20.04.20 Quarterly Insight

esports has always been an interesting investment opportunity because of its diverse growing audience – everything that traditional sports properties are desperate to become – young, global and digital. Covid-19 has increased the disparity between the two.

As traditional sports have faltered without live sport, Tier 1 esports (Counter-Strike: Global Offensive CS:GO, League of Legends, Dota 2, Fortnite) have become the world’s hottest sporting properties. The ESL Pro League Tournament 11 (CS:GO) demonstrated this with a reported 216% increase in viewership including its single most-watched broadcast day of an ESL season in its 5-year history at a peak of 356,000 concurrent viewers. What has been impressive is how quickly these tournaments have been able to adapt online and adjust their format.

These top esports tournaments previously were all LAN-based events, which meant secure, physical infrastructure in-stadia or studio. Through the crisis, they’ve managed to move many of their tournaments from studio broadcast events to online remote play, maintaining key revenue streams and satisfying commercial partners. This is not without its risks, including frequent delays, problems to streaming quality and a longer competition process to follow.

esports tournaments present an opportunity to watch the most talented gamers on the global stage and there is a huge demand for it (as shown by the 44 million concurrent viewers that watched the League of Legends November 2019 finals championship match between G2 Esports & FunPlus Phoenix). In line with this, Newzoo recorded a significant increase in consumer playtime and money spent on gaming. According to Nielsen, people in the US are spending 39% more on their gaming activities and Twitter alone witnessed a 71% increase in competitive gaming conversations during the last two weeks of March, compared to the two weeks prior.

The destructive impact of COVID has, however, created winners and losers in esports. The game publishers and live streaming sectors have outperformed the market, whereas event organisers, esports venues and esports organisations have been impacted significantly. As such, Newzoo has recently revised estimated global esports market revenues down slightly to $1,059m in 2020 (from the previous estimate of $1,100m) due to the temporary cease of esports activity & transition to digital-only events). For the time being at least, the balance of power will shift more in favour of the IP owner than ever before, as companies such as Riot Games, Valve and Epic Games will be able to elicit more control over the ecosystem.

As would be expected during a global lockdown, the clear losers in the esports economy have been its live events and ancillary businesses and this is despite many esports tournaments streaming online. Whilst it is not expected that sponsorship and media values will be significantly impacted, there will obviously be a reduction in merchandise and ticketing revenue streams. Business models will be forced to adapt, just like in traditional sports in order to weather the COVID-19 storm. For example, ESL & Dreamhack (Modern Times Group) the largest esports content producers, expect revenues from media rights, brand partnerships, ticketing and merchandise sales to decline by 35%-45% in the first half of 2020 compared to 2019.

On the positive side, betting on esports (which was already its fastest-growing pre-COVID revenue stream according to Activate) is now showing even greater growth and activity. With practically no traditional sporting events taking place globally, esports betting volumes (in particular CS:GO) has significantly increased and are likely to surpass $10 billion globally in 2020. Betting on esports is expected to become a more normalised activity post-COVID and should rival stronger traditional betting markets of football, tennis and horse-racing in the future.

Whilst most traditional sports have suffered tremendously as a result of Covid-19, it is interesting to see how some sports brands have been able to innovate quickly and adapt to online engagement. Desperate to provide for fans who are being starved of entertainment, professional teams and athletes have innovated by using simulation esports (F1, FIFA, Madden, NBA2K etc) to satisfy the demand for content.

Sport’s COVID-19 inspired esports initiatives:

• F1’s inaugural virtual Grand Prix drew 3.2m online viewers, with an estimated 1.2 million watching on TV
• Nascar launched its own eNASCAR iRacing Pro Series Invitational, which broke the record as the most-viewed US esports event on linear TV history earned 1.33 million viewers on Fox & FS1. This compares to an average of 2.1 million in the US last year for real-life NASCAR Cup Series events on Fox Sports.
• La Liga charity FIFA tournaments draws more than a million viewers with 170,000 viewers watching the final between Marco Asensio (Real Madrid) and Aitor Ruibal (Leganes)
• NBA 2K League hosted an Online Fan Tournament with $25K prize pool during pandemic shutdown and NBA Phoenix Suns & Dallas Mavericks replacing a cancelled game with a match on NBA 2K20
• Big European football clubs including Real Madrid have also launched their own Twitch channels to coincide with new online FIFA tournaments. Streaming platforms such as Twitch facilitates direct fan engagement with new growing audiences and recently exceeded 3 billion hours watched in a single quarter for the first time.

However, for fans, these simulation/virtual sport games will always be the second choice to their respective sport and this can explain why there less viewership, gamers and prize pools between the leading Tier 1 esports and simulation esports. It is important however that sport capitalises on these new audiences and uses this as a means of engagement to build future revenues. In short, Covid-19 has shown that there is latent audience demand within the cross-over of traditional sports and the esports/gaming worlds.

Global esports audiences of c.500 million have been growing at 16% CAGR over the last 5 years and are expected to increase. The real value of this audience is that over 80% of esports views are 18-34 and importantly for brands and investors it’s reaching the unreachables, which gives huge opportunities for sponsorship activations and media value. Traditional sports fans not used to engaging in esports have flocked to the sector, which will naturally boost the future esport audience and market size. This could lead to other esports titles reaching non-endemic audiences, increasing consumer interaction and acceptance of esports content.

Importantly, Oakwell believes that Covid-19 will alter how, in the longer term, traditional sport and entertainment will be consumed and that esports will be at the centre of the recalibration after the current crisis has subsided.

For the time being, however, gaming and esports are taking pole position and connecting communities in safe and virtual ways, which is highly valuable in these unprecedented times.

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