Investors have flooded the esports market in the first quarter of 2018, making it the biggest quarter in the industry’s history. In total, almost $2 billion in disclosed investment funding flowed into esports related companies. That’s according to results published in Esports Observer’s Q1 2018 Esports Business Digest.
That’s an impressive number, made all the more impressive when you consider that it’s nearly 10-times the amount reported this time last year. For Q1 in 2017, just over $100 million in disclosed funding was reported. In fact, that $2 billion is more than the esports industry earned for the entirety of 2017 – and that amount actually exceeded expectations.
Photo Credit: Esports Marketing Blog
Digital research firm SuperData estimated that the esports industry would bring in $1.1 billion in 2017. When the final number was tallied, it was closer to $1.5 billion.
The Q1 2018 Esports Business Digest report takes a detailed look at the financial movements in the esports industry this year to date. It includes a focus on where the money is flowing from (i.e., what areas of the world), which has seen a change.
Of all the esports investments made in Q4 of last year, over three-fourths (about 77 percent) were from U.S.-based companies. This quarter, however, U.S. investors accounted for just about half of the spending.
The biggest investor was China-based internet services provider Tencent Holdings, which spent nearly $1.1 billion on investments in a single day when it funded Chinese livestreaming companies Huya TV and Douyu TV. Livestreaming is currently worth $5.5 billion in China, and the industry is expected to grow to $16.5 billion by 2022.
In fact, Tencent recently announced its Q1 earnings for 2018. Prognosticators anticipating a rare down quarter for the internet giant were proven wrong when the company reported a net profit of 23.29 billion yuan ($3.7 billion) on revenue of 73.53 billion yuan ($11.5 billion). Net profit was up 61 percent year-on-year, and revenue increased 48 percent over the same period.
In addition to its livestreaming investments, Tencent has also secured the rights to distribute two of the biggest games currently available for mobile platforms: PlayerUnknown’s Battlegrounds (PUBG) and Fortnite. The company’s gaming revenue was up 26 percent.
The increase in investor money should not be a surprise. The esports industry is in the midst of a boon. It’s already been mentioned how the market exceeded earnings expectations for 2017, but it’s also interesting to look at those numbers. When SuperData published their 2016 esports market review (in which the industry brought in $900 million for the year), the company used that year’s earnings and growth over the previous years to estimate that 2017 would hit around $1.1 billion.
Photo Credit: Dot Esports
According to that 2016 report, the esports industry was not supposed to hit $1.5 billion in yearly revenue until 2019, a benchmark it beat by two years. Now, the 2017 report estimates, based on the $1.5 billion earned in 2017, that global esports revenue will grow 26 percent by 2020 and achieve a total of $2.3 billion. However, it is certainly possible that these estimates will turn out to be conservative.
So, the increased interest by investors is not out of left field. Esports increasingly has the appearance of a safe bet.
There are a few main aspects that investors consider when they are evaluating an investment.
One is financial performance. In addition to the examples that have already been given, let’s take a look at how team earnings increased in 2017. There were more than 350 teams that won prize money from esports tournaments in 2017. The highest earner (by far) was Team Liquid, whose total prizes added up to $13,379,499.03. That’s $10 million more than the team’s 2016 total ($3,054,130.46), which was still enough for them to lead the category that year, too.
The next four teams are Newbee ($4,835,462.69), LGD Gaming ($4,777,479.15), Virtus.pro ($3,544,695.81), and OpTic Gaming ($2,500,550.00). All of whom at least doubled their earnings from the previous.
It’s worth noting that about 22 percent of the season’s total prizes can be attributed to The International. This was the largest Defense of the Ancients 2 (Dota 2) tournament ever and had a prize pool to match: nearly $25 million, the largest ever distributed in esports (an increase of $4 million from 2016).
Almost $11 million of Team Liquid’s total is due to them winning The International, and the other four teams finished near the top of the tournament.
Photo Credit: Dota 2
While you can look at The International’s prize pool as an anomaly, you can also see it as setting a precedent. Prize pools are going to have to be attractive to encourage top talent to attend a tournament. In fact, Defense of the Ancients 2 has a much smaller base of monthly users when compared to a big player like League of Legends (in 2017, 12.6 million compared to 101 million). Yet, its prize pools are over three times as much, 37.1 million compared to 11.4 million.
So, the larger companies, like Activision Blizzard (Overwatch) and Riot Games (League of Legends), are expected to keep increasing prize pools to encourage participation. However, smaller games are also expected to increase their prize pools by finding innovative methods to maintain a player base.
Investors also like to look at an industry’s market size. The larger and more stable the customer base is, the more appealing it is to investors.
SuperData estimates that viewership of esports will grow 12 percent each year. In addition, the biggest games in the industry, such as League of Legends and Overwatch, will continue to grow brand loyalty by selling sponsorships, advertisements, tickets sales, and team merchandise.
But these games have also formalized their leagues in interesting ways. The Overwatch League, for example, is mirroring traditional sports organizations by assigning teams a home city. Other franchises have followed suit, including the NBA 2K League and the Madden NFL Club Championship. This will hopefully encourage local rooting interest and rivalries. In fact, Activision Blizzard hopes to hold matches in each team’s city in the near future.
Photo Credit: Dallas Mavericks
The other league shift that occurred recently is with League of Legends. Both the North American League Championship Series and the European League of Legends Championship Series changed from a promotion and relegation system to become a franchised league. This means that teams are locked into the league with a contract and don’t have to fear being relegated out due to performance. This also creates a great deal of security for sponsors and investors.
In fact, one of the big Q1 investments was made by Korelya Capital, Kima Ventures, and H26 (owned by Olivier Delcourt, president of French Ligue 1 soccer club Dijon FCO) for $3.1 million (€2.5 million) to Team Vitality. This marks the first 2018 investment in a European League of Legends Championship Series team organization, with more expected to follow due to the new franchising structure.
These are exciting times in the world of esports. Expect more capital to be invested throughout the year – it’s on pace to be historic. If you are interested in investing or sponsoring an esports player, team, or league and are looking for some professional advice, give an eGency expert a call at 972-323-6354.