TVN’S FRONT OFFICE BY MARY COLLINS

Collins | Experts See Bright Future For Esports

What has really attracted advertisers’ attention is that 43% of fans have annual household incomes of $75,000 or more and that “58% of fans that are aged 25 or older live with children in their household.” These are audiences that are less likely to watch traditional television.

Mary Collins

The other day I had a conversation with someone, a millennial, who said he just didn’t understand the popularity of esports. He couldn’t imagine watching other people play a video game. Sure, he acknowledged times when hanging out playing a game with several friends and they only had a couple of game controllers, he’d watch game play for a bit. But, he said, he wouldn’t just sit down and spend an afternoon or evening watching someone else play. It turns out that he is in the minority.

Eye-Opening Demographics

The May/June issue of MFM’s member magazine, The Financial Manager (TFM), includes an article entitled, “The Esports Explosion” by Stout Managing Director Kim Randolph and former Stout analyst Mac Holland. They cite some statistics that caught my eye. First, 21-34 year-olds make up 66% of esports fans.

Next, 38% of esports fans are women. Even more eye-opening is the projection of esports audiences — 453.8 million in 2019 and 645 million people by 2022; that’s a projected growth rate of 14% annually since 2017.

Sold-Out Crowds

BRAND CONNECTIONS

Randolph and Holland see a bright future for esports revenues and sponsorships. The authors cite esports data analytics firm Newzoo research in saying that in 2018 there were 737 major esports events hosted in traditional sports stadium atmospheres, most are commonly viewed online and occasionally on network television. Among them are Overwatch, League of Legends, Counter-Strike: Global Offensive and Dota 2, four titles Newzoo calls “the west’s four biggest esports games.”

These events are already producing sold-out crowds for venues including Madison Square Garden and the Staples Center. One outcome is the construction of stadiums built specifically for esports, including a $10 million, 1,000-seat stadium in Arlington, Texas.

Advertisers Are Paying Attention

What has really attracted advertisers’ attention is that 43% of fans have annual household incomes of $75,000 or more and that “58% of fans that are aged 25 or older live with children in their household.” These are audiences that are less likely to watch traditional television.

Significant Revenue Projections

Newzoo forecasts 2019 revenue at $1.1 billion, a 26.7% year-over year increase. By 2022, industry revenue is expected to near $1.8 billion, reflecting an annual growth rate of 22% from 2017 levels. Randolph and Holland expect this strong industry revenue growth to be driven by media rights and sponsorship revenues. Esports companies also benefit from advertising, merchandise and ticket sales.

Who’s Who In Investors

Randolph and Holland say it’s little wonder that the esports industry is attracting significant investment from private equity and venture capital firms as well as from technology and media companies, traditional sports teams and wealthy individuals.

Goldman Sachs reports that during the first six months of 2018, $1.4 billion of venture capital has been invested in esports start-ups. In the five-and-a-half years prior to June 2018, nearly $3.3 billion was invested in the esports industry, also according to Goldman Sachs.

The expert authors say institutional investors see the potential as well, citing a Crunchbase report that 79% of all equity investments in 2016 were Angel or Series A. Their article includes a graph with six years of esports venture capital investment sourced from Goldman Sachs.

The Philadelphia 76ers are reportedly the first professional sports investors in esports teams. They are joined by former baseball player Alex Rodriguez, Ted Leonsis, franchise owner of both NBA and NHL teams, and the venture capital firm Accel Partners, among others.

Media companies are also getting into the business. Comcast owns the Philadelphia Fusion, a team in the Overwatch League. MSG, the regional sports channel, has created a TV show that follows the esports team Knicks Gaming. Nickelodeon, along with theater chain Cinemark, has backed esports startup Super League Gaming that hosts esports competitions in movie theaters.

Additionally, MFM member company WarnerMedia’s sports division has a partnership with entertainment holding company Endeavor for a professional video gaming league and broadcasting operation; MFM members have had the opportunity to hear about this business from their company experts. The article’s sidebar, “Media Jumps on the Bandwagon” details these and other media company investments and developments.

Big Transactions

There are also some large transactions taking place in the space. Holland and Randolph report that, in 2018, Twitch agreed to pay more than $90 million for two years of Overwatch League distribution rights, and Facebook inked a deal to stream Counter-Strike: Global Offensive content.

Also last year, ESPN announced that its premium streaming service, ESPN+ would be broadcasting the North American League of Legends Championship Series. And for the second year, the Overwatch league will air across the Disney platform, with select programming scheduled to air on ABC.

Walmart announced a partnership with esports venue and production company Esports Arena last November. “The retailer is hosting live, in-store events and has launched a new line of gaming hardware.”

On the Way, But Not There Yet

Much to the surprise of my millennial friend who doesn’t see the appeal of esports, there are now more than 300 collegiate esports teams. Moreover, the Big Ten Network reports that 30-plus programs offer scholarships to esports athletes.

Despite all this good news, “profitability remains an afterthought.” Yet, the authors see the industry’s future as increasingly bright. They say: “As revenues grow, esports valuations should continue to rise, and as revenues become more predictable and the industry approaches profitability, traditional valuation methods may become appropriate for esports teams.” In their analysis, two of esports’ primary sources of income — media rights and sponsorship revenues — are growing quite quickly.

At the same time, Randolph and Holland caution that esports faces significant challenges. The greatest of these is monetizing an audience that is growing much more quickly than those of traditional sports teams. Traditional sports audiences spend considerably more on items including tickets, merchandise and subscriptions. Esports audiences can, and often do, watch teams compete for free, “discouraging paid participation.”

Despite these and other challenges, including the need to be able to offer competitive salaries to a larger proportion of professional gamers, the authors believe that, when compared with professional sports teams, esports has more financial upside. They also note that industry’s economics are beginning to be such that they will be able to apply “traditional valuation approaches to the esports industry.”

They close by observing that, “at a time when the primary professional sports leagues in the U.S. are dealing with headaches over National Anthem protests, athlete safety, reduced competitiveness due to so-called super teams, pace of play initiatives and aging fan demographics, esports may be burgeoning at just the right time.”

Esports was also part of the conversation last month at MFM’s annual conference in New Orleans. Among the presentations was one from Deloitte principal Pete Giorgio, who observed that with professional sports’ skyrocketing ticket prices and programming costs that are difficult to justify, esports are the next great frontier.

I will be sharing insights from his, and other, conference sessions in future columns. In the meantime, if there is a media finance-related topic you are interested in hearing more about, please let me know.

Mary M. Collins is president and CEO of the Media Financial Management Association and its BCCA subsidiary, the media industry’s credit association. She can be reached at [email protected] and via the association’s LinkedInTwitter or Facebook sites.


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