life. money. probability.
JULY 2019
ELECTRONIC GAMING &
ESPORTS 450M fans
$1B
revenue
PLUS luckboxmagazine.com
$7.99
Epic’s Fortnite Google’s Stadia Beyond Meat Million-Dollar Side Hustle Zillow: Flippin Lucky
The
B U S I N E S S of E S P O R T S
hile we weren’t looking, video gaming grew into something called esports—a professional sport complete with well-paid players, huge fan followings, sold-out arenas, lucrative sponsorships and hefty tournament payouts. For video game developers and publishers, esports functions as both marketing expense and operating income. Esports can keep the general public engaged in video gaming and willing to spend more on games. Today’s dominant video game, League of Legends (LoL), was developed by Riot Games, which was purchased by Chinese tech giant Tencent in 2011. LoL uses five-player teams who control characters with differing abilities and attributes The goal is to push into the opposing team’s base and destroy it. Because each game takes place on the same map, fans can easily follow what’s going on and every game offers a balanced playing board. Live tournaments fill huge stadiums like the Staples Center in LA and Seoul’s World Cup Stadium. Prize pools often reach eight figures, and big-name sponsors like Samsung, Red Bull and Coca Cola, pony up for advertising. Esports tournaments also attract tens of thousands of fans, and millions of online viewers. To lead off this special luckbox leans in report, the editors joined forces with Newzoo, a leading global provider of esports analytics, to provide an introduction to the opportunities that lie ahead in the fast-growing world of competitive electronic gaming.
W
12
luckbox | july 2019
Newzoo: Amsterdambased Newzoo, a leading global provider of games and esports analytics and research, provides esports market insight and data to the world’s largest entertainment, technology and media companies. The firm specializes in daily consulting on investment, marketing, sales and product development.
PHOTOGRAPH BY MARV WATSON
The Business of Esports
KEY TERMS Esports: Professional-level competitive gaming in an organized tournament or league with a specific goal, such as winning a championship title or prize money. Streaming: One person, or sometimes a group of people, streaming live video via a streaming platform to enable viewers to see what’s happening at that moment. Media Rights Revenues: Revenues generated through media property, including all revenues paid to industry stakeholders to secure the rights to show esports content on a channel. It includes payments from online streaming platforms to organizers to broadcast their content, foreign broadcasters securing rights to show content in their country, or copyright costs to show video content or photos of an esports competition. Sponsorship Revenues: Revenues generated by teams and organizers through sponsorship deals. This includes all deals relating to sponsoring an event, including product placement, sponsoring teams, and payments by brands for the use of team, event or game-specific IP rights in their marketing communications. Any advertisements sold as part of a sponsorship package are also included in sponsorship revenues. Game Publisher Fees: Revenues paid by game publishers to independent esports organizers for hosting events. This excludes investments or spending by game publishers on their own events because that is considered part of their regular marketing effort.
Wagering On Esports SPECIAL SECTION
Electronic Gaming & The Business of Esports
Companies . . . . . . Investors . . . . . . . . Audience . . . . . . . . Prizes . . . . . . . . . . Valuations . . . . . . Players . . . . . . . . . Fortnite . . . . . . . . . Stadia . . . . . . . . . . Glu Mobile . . . . . . .
15 16 18 19 20 21 24 26 28
The final match up at the Mid Season Invitational of League of Legends 2015 Season, held in Tallahassee, Fla.
Esports betting resembles traditional sports wagering, which has long been a fundamental part of that industry. In particular, esports betting in the United States is on track to grow significantly because some states are legalizing betting for certain sports, including esports. Fantasy drafting is gaining popularity with fans, and Riot Games offers it for free in connection with its major leagues and World Championship event. Esports organizations appear ready to provide incentives for fantasy drafting by offering rewards, such as in-game currency and cosmetics. In addition, betting operators will continue to expand their sponsorship and will offer more forms of esports betting, such as liveaction betting on results (bookmaking). Newzoo predicts fans’ collective spending on esports betting will soon surpass their spending on esports merchandise and tickets.
july 2019 | luckbox
13
The
B U S I N E S S of E S P O R T S
Key Takeaways
ESPORTS GLOBAL AUDIENCE GROWTH
2019 Global esports revenues will surpass $1 billion for the first time Global esports revenues will grow to $1.1 billion in 2019, a year-on-year growth of +26.7%. North America will generate $409 million of this amount, while China will account for $210 million. 1
In 2019, $897 million in revenues, or 82% of the total market, will come from brand investments (media rights, advertising and sponsorship). That will increase to $1.5 billion by 2022, making up 87% of total esports revenues. 2
Globally, the total esports audience will grow to 453 million in 2019, a year-on-year growth of +15.0%. Esports Enthusiasts will make up 201 million of this number, growing +16.3% year on year. 3
2019 ESPORTS GLOBAL REVENUE STREAMS
China will have the most Esports Enthusiasts in 2019 with 75 million, followed by the U.S. and Brazil. South Korea will have the highest share of Esports Enthusiasts relative to its online population (Esports Density) in 2019 with 12%. 4
The global average revenue per Esports Enthusiast will be $5.45 this year, up +8.9% from $5 in 2018. 5
Last year, 737 major events occurred. Together, they generated $55 million in ticket revenues, down from $59 million in 2017. 6
Last year’s total prize money reached $151 million, a significant increase from 2017’s $112 million. 7
The League of Legends World Championship was last year’s biggest tournament by live viewership hours on Twitch—a livestreaming platform for gamers—with 53.8 million hours. It also produced $1.9 million in ticket revenues. The Overwatch League was the mostwatched league by live viewership hours on Twitch, generating 79.5 million hours. 8
Global Population
Online Population
Esports Enthusiasts
Esports Revenues
Annual Revenue per Enthusiast
7.7B 4.1B 201.2M $1.1B $5.40
2019 figures
14
luckbox | july 2019
AAPL, GOOG
THE TOP 25 PUBLICLY TRADED GAME COMPANIES EARNED MORE THAN $100 BILLION IN GAMING REVENUES
Top 10 Gaming Stocks ast year, the 25 public companies with the largest game revenues generated a combined $107.3 billion, up +16% from 2017. That marks the first time they have exceeded the 100-billion-dollar mark—a milestone for the market. Together, those companies accounted for nearly 80% of the $134.9 billion global games market. Tencent (TCEHY) alone earned $19.7 billion in revenues, accounting for nearly 15% of the entire games market, and it was the world’s No. 1 public company by game revenues for the sixth year running. Tencent is followed by Sony (SNE), Microsoft (MSFT), Apple (AAPL) and Activision Blizzard (ATVI), respectively. Combined, the Top 10 companies grew +19% year on year. However, the top 11-25 companies together grew just +6% year on year, with many companies in this bracket unable to keep pace with the market leaders.
L
TOP 10 PUBLIC COMPANIES BY GAME REVENUES
Jurre Pannekeet, senior market analyst at Newzoo, models the esports economy, finds and dissects key esports trends and helps brands shape esports strategies. Sander Bosman, Newzoo vice president of research, is the company’s second-ever employee and leads the Consumer Research and Insights team. newzoo.com @newzoohq. Tom Wijman, Newzoo senior games market analyst, leads the company’s efforts on the global games market, forecasting revenues and players per market and identifying how trends influence those markets. @newzoohq
Apple and Google’s New Gaming Market Plays Apple (AAPL) and Google (GOOG) have long monetized video gaming. The consistently strong performance of those two American tech giants is a direct result of revenues generated by their respective app stores, where both take their cut of every transaction. Now, both companies have revealed initiatives that will expand their involvement in the global games market. Google has recently announced Stadia, a cloud gaming platform that enables users to stream entire games via the internet. The games run on hardware at Google’s data centers, which means consumers don’t need to own expensive hardware. At the same time, Google announced the creation of Stadia Games and Entertainment, a studio that will develop Stadia-exclusive games. (see p.26) Meanwhile, Apple plans to release Apple Arcade this year. The subscription service gives users access to a library of 100 new games for a monthly subscription fee. The platform will carry no ads and no in-app purchases—key drivers for growth in the games market in past years. Both companies have acquired top talent from the games market but have remained quiet about expansion plans. Both intend to use their strengths to expand their activities in the games market: Google leverages the global presence of its data centers and strong tech credentials, while Apple will rely on its expertise in accessibility and its focus on curating content.
july 2019 | luckbox
15
The
B U S I N E S S of E S P O R T S
VIDEO GAME COMPANIES DERIVE MORE THAN 70% OF THEIR REVENUE FROM CONSOLE-BASED GAMES. HERE COMES THE CLOUD.
Google’s Got Game By Ryan Shaw
wo years ago, games like Fortnite and PlayerUnknown’s Battlegrounds shook up the game industry, delivering an easily accessible platform that connected them to dozens of players around the world from multiple devices. Players flocked to the new games with an almost cult-like voracity, catching established game makers off guard. Two years later, a company not synonymous with gaming is looking to make an even bigger splash. The Google (GOOGL) announcement of its cloud-based gaming service called Stadia looks to disrupt an industry that has been surprisingly static until recently. Since the inception of Nintendo (NTDOY) 30 years ago, gamers have been buying cartridges and disks to plug in to their clunky gaming consoles. While newer consoles can download the game to the console directly, users are still confined to the console and the storage limitations that come with it. Google looks to trash the console-based gaming industry, enabling users to stream games from multiple devices, much like Netflix (NFLX) or Hulu. While games have evolved tremendously over the years into beautiful and massively scaled masterpieces, little else has changed in the way players purchase and use video games. Bringing players online to play together and against each other was arguably the only major paradigm shift the industry has seen. Video game and console makers have been stuck in a rut of simply improving the foundations that are already there, instead of finding a new way to consume content. Stadia looks to take advantage of that complacency.
T
TWITCH HAS THE KEY
According to TwitchTracker, Twitch’s average viewing growth has increased more than 100% since 2015.
TWITCH KEY PERFORMANCE INDICATORS vg concurrent viewers A Avg concurrent channels
Source: TwitchTracker.com
26
luckbox | july 2019
Stadia not only releases gamers from the confines of gaming consoles, but also integrates services such as Twitch. According to TwitchTracker, Twitch’s average viewing growth has increased more than 100% since 2015 (See “Twitch has the key,” below). Stadia aims to integrate those who watch video games with those who play them, even enabling those watching to join the game in certain cases. With YouTube in their holster, one can imagine this integration would be seamless. Video game companies such as Electronic Arts (EA) derive more than 70% of their revenue from consolebased games, according to their fourth-quarter earnings report, with more than half of that revenue coming from service-based fees and charges. That includes in-game purchases, subscriptions and add-on content. It’s impossible to deny that the business model is changing to more service and subscriptions, instead of just direct-game sales. Fortnite was a wakeup call that supplied the kind of content the video game world lacks. In addition to high-end blockbuster games such as Call of Duty and Madden, demand is high for simpler games with little or no initial cost. Those games capture their audience’s time with the addictive gameplay opportunity to engage with dozens of human-controlled characters, and
If Stadia delivers exclusive content that draws eyes from competitors, console-based gaming companies could find themselves on the wrong end of a gaming revolution
GOOGL, NTDOY, AMZN, NFLX, EA, MSFT, AAPL, ATVI, SNE
capture audience dollars by offering low-cost additions, upgrades and extra content that serve as a recurring revenue stream instead of just a onetime purchase. Cloud streaming can thrive with that type of game design and an intuitive connection among watching, playing and interacting with others in a platform. While it may have been hard for them to create the grand-spectacle masterpieces made famous by established companies, they appear likely to have a much easier time focusing on the shareable experience games provide. Stadia and other ambitious cloud-streaming gaming platforms’ success will likely come down to content, like the Netflix (NFLX) stranglehold on the video streaming business. If Google can acquire or engineer games that pull more users from console-based gaming to the cloud, they could position themselves the way Netflix did in the beginning of the video-streaming boom. Google will have to beat competitors like Microsoft (MSFT), Amazon (AMZN) and possibly Apple, (AAPL), though it seems they’re first on the scene. While Stadia will represent only a small part of Google’s business for the foreseeable future, its impact on gaming companies such as Electronic Arts, Activision Blizzard (ATVI), and Sony (SNE) may be felt earlier as hype builds for cloud-based gaming. It’s not clear yet where and if Google will turn a profit in this venture, but with the cash hoard Google has at its disposable it seems they’re willing to do what it takes to earn market share. With the price rumored to be free initially, Google can undercut the market until it gains its followers, much like the Amazon model of the last 20 years. If Stadia delivers exclusive content that draws eyes from competitors, console-based gaming companies could find themselves on the wrong end of a gaming revolution. For investors who are considering a gaming play for the long term, it’s possible buying Google and selling companies like Electronic Arts and Activision Blizzard offers a compelling pairs trade. If gaming continues to take off in popularity, Google seems likely to execute its plan with some success. That could be the positive catalyst many are waiting for from the company. If not, it will be sheltered from the secular trend away
PHOTOGRAPH: REUTERS/STEPHEN LAM
RECENT PERFORMANCE
from gaming, while gaming companies will feel the full brunt. Adding the third scenario of Google taking significant market share from the established companies, being long Google and short Electronic Arts could prove a winning strategy. Ryan Shaw, a futures and derivatives trader, specializes in option spreads and pairs trading at NinjaTrader, analyzing order execution, charting and automated strategies.
Google Vice President and General Manager Phil Harrison announces new video gaming streaming service named Stadia.
While Stadia will represent only a small part of Google’s business for the foreseeable future, its impact on gaming companies such as Electronic Arts, Activision Blizzard and Sony may be felt earlier as hype builds for cloud-based gaming.
JULY 26, 2018– MAY 13, 2019 Alphabet E lectronic Arts Activision Source: StockCharts.com
july 2019 | luckbox
27
B U S I N E S S of E S P O R T S
As the Esports Audience Grows, So Do Valuations To illustrate the rapid and widespread adoption of esports, luckbox provides analysis and investment perspectives from Konvoy Ventures, a venture capital firm that invests in earlystage companies in esports and video gaming By Josh Chapman
Video Gaming: The Next 1 Billion Players
The cost of gaming via PC or console is decreasing, which should fuel adoption and boost esports Video gaming is heating up around the world. In fact, more than 2.3 billion people are playing and more than 380 million watch esports. Consumers are spending more discretionary income on digital entertainment while the price of video gaming equipment is decreasing. It’s a combination of trends that should result in continued consumer adoption and accelerating monetization of the global video gaming industry. Meanwhile, video gaming is becoming more socially acceptable for players in a variety of age groups. That not only includes today’s teenagers and millennials but also the “Atari Generation.” About 43% of mobile gamers are parents who continue to play as adults. Additionally, it’s not only men that play video game—women account for 45% of gamers and 30% of esports viewers in America. At the same time, the lower cost of playing seems likely to entice more people into taking up video gaming. PC and console costs Players have two hardware options
The DreamHack 2015 tour drew a massive crowd at a stop in the Romanian city of Cluj-Napoca.
18
luckbox | july 2019
PHOTOGRAPHS: (DREAMHACK) COURTESY OF DREAMHACK; (PS4) SHUTTERSTOCK.COM
The
SNE, MSFT, NTDOY
for video gaming: personal computers or gaming consoles. Console gaming largely revolves around Playstation form Sony (SNE) and Xbox from Microsoft (MSFT). Switch from Nintendo (NTDOY) lags far behind in third place. Playstation 4 has sold 75 million units, Xbox One has sold between 30 million and 50 million, and Nintendo Switch has sold 17 million. PCs offers better visuals, a greater number of indie titles and more affordable games, but are substantially more expensive to buy than consoles, according to GamingScan, a website that carries product reviews. Here’s the bottom line: In the past, owning a quality gaming PC was significantly more expensive than playing on a console. Today, that gap is quickly closing thanks to lower manufacturing and hardware costs.
PHOTOGRAPH: FLICKR/LOL ESPORTS
Despite making less money these days, Americans choose to spend more of their discretionary income on entertainment
Spending more on entertainment While average income has decreased recently by 1.5% in the United States, according to the Bureau of Labor Statistics, entertainment spending has increased by 10%. Despite making less money, Americans still choose to spend more of their discretionary income on entertainment. The narrowing price gap between console and PC gives consumers more options that they can afford. This trend appears likely to continue, especially as production costs of hardware decline and the rise of cloud gaming ensues. Once cloud gaming becomes ubiquitous, gamers won’t need to update hardware as regularly to fully experience any game. From 100 million players in 1995 to 2.3 billion today yields a 14.38% compound annual growth rate— the next 1 billion gamers are close at hand.
A win is rewarded at the 2018 World Championship Finals at the Incheon Munhak Stadium in Incheon, South Korea.
Esports Prize Pools Are Growing Fast
Gaming tournament rewards now rival the size of some of the largest purses offered to winners in traditional sports Esports pros are reaping the benefits of dramatic increases in prize money. In 2010, the total esports prize pool for almost all events in every tracked title totaled about $3 million. In stark contrast, esports paid $156 million in prizes last year. Compensation for esports athletes resembles that of golf and tennis. Those sports lack the high salaries of basketball, hockey, football, soccer and baseball but pay off in lucrative prizes, sponsorships and endorsements.
TOP 10 PRIZE POOLS BY EVENT
In 10 years, esports pros may see changes in compensation as high salary and more multi-year contracts. With that trajectory, esports prize pools and athlete compensation may quickly compete with the top traditional sports athletes in the not-so-distant future. Below is a list of the Top 10 events of 2018 by prize pools. Two of the biggest prizes were in esports: The International 2018 (Dota 2) and League of Legends World Championship.
World Series
$66,000,000
US Open-Tennis
$53,000,000
FedEx Cup
$35,000,000
Dubai World Cup Night
$27,250,000
The International
$25,500,000
US Open-Golf The Masters Super Bowl
$12,000,000 $11,000,000 $9,200,000
Stanley Cup
$7,000,000
LoL World Finals
$6,450,000
raditional Sports T E sports
july 2019 | luckbox
19
The
B U S I N E S S of E S P O R T S
Today’s Esports Team Valuations = NBA Teams in the 1980s
Today, every NBA team is worth more than $1 billion. Esports teams could reach similar heights, perhaps even more, in the near future. History is repeating itself, but more quickly this time Esports teams are attracting investments of about the same size as NBA teams of the 1980s. Examples include Cloud9 raising $50 million, TSM raising $37 million, and Team Liquid raising $25 million. In the 1980s, 15 NBA teams were purchased in whole or in part ranging from $9.8 million for the Houston Rockets in 1982 to $120 million for the Boston Celtics in 1986. Those figures are similar to the $37M average for top esports organizations today. Two significant outliers occurred among the 1980s NBA transactions: Portland and Boston. They alone increase the average by nearly 50%. Adjust for inflation and remove those two from the table, the average NBA franchise investments were within 5% of the three most notable recent investments in esports organizations. When those NBA transactions were completed, teams were valued from $10 million to $120 million, and today every NBA team is worth more than $1 billion. Most of the value appreciation can be attributed to technological advances that have brought wider viewership, which in turn has created lucrative media rights deals for the NBA and its teams. That’s important because esports franchises already have the viewership, and today’s digital distribution platforms will enable rapid audience acquisition and adoption. With more viewership comes more rich media deals. The esports audience Esports team franchises appear inherently lucrative because of their global digital audience. The NBA audiences in the 1980s were predominantly based in the United States and the teams couldn’t develop wide-
20
luckbox | july 2019
spread, loyal fan bases abroad. Global potential should help esports franchises appreciate in value at a materially faster rate than the NBA franchises from the 1980s. They have comparable audiences; considering the Overwatch League’s 10.8 million viewers today versus the NBA’s 13.2 million viewers in the 80s. Another reason for esports teams to appreciate in value is the age of their fans. The average NBA viewer is 42 years old, but according to Nielsen, the average age of esports viewers is 31 and 61% of viewers are millennials. These factors should drive the appreciation of valuations because those viewers have grown up not only watching esports, but also continue playing as they get older. With traditional sports, the majority of the viewers are just fans—even if they played the sport when they were younger they probably are not playing regularly years later. Millennials have a lasting affinity for the video games they grew up playing (and still play today) because they enjoy the exact same game at a high level of competitiveness. This dynamic is going to keep them engaged for years. It’s similar to golf, which players continue to enjoy for a long time. The same will be true for the younger Gen X and Gen Z demographics. History is repeating itself… but faster. Esports could do in five to 10 years what took the NBA over 30 years to achieve.
ESPORTS TEAM VALUATIONS: BACK TO THE FUTURE In millions, adjusted for inflation
The average age of esports viewers is 31, and 61% of viewers are millennials
Josh Chapman is managing partner at Konvoy Ventures, a Denver-based venturecapital fund specializing in esports and video gaming. @joshchapmn
Esports teams will reach $1 billion valuations more quickly than NBA teams Early-stage team transaction values are similar Digital platforms for esports will drive audience acquisition more quickly than NBA franchises The asset value appreciation timeline will be much faster for esports than NBA valuations
Esports Teams
Price
Team Liquid
$25
Team SoloMid
$37
Cloud9
$50
Avg. Deal
$37.3
NBA Transactions
Price
Chicago Bulls (’85)
$18.6
Houston Rockets (’82)
$22.1
Kansas City Kings (’83)
$23.0
Indiana Pacers (’83)
$24.1
Philadelphia 76ers (’81)
$28.8
LA Clippers (’81)
$31.2
Milwaukee Bucks (’85)
$38.5
Denver Nuggets (’85)
$40.5
Cleveland Cavs (’83)
$43.8
Utah Jazz (’85)
$44.1
Seattle Sonics (’83)
$46.0
Phoenix Suns (’87)
$85.4
Portland Trailblazers (’86)
$129.0
Boston Celtics (’86)
$238.7
Avg. Deal
$58.2
Avg. Deal (x-Bos & Por)
$38.9 Source: Konvoy Ventures
WITH ESPORTS PRIZE POOLS IN THE MILLIONS, WHERE DOES THE MONEY FLOW? MEET A PAST AND PRESENT PRO
Young Money By Ed Mckiney
PHOTOGRAPH: (LIU) ROBBIE NAKAMURA; (SUNDERHAFT) TING
This Med Student spent his gap year as an esports pro After devoting a gap year between high school and college to playing StarCraft II professionally, Conan “Suppy” Liu, aka “Superiorwolf,” went back to the books, completing a bachelor’s at the University of California at Berkeley. But he didn’t stop there. Now, he’s studying medicine at Sidney Kimmel Medical College of the Thomas Jefferson University in Philadelphia. When it comes to meeting the high cost of so much education, it can’t hurt that Liu racked up $75,000 in prize money during his pro esports days, having his best year at age 19.
A seasoned pro with upside mo Young, inexperienced professional gamers can fall victim to unscrupulous organizations looking to make a quick profit in esports, says highly ranked StarCraft II player Alex “Neeb” Sunderhaft. “Being mistreated as a player is fairly common,” he maintains. “I’m being paid fairly, for sure, but not all players are.” Understandably, teenaged pros generally don’t have much previous experience of the world when they hit the big time, Sunderhaft, notes. “I’ve never worked a conventional job in my life,” says the 21-year-old who’s been making his presence felt on the professional scene since age 16. Nefarious teams can take advantage of such inexperience, some observers claim. One young pro, Turner “Tfue” Tunney, recently sued Team Faze Clan for allegedly limiting his business opportunities, appropriating a huge share of his earnings, and encouraging him to gamble and drink underage, according to published reports. But Sunderhaft reports that he hasn’t experienced the fate described in Tenny’s headline-making lawsuit. “My sponsor, (mobile —Neeb networker) Ting, has been easy to work with and reliable regarding salary,” Sunderhaft says. In the past four to five years, he’s reportedly earned just shy of $440,000 in 156 tournaments. That degree of success required extraordinary measures. After graduating from high school Sunderhaft skipped college and moved from New York to South Korea to hone his skills on StarCraft, because that’s where that game’s played with particular intensity. “I practice three to four hours a day, which is standard for StarCraft,” Sunderhaft says of his current regime. “I’d imagine the very popular games have players with strict practice schedules to optimize their entire day, just as StarCraft did when it was at its peak about eight years ago.” Looking to the future, Sunderhaft plans to “simply enjoy StarCraft for as long as it stays a viable esport.” But he doesn’t blame other professional video game players for dreaming big. “Esports offers endless opportunities for ordinary people,” he says. “I’ve been grateful ever since I started almost 10 years ago.”
“I’ve never worked a conventional job in my life”
