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I recently had a conversation in which someone said to me: “You know how kids put everything into their mouth to understand how it works? Well, investors put money into things for the same reason.” While we can argue about the analogy, I liked it enough to steal it, as I feel there is some truth to it.
This piece is a collection of insights I gathered through having conversations with investors and team owners around esports teams and;
- why some of them believe that esports teams will be the next NBA franchises,
- why investors invest double-digit million-dollar amounts into the esports ecosystem, and
- how some teams try to meet these expectations.
Investments in Teams Sky-Rocketed in 2019
As with most other upcoming and mainly unregulated industries, investments in the esports ecosystem are increasing. Based on investment data collected by The Esports Observer, around $2B USD has been invested into the esports ecosystem through disclosed investments in 2019. In comparison, 2018 saw approximately $4.5B in disclosed investments, of which Epic Games alone raised $1.25B in October 2018 and Tencent invested over $1.5B in Q1 2018 with its investments in Huya, Douyu, and Shanda Games. Looking at the amount of investments made, The Esports Observer tracked 141 in 2019 compared to 114 in 2018, a transaction increase of almost 24%.
There is no doubt that esports is a growing market. While revenue and profitability flourish in parts of the ecosystem, mainly for publishers and distribution platforms like Twitch, there is an increased amount of pressure put on esports teams. A disclosed amount of $400M, representing 20% of the $2B for 2019, can be associated with esports teams while noting that over 50% of tracked investment into teams did not disclose any amounts. According to data collected by The Esports Observer, the highest disclosed transactions in 2019 include Gen.G Esports raising $46M, 100 Thieves raising $35M, and Immortals Gaming Club raising $30M. The Esports Observer recently released a list of the top 10 esports related investments of 2019. Furthermore, total disclosed funding to-date for teams and their operating companies hit values such as $72.5M for aXiomatic Gaming (Team Liquid), $70M for Cloud9, $60M for 100 Thieves, $55M for Envy Gaming, and so on. To be clear, teams have raised higher amounts of money and the shown values also consider disclosed amounts.
While Mark Cuban thinks owning an esports team in the U.S. is an “awful business” and that “a lot of people who bought into [esports] teams […] had no idea how bad a business it is,” there are several team owners and ownership groups that feel differently. When I conducted interviews with both groups, the one question that was fired back at me and stood out was “would you buy an NBA franchise for $30M right now?” Yes, I would. When I discussed this question further with others, I even heard “I would even buy it for $300M right now.”
In November 2019, Forbes put out a list with esports team valuations. While it received a negative backlash from multiple people involved in the esports business, it might be seen as a rough indicator in an untransparent market. People mainly criticized revenue multiples used by Forbes and mentioned that valuations are too high compared to tangible value the teams provide.
Why do some investors believe that esports franchises, teams participating in franchised leagues, will be the next NBA franchises with valuations beyond $1B? The following paragraphs provide some insights into underlying core assumptions.
Franchising League Structures Provide Stability
I don’t want to open pandora’s box and discuss whether the closed or open ecosystem approach is best or better. When I spoke to investors, most of them mentioned that the closed ecosystem with publisher-run leagues provides them with stability and reliability. When League of Legends, Overwatch, and other games began to franchise/partner their western world league structures, I don’t think that there was any team that could have been able to afford buying into them without giving away equity. When you look at who acquired this equity, it’s often sports-related entities with an understanding of their space, the industry which franchised leagues are modeled after. If we believe that franchised esports leagues can be successful, the new shareholders should have knowledge on how to build an organization, how to create revenue streams, they would bring an existing network of partners, and so on. There are different ways to look at this process; I often call it “forced professionalization.” It does not matter if people who have been endemic to the esports space for years and decades, like the development or not. People have been asking for non-endemics to enter the space with their deep pockets, which includes the consequences of things changing.
Global Orientation and Digital Audience Will Accelerate League Growth
Chris Overholt, CEO at OverActive Media, quoted three reasons for why he believes that esports leagues will eventually outperform traditional sports counterparts during a panel discussion at Leaders Week London in October 2019. Esports leagues cater to a natively digital audience, have a global orientation from the start, and see a highly engaged audience. Overholt also stated that there will be consolidation and that he does not believe that an increasing amount of franchised leagues will be able to coexist. This is most likely one of the reasons why OverActive Media diversifies their portfolio by owning franchises in multiple leagues, like Toronto Defiant in the Overwatch League, Toronto Ultra in the Call of Duty League, and Mad Lions (formerly Splyce) in League of Legends European Championship (LEC).
Borders Between Esports, Gaming, and Entertainment are Fluid
The esports industry is a comparably small industry. Even if you would double Newzoo’s expected industry revenue, esports as a global industry would still be smaller than some individual leagues that are based on one sport in one country. A metric that draws interest is market growth. The esports industry shows linear, not exponential, growth. With titles like Fortnite and everything Epic Games has done to push gaming into mainstream, esports and the competitive scene automatically becomes a focal point. Outlets quote Tyler “Ninja” Blevins as an esports player, even though Epic Games itself call it competitive rather than esports. Individual streamers are more entertainers than they are necessarily pro players. Media and outside sources have challenges differentiating between gaming, esports, and entertainment as the borders are vanishing.
Does it matter if we are talking about competitive gaming or esports? There is the tip of the competitive pyramid that people typically refer to as esports, but there are more and much larger parts to the player base. The global gaming industry is north of $150B in global revenue. Investing in an asset that is not just an esports team, but connected to something bigger, such as entertainment, gaming, and pop-culture, opens more opportunities in the future. We are moving away from lean-back entertainment into a phase where lean-in entertainment will dominate. Netflix released an interactive movie, Black Mirror: Bandersnatch in December 2018, where the viewers drove their own story. According to Variety, Netflix plans to ‘double down’ on interactive series after ‘Bandersnatch’ success.” Intel is working on its volumetric video capture technology that will allow for more interactivity and flexibility in consuming content, almost making sports events and movies look like what people know from consuming games. There are plenty of examples and new technologies which are being developed, so the border between gaming and entertainment will disappear and pave the way for more story-driven content. Nicolo Laurent, CEO at Riot Games, made the following statement in an interview with The Esports Observer: “I think THE entertainment company of the 21st century will have their roots in gaming.”
“I think THE entertainment company of the 21st century will have their roots in gaming.”@RiotGames CEO Nicolo Laurent on expanding #LeagueofLegends into sports, animation, and music. Watch full video: https://t.co/ck7Eys7agw pic.twitter.com/JObC5GmHTD
— The Esports Observer (@esportsobserved) December 18, 2019
Replicating The Sports Experience
The question of whether I would buy an NBA franchise for $30M right now or not came up in a conversation I had about the sports experience. Let me give you an example of an actual situation. I was invited to a Dallas Mavericks NBA game. Did I enjoy the experience? Absolutely. Would I have bought a ticket that day for myself alone? No.
After the game, I set this Tweet, because I was impressed with the experience.
Saw the @dallasmavs game today and am pretty impressed with what I saw.
✅ Every minute filled with entertainment
✅ One big party w/ animation
✅ Compelling and natural sponsor integrationsIt was a close game and I enjoyed every minute. Thanks for having me! pic.twitter.com/FGEEj6dCqF
— Chris Hana (@HerrHana) November 19, 2019
When we are talking about replicating the experience, it’s not about whether esports is sports or not. The best way to explain this is along the lines of: If you bring someone you care about who has no idea about video games into an arena to watch a game with you, is the experience engaging and enjoyable enough for them, so they would come back, and even bring someone else, who is new to the space, to enjoy it with them?
Not everyone has to enjoy a sports event, but would I buy tickets for an NBA game next time I am in town? Yes, and I would definitely want to share this experience with someone I care about, as I had a really good time. The assumption here is that esports will be able to replicate this experience or create a completely new one that is so enjoyable that its audience will keep growing beyond the people who already enjoy playing or watching video games.
This assumption partly plays into the increase in dedicated esports properties around the world. When you own the venue, it will allow you to create a new and different experience. While you might be able to create a new experience in an existing venue, building something from scratch is a risk, but as with every risk, it might provide you with a big reward. There are many AR, VR, and hologram technology companies that try to create new immersive experiences. The main issue with new technologies is that they are pricey. Would it be possible to watch League of Legends in a football stadium, where the pitch is replaced by a 3D rift? Yes, the underlying technology exists, but it would be really expensive and right now, companies would most likely not be able to see a big enough return on this. I do believe that new technologies will change the way content is consumed and that we will see innovation around the way people interact with video games, as players and spectators.
Different Approaches to Solving “Esports” for Teams
I have briefly touched upon team investments and the convergence of gaming, esports, and entertainment. No larger esports organization is profitable or close to being profitable, and this is okay and by design in order to sustain the race and reap the benefits in the future. What’s interesting are the different approaches to how a team strategizes and thinks within the esports ecosystem:
- In an interview with Forbes, after closing a $17.3M series A round, G2 Esports’ CEO Carlos Rodriguez said: “When thinking about esports teams in particular, I genuinely believe we’re closer to what Disney is than we are to what the LA Lakers are,” which puts an emphasis on entertainment, IP, and content.
- Being part of the Dallas Cowboys, and being based at The Star in Frisco, the Dallas Cowboys’ $1.5B training facility, Complexity Gaming’s “about section” states: “With unparalleled support and infrastructure from its ownership group, Complexity has created the world’s foremost operations center and training facilities. Complexity’s player-first mentality, passion, professionalism, and innovation has led them to be recognized as a global leader in modern esports.” A clear statement that highlights Complexity’s approach to being an organization focused on being the best place for player wellbeing, which is believed to lead to an increase in performance over time.
- With the FUNC acquisition and the launch of its Fnatic Gear business at the end of 2015, esports organization Fnatic was taken down the path of providing equipment for players, directly competing with established endemic hardware providers, such as Logitech, HyperX, Razer, and many more. Fnatic also opened its own shop in London, called Bunkr, to “break mainstream boundaries”, in 2017. The shop was closed a year later.
There are manifold approaches to monetization. It might seem like esports and competitive gaming is leveraged as a launchpad to sell merchandise and streetwear, or to launch a more classical MCN (multi-channel network), etc. The future will show which approach will be (most) successful, who will create enough incremental value from their investment, and who will have to raise its next investment round on a downround.
Audience Monetization
The main reaction I have received to questions around future audience monetization was along the lines of “the market will find a way to monetize the audience.” Teams will apply and refine existing monetization methods. Media and licensing rights will be sold. Publishers might look into direct-to-consumer monetization as mentioned by Marc Riccio, EVP of commercial at Lagardère Sports during Sports Business Journal’s Esports Rising All Access interview. Revenue share will be of increasing importance. More non-endemics will try to apply their services to drive revenue and startups will drive innovation.
Publishers and league operators already understand that they need teams to compete in their leagues in order to draw in an audience. In the end, publishers want to retain active players and acquire new ones, so there is a mutual interest between teams and publishers running their own leagues. As long as teams build strong brands which are not easy to exchange, their bargaining power will increase.
TLDR;
- Investments in teams increased even though there are different opinions on investment viability and business models.
- According to investors, franchising provides stability.
- Franchised esports leagues will outperform their sports counterparts they have been modeled after.
- Borders between esports, gaming, and entertainment will disappear.
- Through new technologies, esports events will be able to provide a unique and engaging experience.
- Different teams have different approaches to monetization and their position in the market.
- The market will figure out a way to increase audience monetization.
