top of the food chain, feeding down to the teams and tournament organisers, then finally encompassing a wealth of associated marketing, data analysis, and merchandising opportunities.
“Intellectual property is king, so the games publishers and developers who own these games continue to be in highest demand amongst investors,” advises Ed. “On the other hand, esports remains largely unmonetised, presenting a huge opportunity for investors who can afford to take risk and get involved early.
“A growing number of venture capital and hedge funds have turned their heads to this sector as a result.”
China and the US lead the global scene in terms of participation and revenue. The UK, despite being the fifth-largest market for games purchases,4 has lagged behind many other countries when it comes to esports.
So far, there are few British players competing at a level to rival the high-earning global stars from Asia and the US. However, UK organisations such as the British Esports Association are working at the grassroots to change that, developing skills alongside schools and universities.
UK esports begin to flourish with new opportunities for investors
Alongside the work of the British Esports Association, there have also been encouraging signs of growth in UK tournaments and esports leagues. 2019’s ESL One tournament in Birmingham set new records, attracting 13 million viewers.5 By way of comparison, the 2019 Rugby World Cup Final netted 12.8 million viewers.6
Two of the giants of the US sector, Cloud97 and ReKTGlobal8, have recently invested in UK esports teams (also known as ‘franchises’ when participating in a league) for the Overwatch and Call of Duty games respectively.
The franchise model is a relatively new phenomenon in esports. It enables games publishers to sell exclusive rights within a city or location to esports teams, allowing them to compete in global leagues. These leagues have equivalent structures to the Premier League in football, and often require buy-in fees of more than USD10 million per team.
“These fees create a competitive platform that is enticing for media companies and large brands to engage with local audiences,” explains Dave Martin of the British Esports Association.
Franchise holders are able to seek local sponsors, with the proviso that they are not in competition with sponsors of the global parent company. Broadcasting rights are negotiated at publisher level and the proceeds split among teams within the leagues.
The leagues create a certainty of scheduled games, and provide consistent revenue streams that have made investors more willing to explore this sector.
Gen.G, which runs esports teams across the US and Asia, netted USD46 million in a 2019 funding round, including a contribution by actor Will Smith – one of a host of celebrities and traditional sportspeople investing in esports.9
However, while some esports teams seek to attract funding with the prospect of large returns and although significant yields are entirely possible, the uncertainty in the market, the general lack of structure and its fluid nature means any investment comes with a certain level of risk.
The question now seems to be which esports investment areas attract the most attention going forward.
HSBC Private Banking’s has recently released a high conviction equity theme on esports and video games as part of the Digital Consumer theme. If you would like to discuss investment opportunities, contact your Relationship Manager for advice.
1Daily Mail, Video game players are urged to play at ‘reasonable times’ to avoid putting an extra strain on internet networks during the coronavirus outbreak, March 2020
2Quartz, The borderless nature of gaming is allowing esports to thrive during coronavirus, March 2020
3-4Newzoo, Key Numbers
5Esports News UK, ESL One Birmingham, sets record for best viewership of any ESL One Dota 2 event to date, June 2019
6The Guardian, Rugby World Cup final’s TV viewing figures hit 12.8m peak – the best of 2019, November 2019
7VentureBeat, Cloud9’s Overwatch League team gets a new name and new facilities, November 2017
8esportsinsider, London Royal Ravens unveiled as first Call of Duty League franchise, October 2019
9esportsinsider, Will Smith invests as Gen G announce 46m funding round, April 2019