Why eSports is kind of a big deal

With the Overwatch World Cup, one of the largest eSports tournaments, wrapping up this month, we take a look at the rapidly growing industry and why it could be the one to watch

Not too long ago, gamers were shunned; deemed nerds and geeks by the everyday person. But if you look online today, you’ll notice a very different scene: gamers are taking over the digital world. ‘Let’s play’ videos rule YouTube, Fortnite is still making media waves over two years after its release and teenagers are making millions in gaming tournaments.

This month saw the fourth annual Overwatch World Cup play out, with ten teams from across the world coming together to compete for the gold medal. At first it might sound like a small time affair; a few people sitting around, chugging energy drinks and playing video games. But these competitive gamers are not only viewed by millions whilst playing in gigantic stadiums, they’re also competing for millions of dollars in prize pools. In 2017, the Dota 2 International awarded a top prize  of over $10 million and was watched by 92 million people worldwide. That's 64% more than the audience for Wimbledon in 2018.

But how did playing video games jump from being a nerdy secret to a multi-million dollar, competitive industry?

What is eSports?

Video game competitions have been around since the early seventies, when video games themselves became somewhat mainstream thanks to their introduction in arcades. The first competition, held in 1972, was for a game called ‘Spacewar’ and took place at Stanford University. Sponsored by Rolling Stone magazine, the event pitted students against each other, with the winner receiving a year’s subscription to the magazine. It may have been quite a small tournament at the time, but it paved the way for the eSports industry that we know today.

There were a few competitions in the years that followed, with a notable Space Invaders competition appearing in 1980, but nothing else major happened in the competitive gaming space until the 90s. As with many other industries, the internet catapulted things into overdrive. Huge companies, like Blockbuster, began sponsoring events, which in turn drew larger crowds, and the prizes started to rise. This was the true start of the gaming revolution and the birth of the eSports industry.

By the 2010s, tournaments had reached a new level: prize pools shot up into the millions, global conglomerates began sponsoring these massive events and the advent of streaming platforms pushed viewership into the millions, with 58 million frequent viewers in 2012 . And by the looks of it, the eSports industry is only expected to grow, with experts projecting over $1billion in revenue worldwide this year, a year-on-year growth of +26.7%  .

Main players

One of the biggest differences between traditional sports and eSports is that the former can be played without any governing body or organisation (FIFA doesn’t get involved every time someone kicks a football around) whereas eSports rely heavily on developers. These developers are the teams that create the games and continue to maintain servers for players to play on. With over 3000 eSports competitions each year, there are a multitude of games developers, but despite some becoming revenue behemoths, very few are actually public companies.

Despite this, earlier this year Deloitte compared an index of game developer’s return on investment using the EV/EBITDA ratio against the S&P 500 from 2016-2019. They found that game developers consistently outperformed the S&P 500, with multiples for game developers reaching a high of 25.5x in January 2018. The index included Electronic Arts (EA), Activision Blizzard (ATVI), Take-Two Interactive Software Inc. (TTWO), NetEase, Inc. (NTES), and Nintendo (NTDOY).

Two of the main players in game development, and subsequently eSports, are Electronic Arts (EA) and Activision (ATVI), with the former’s share price hitting an all-time high for the company back in July 2018, and the latter doing the same in September 2018. Both companies saw a drop towards the end of 2018, partly due to the explosion of battle royale games, such as Fortnite, affecting their holiday revenue projections, but the share prices have started to slowly recover this year. Take Two Interactive Software (TTWO), a UK based games developer, saw similar heights in September 2018 followed by a steep drop shortly after, which shows the impact that shifting gaming trends can have on the entire industry. Much like the other developers though, Take Two seem to be picking up steam again this year.

An outlier in this industry, although probably not for long, is Gfinity (GFIN), a solely eSports-focused business. Gfinity describes themselves as a leading international eSports business that provides advisory services as well as designing, developing and delivering unparalleled experiences. UK-based and set up in 2012, the company’s share price has been dropping steadily since it peaked in September 2017, despite a reported revenue growth of 59% per year. Ultimately, it’s currently a loss-making business, but with the industry as a whole being fairly new, it could be one to watch in the years to come.

A legendary league in the making?

Like any industry in its younger years, eSports is still growing, and although tournaments and competitions in the gaming market have been around for almost 50 years, the global appeal and monetisation of eSports is relatively new. There’s a wide array of established companies within the industry, many of which have successfully incorporated eSports into their core game development business. While most aren’t currently publically traded companies, if the industry continues to expand and the likes of Activision and EA games grow further, it wouldn’t be a surprise to see more developers decide to float.

Much like Netflix disrupted the home entertainment industry, the one to watch in eSports is Gfinity. Similar to the streaming giant, Gfinity has the potential to be a disruptor with its potential to shape eSports tournaments and experiences. Being a new type of business in the space, it could go either way for the company depending on their long term plans, ability to adapt to the fast-paced industry and business acumen.

With the eSports industry expected to grow its audience by around 46% over the next 2 years, and its revenue projected to increase by a staggering 82% across the same period, it seems that the industry is set to explode even further. It’s definitely a market to keep an eye on.


All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

 
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