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Will e-sports have its COVID-19 moment too?

03072020_ESports

Will e-sports have its COVID-19 moment too?

Everyone knows that video streaming is having a transformative moment during the global COVID-19 pandemic, but in another corner of the media landscape, video gaming is having its own hypergrowth moment as well.

Both paid and free-to-play games have experienced an unprecedented spike in engagement and monetization, with growth in hours played running 6-8 times higher and revenue growth 2-3 times higher than pre-COVID levels. But perhaps most unprecedented is the sudden explosion in e-sports coverage by mainstream sports channels. With traditional sports events all but suspended, channels such as Fox Sports and ESPN have picked up e-sports content, in some cases airing more than 14 hours of e-sports programming a day!

If those familiar with the listed video game publishers cast their minds back to 2018, they will recall the excitement and hype that surrounded the “e-sports opportunity,” especially for publishers such as Activision Blizzard (“Activision”) and Electronic Arts. One of the most bullish brokers on Wall St predicted in 2017 that the inaugural season of the Overwatch League could gross $720 million for publisher Activision and the league’s teams.

In 2018, Activision reported less than $150 million in revenues for all its e-sports related activities, including the Overwatch League. Similarly outlandish forecasts have been made by industry research firms such as Newzoo, which predicted in 2017 that global e-sports revenue would reach $1.5 billion to $2.5 billion in 2020. By February 2020, that forecast had been revised down to $1.1 billion.

This debate over the size and the tangibility of the e-sports opportunity was front of mind when we recently revisited our video game publisher theses. With video gaming experiencing a huge increase in popularity and engagement during the COVID-19 pandemic and e-sports gaining wider media coverage, a natural question to ask is whether e-sports will – this time – become a permanent revenue and profit driver for the U.S. video game publishers (particularly Activision). A recent essay by venture capitalist and former media executive Matthew Ball expounds in some depth the challenges that e-sports face to become sustainable digital models of real sports, and echoes many of the same concerns that we have as well.

Back in 2018, we felt that one of the biggest barriers to e-sports penetration was the ease of following the game. As Ball argues, traditional sports, especially the major sports leagues, are designed first and foremost to be fun to watch. Video games, on the other hand, are designed first and foremost to be fun to play. Gameplay, at least for popular e-sports titles, is fast, furious and almost impossible to follow or understand unless the viewer is also a (casual) player of the game. Imagine watching a football match through a GoPro strapped to each player’s chest – the viewing experience is hard to get into unless the viewer is also invested in the game in some way or other.

Secondly, for a game to be fun (and thus successful), it needs to cater to the widest audience – the casual players. What is fun for the millions of casual players of a game might not be fun for the handful of professional players, and conversely what may be engaging or balanced for professional players may be frustrating for casual players. Considering the video game publishers still generate substantially all their revenues and profits from selling games and in-game content to casual players, catering to casual players will always take priority over catering to professionals (and thus e-sports takes a back seat).

Finally, and perhaps most detrimental to the long-term success of e-sports, is the incentive structure within the industry. As Ball points out in his essay, e-sports leagues are not the same as traditional sports leagues. Sports leagues such as the NFL, NBA or Premier League are governed by an association but not owned by any one entity. In the U.S., the NFL and NHL are non-profits, while the NBA and MLB are managed as such – revenues generated by the league are distributed to the individual teams that are privately owned. The Overwatch League, on the other hand, is owned by Activision, which is most definitely not a non-profit. Not only do teams pay Activision for the privilege to participate, Activision also has first claim to revenue generated by the league to offset the costs of running and marketing the league, and then pockets a majority of the remaining profits. Activision’s position of the league as a marketing tool is orthogonal to the teams’ position of the league as one of their main sources of revenue. If Activision had to choose between the health of the game and the health of the league, it will almost always prioritise the former over the latter.

In summary, we believe that while the COVID-19 pandemic has added rocket fuel to the growth of video gaming and sparked greater mainstream interest in e-sports, the gains during the past few months are likely to be temporary unless some fairly structural hurdles can be overcome. If the NFL was fun to watch only for those viewers who also played American football – and paid the NFL for the privilege to do so – the league would be several orders of magnitude smaller than it is today. That is where e-sports currently sits.

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Daniel Wu is a Research Analyst at MGIM. Prior to joining MGIM in June 2016, Daniel was an analyst in the investment banking divisions of UBS and Goldman Sachs, where he covered the Infrastructure, Utilities, Technology and Media sectors.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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Comments

  1. David McAllister
    :

    Daniel – Agree that COVID-19 has really propelled e-sports and a level of scepticism is warranted. However, rather than over think this I take a simpler approach and look to a thematic ETF such the VanEck Vectors Video Gaming and eSports ETF (ESPO). The ecosystem for this ETF goes beyond the publishers and includes semiconductors and other hardware suppliers. So I would simply ask, do you believe the likes of their top holdings – NVIDIA, TENCENT, ADVANCED MICRO DEVICES, ACTIVISION BLIZZARD, NINTENDO – will grow and become more profitable over the next 5-10 years? If the answer is yes then it is probably an investment worth considering.

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