A World Apart

BY KIMBERLY M. RANDOLPH & COLIN M. O’BRIEN

Viego, the Ruined King (From League Of Legends)

Four major types of participants in the esports business are experimenting with revenue streams that can be quite compelling, for the right investors.

This is the fifth in a series of stories on the financial performance of media.

KYLE GIERSDORF IS LIKE MANY other kids growing up in the last decade; he has a love for video games. Bugha – as Giersdorf is known in the esports world – became infatuated with Fortnight, a game launched in 2017 that puts 100 players together on a map, and they fight to become the last one standing.

The teen did not just use the game as a means to unwind after a day at school though. His skill became so advanced that he was one of 100 players to qualify for the inaugural Fortnight World Cup in New York. To put that in perspective, around 80 million global competitors were actively playing Fortnight at that time, according to Fortnite’s distributor, Epic Games

Bugha placed first in the tournament, taking home the grand prize of $3 million dollars. This was the largest earnings ever for an esports player in a single event. The International 8 championship for another esports game, Dota 2, had a total grand prize of $11.2 million, and members of the winning team took home about $2 million. By comparison, when Patrick Reed won the Masters in 2018, he took home just under $2 million

While the world of esports has many similarities to the traditional world of professional sports, there are distinct differences – not the least of which is the need for esports leagues to reach profitability. The industry is still in its adolescence, and business participants are experimenting with different revenue models based on their position in the market. They include developer-backed leagues (professional leagues run by game developers); esports teams themselves and their investors; the players on the teams; and the streamers and streaming companies. Let’s look at each one in turn.

DEVELOPER-BACKED LEAGUES

One unique aspect of esports is that the actual games are intellectual property (IP) owned by a company. As a result, the IP owners take a very active role in developing leagues and often provide prize money. While there are separate, sponsored leagues that aren’t backed by developers, they typically have much smaller audiences, and the prize money is not as attractive.

Most leagues include revenue-sharing agreements that are similar to that of traditional professional sports leagues. Teams are able to generate revenue from sponsorships, advertising and merchandising. The digital platform that they use creates a unique way of generating sponsorships. Marketers can create non-traditional brand awareness. For example, they can offer special “skins” that are layered on a player’s avatar and are only available if a player purchases one of the sponsor’s products. Ads can also exist within a league’s virtual playing field.

As revenues and participation grow, so does optimism in the industry for continued investment from both existing and new participants. Developer Riot Games believes that its League of Legends Championship Series (LoL CS) will be profitable in the next two years, as revenue from sponsorships and viewership increases. Legends is a North American-based league with 10 franchises. According to ESPN, citing data from Nielsen, the league attracted 124,000 viewers in the most sought-after demographic, 18-34, during its 2019 games.

Riot Games reports that its 2018 League of Legends World Championship Finals drew almost 100 million viewers. That’s a larger audience than the National Football League’s (NFL’s) Super Bowl in 2018, which attracted 98 million, according to CNBC referring to data from Nielsen

Major brands such as Mastercard, Verizon, Bud Light and Louis Vuitton are working with the leagues, and individual teams have landed major sponsors of their own, including BMW and PepsiCo. The leagues also have initiatives to create more localized leagues to encourage a more traditional sports path for players to get noticed and recruited to the national teams.

INVESTMENT & FRANCHISE VALUE

One of the most direct ways for organizations to participate in the esports industry is investing in the teams themselves.

Franchises in an esports league work differently that traditional sports. Esports organizations have a pool of gamers signed under contract to play in their leagues. Many of the players specialize in a single popular video game, such as League of Legends or Fortnight, but sometimes they play competitively across several games.

Organizations are able to compete in a league by purchasing a franchise spot. This allows them to enter a team comprised of gamers under contract with their organization to play against other teams. In LoL CS, a team is comprised of five players. Many of these organizations have teams across most of the largest esports leagues.

As viewership continues to grow, a sustainable, profitable model has become more realistic. And franchise valuations have skyrocketed in response to the increase in demand. In 2017, Echo Fox, a competitive esports group founded by basketball player Rick Fox, paid $10 million for one of the franchise spots in the LoL CS. The spot was subsequently purchased by rival competitive group Evil Geniuses, for a reported $33 million in late 2019, according to The Washington Post.

Evil Geniuses , in turn, was acquired by investment firm PEAK6 in 2019 for an undisclosed amount. Acquiring entities like Echo Fox and Evil Geniuses gives investors an opportunity to purchase an organization that can quickly assemble new teams to compete in new games as

the industry ecosystem continues to evolve.

TeamSoloMid (TSM) is the highest-valued organization on Forbes’ annual esports list. It was valued at $410 million in 2020, with a revenue multiple of around a 9.1x. While this multiple may seem impressive, it is actually below several of TSM’s competitors. In 2020, Cloud9 was valued at 11.7x multiple ($350 million valuation) and 100 Thieves was at a 11.9x multiple ($190 million value). Each of these groups has teams spread across different leagues in different games, such as FIFA, League of Legends, PUBG, and Fortnite.

It’s important to understand that these organizations are the brand, not necessarily the team that is competing in a franchise spot. Evil Geniuses may sell their franchise spot in LoL CS several years from now and use the funds to start a franchise team in a different game. This dynamic is part of what makes the investment more sustainable. As different games grow less relevant over time, organizations can assemble new teams.

THE PLAYERS

Similar to pro sport franchises, having the best talent is very important. Gamers often sign exclusive contracts with a single organization. However, they will often move to different organizations’ rosters over time. Given the unconsolidated nature of the market, central rules on how players move between competitive groups are not established like in the National Basketball Association or the NFL, where players are drafted or traded.

Most players fall under two categories: competitive players and streamers. Although there is a heavy amount of overlap between the two.

Competitive players are signed to a group like TSM, an esports organization that fields players in several games. Then the players are assembled onto rosters for team games like League of Legends or enter a league for a single play game like Fortnite. They share prize and league earnings with their parent organization.

Most streamers have been competitive players. They gradually transition into part- or full-time streamers. Streamers livestream a video of both themselves and their screen as they are playing. Typically, they are not in a specific league or in competition for prize money. The streamers often play with novice players while commentating over their gameplay. However, they are an extremely important part of competitive esports groups. TSM has over a dozen streamers under its umbrella. Streamers are capable of generating massive audiences that can be monetized in several ways. The large audiences are an opportunity to promote TSM and its sponsors, as well as draw attention to its competitive teams. Revenue is also generated from ads on social media and streaming platform websites such as YouTube and Twitch.

THE FUTURE

Although ample risks remain, there are reasons to be optimistic about the future of esports. Insider Intelligence estimates that total viewership is expected to grow at a 9% compound annual growth rate (CAGR) between 2019 and 2023, up from 454 million in 2019 to 646 million in 2023.

Investment across the industry is expected to continue. A massive $4.5 billion was invested across the esports industry in 2018, up from just $890 million in 2017, according to Deloitte. September 2020 alone saw $186.3 million of funding raised across the industry, according to eSports Insider, an esports business focused platform.

Asia still remains the largest esports market. And PricewaterhouseCoopers estimates North American total revenue will reach a new high of $300 million this year. As market players continue to experiment with different strategies for monetizing viewership and sponsorship, the industry will likely continue to grow from a niche online community to a global leader in entertainment.

That said, the esports business continues to be risky. Most esports leagues are still bleeding red ink, and they are unlikely to become profitable over next few years, at least. Additionally, the fast speed at which the industry moves causes most games to be irrelevant within several years of the launch, assuming they even reach a point of success. Regardless, it appears that investors’ appetite for the industry is still strong and may mirror that of the more traditional sports world, whereby investors view the opportunity to invest in these assets for reasons other than pure economics.

THE STREAMING GIANTS

ONE OF THE MOST CRITICAL COMPONENTS OF THE ESPORTS BUSINESS ARE

streaming companies. They bring content, both competitive and otherwise, to the public via digital video game streaming. They are gradually growing from niche online services to mainstream digital content providers.

In 2014, Twitch was purchased by Amazon for approximately $1 billion dollars, according to the BBC. Since then, the company has become the dominate player in the North American streaming market, with its value estimated by Needham & Co. at $15 billion as of June 2020. Since Amazon’s acquisition, Twitch has grown from 55 million monthly users to around 140 million, according to Backlinko, an online consultancy for increasing web traffic.

Twitch’s earnings are similar to other digital content providers like YouTube and Netflix, with money primarily generated from advertising revenue and from subscriptions, which is shared with content providers. Twitch is the primary platform to watch most competitive esports leagues and events, sometimes selling tickets in advance for high-profile events.

An in-house currency called “bits” boosts Twitch’s revenue as well. Bits are purchased through Amazon and PayPal and allow an individual to “cheer” on the platform while they are watching a streamer they enjoy. The more they cheer, the more likely a streamer is to interact with them. Cheering also generates money for that streamer as it allows them to gain popularity and produce more content.

While Twitch continues to be the dominant player in the North American market, it has had to fend off competition, most notably from Microsoft’s platform, Mixer. However, Mixer was abruptly shut down by Microsoft in 2020 after struggling to reach sufficient viewership numbers need to be competitive.

One of Twitch’s largest challenges has been expansion abroad, most notably in China, the world’s second largest economy. The platform is blocked there. As a result, Huya Live (majority owned by Tencent Holdings) and DouYu have become the dominant players in the market. In late 2020, the two announced plans for a potential merger, with the value of the combined business reportedly worth $500 million, according to a DouYu press release.

Kimberly M. Randolph is managing director and Colin M. O’Brien is an analyst at the financial advisory Stout. They can be reached at krandolph@stout.com and cobrien@stout.com, respectively.