The days when esports were dismissed with laughter and jokes are behind us. Today, the esports industry spans the globe, forming an international business that is more legitimate industry than punchline.
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And it’s not only gaming-friendly brands that are helping power the esports boom. Sure, Need4Seat and Razer are still helping finance tournaments. But State Farm now sponsors the competitive League of Legends circuit, and more traditional brands are expected to hop on the bandwagon.
But underneath the esports glitz, the huge events, the growth in online audiences, and the rapid rise of new titles and streaming brands, trouble lurks.
Concerns are growing among industry participants, observers, and skeptics alike that esports-focused startup valuations are too high, and that monetization still lags audience growth. And until those issues are resolved, the rise of esports will flounder.
Few expect a collapse, but a reckoning is not outside the realm of possibility. We reached out to investors and founders in the esports arena to reconcile the hype versus the reality.
To say global VC firm NEA Partner Rick Yang is bullish on esports would be an understatement. During an animated phone conversation, Yang explained that esports is “a pretty nascent space with a lot of promise.” NEA looked at esports companies for about three to four years before investing in South Korea-based Gen.G (previously known as KSV Esports) and PlayVS. PlayVS, which we covered here, as well as profiling its co-founder Delane Parnell here, is focused on building an infrastructure for esports in high schools.
For Yang, a lot of the excitement stems from his own personal experience as a gamer in high school.
“I’d have my swim club practice and then come home and wake up in the middle of the night to start gaming with my friends,” Yang said. “At that time, gamers were considered to be ‘nerds.’ But that has massively changed as gaming has become more mainstream and melding with pop culture. We’ve seen this shift in gaming and gaming culture over the past few years. And that’s sort of indicative of why we’re so excited about this space.”
One reason esports struggles, Yang believes, is that people who aren’t in the industry, or aren’t familiar with it, view it very “narrowly.” And even though it’s more mainstream, it’s still young. Yang points out that there are less than 1,000 professional gamers out there. And professional leagues have (on average) been around for only about three years.
Yang also acknowledges that the monetization aspect is a valid concern. To him, the clearest value creation is on the side of the publishers and game developers, who are increasingly finding ways to make money with in-game purchases (Epic’s Fortnite is a prime example) of virtual goods. Historically the gaming industry has grown up very siloed, with each publisher carving out their own piece, he said. As the space matures, that’s slowly changing. The second most mature sector within esports is the distribution of live gaming.
“The broadcasting layer is super dominated by Twitch and YouTube,” he said, estimating that the top 10 earners on YouTube last year were related to gaming. “People have claimed it’s silly for people to want to watch other people play video games. But you could make the same argument for other sports. People watch so they can better. And so now. in the last few years, you’ve got this massive audience of both gamers and people watching gaming.”
Just as sports players are conscious of what shoes they were, gamers being watched by millions of viewers have a vested interest in looking good, too.
“Gamers want to look cool while playing the game so they spend money on skins (items that players can acquire in games) for example, and now you’re starting to see more offline and real-life brands tapping into this channel because there’s a bunch of eyeballs,” Yang said.
For example, Fortnite recently collaborated with the Michael Jordan brand and Nike to get Jordans in the game. Electronic music producer DJ Marshmello also performed a concert in the middle of a Fortnite game with 10 million different participants from around the world watching, he added.
“Do you know how many years and hours of travel of tours it would take to get 10 million viewers,” Yang asked. “It’s mind-blowing.”
The global aspect is not to be underestimated, he believes.
“There’s a huge opportunity to tap into all aspects” of gaming across its social, content, and virtual goods components, he said. And to Pradyuman Vig, monetizing analytics around gaming is a huge opportunity as well.
The 22-year-old co-founded an Austin-based startup called Asuna out of his personal desire to improve at playing League of Legends. Essentially, the company employed machine learning algorithms to help gamers get better at playing games.
Ultimately, in 2018, the bootstrapped Asuna was acquired by Swift Media, the company behind esports team Team SoloMid, after being sponsored by Microsoft and Xbox. The technology he helped develop is now being incorporated into Swift’s overall infrastructure so that its whole network of analytics websites (used by players of games like League of Legends and Fortnite) will be powered by the technology Asuna built. It will power a new personal assistant called Pix.
“So many people are competitively playing, so there’s a very big market there to sell tools,” he said. “It’s almost like automated coaching tools to help these people play better, even those who are not (yet) getting paid to play. There’s a huge market to bring a lot of knowledge to.”
His company recently launched streamer betting with a system that uses AI trading bots, based on computer vision technology and predictive analytics, to come up with live odds.
“In other words, you can be watching your favorite streamer play Fortnite and the system places odds on certain things happening during that match while they’re playing live,” Sood, who sold a previous startup VoodooPC to Hewlett-Packard in 2006, told Crunchbase News.
His company also launched something called “umode,” which can connect to the platform and give users the ability to bet on themselves while playing games. It’s currently legal in 41 states, he said.
Overall, Sood (who also was the creator and general manager of Microsoft Ventures), is naturally bullish on the space and believes the wagering side of esports has “huge” potential.
“There’s very few people who understand it so those building on it are building on the future,” he said. “A lot of people don’t get the full potential of the space. I still talk to people who have never heard of it. Yet there are hundreds of millions of people who watch it. So raising awareness is part of the battle.”
Today, the esports industry is an international business that is more industry than cottage endeavor.
Powered by the growth in high-speed Internet connections, streaming technology, and rising decoupling of consumers’ viewing habits, esports fits neatly between a number of changes in the media and technology landscape. But has the hype outpaced reality? Some would say yes.
In May, Kotaku reporter Cecilia D’Anastasio wrote that: “More and more, esports is looking like a bubble ready to pop.” She went on to say that 18 “experts” on the North American esports industry expressed concerns to Kotaku, with “some describing it merely as ‘inflated’ and others as ‘completely unsustainable.’”
Yet others point to statistic such as Goldman Sachs projecting that the esports industry will see annual revenue jump from $655 million in 2017 to $2.96B by 2022. (For other similar stats, see my previous story on esports funding.)
Time will tell if concerns about monetization in particular are a real threat. Ultimately who wins in the esports game will be those companies that can crack the profit code.
Illustration: Li-Anne Dias