RESEARCH

The Supercharged

World of Esports

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February 28, 2019

With over 320 million fans worldwide, esports is fast becoming a billion-dollar mainstream industry. According to Newzoo, revenue from global esports was over $655 million in 2017 and is estimated to grow to over $1.6 billion by 2021. Since video games became competitive, the appeal of esports has boomed so quickly that in South Korea, esports is even described as a national pastime. In January 2016, ESPN began covering esports as a vertical and Yahoo Sports followed suit just a few months later. However, even with rapid growth, the landscape of esports has unique issues and challenges the industry will face as competitive gaming develops. So what’s actually powering up and potentially powering down the competitive gaming industry? This report from the J.P. Morgan Global Research team takes a look inside the exciting playing field of esports.

Sizing the Playing Field

Despite the ongoing debate about how a sport is defined, it is undeniable that competitive video gaming is growing exponentially across the globe. In addition to advertising, sponsorship and media rights deals, ticketing, merchandise, and promoter and game publisher fees also contribute to the gaming industry’s overall revenue.

2017 esports revenue by stream

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Media Rights

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Sponsorship

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Game Publisher Fees

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Advertising

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Merchandise & Tickets

Media Rights - Mobile Created with Sketch. $161M Media Rights
Sponsorship - Mobile Created with Sketch. $359M Sponsorship
Game Publisher Fees - Mobile Created with Sketch. $116M Game Publisher Fees
Advertising Created with Sketch. $174M Advertising
Merch Tickets - Mobile Created with Sketch. $96M Merchandise & Tickets
Source: Newzoo 2018 Global Esports Market Report

Relative to the four major American sports leagues, esports appears to be under-monetizing its fan base. The $655 million of revenue against 143 million esports enthusiasts equates to just under $5 per fan, which is approximately 10% of what other leagues generate in aggregate.

Esports vs. the four major sports leagues

mls-mobile Created with Sketch. 79M 118M 133M 326M 143M $3.7B $9.0B $5.0B $11.2B $655.0M $46.8 $76.3 $37.6 $34.4 $4.6 UNIQUE ANNUAL VIEWERS LEAGUE REVENUE REVENUE PER VIEWER Source: Activision 2015 Investor Day. Newzoo; J.P. Morgan estimates. Note for esports, “Unique annual viewers" is enthusiasts

Esports generates
10%
of what other leagues generate in aggregate

However, it is important to note that esports cannot be directly compared to the four major sports leagues. Traditional sports make up the majority of their audiences on live television and esports on digital platforms, which cause misleading results regarding viewership. However, Riot Games stated that the 2015 League of Legends World Championship had an average of 4.2 million concurrent viewers over 73 matches, placing the event on par with the Stanley Cup Finals with 4.8 million viewers in 2017, but below the 2018 NBA Finals with 20.4 million viewers and the 2017 World Series with 18.7 million viewers.

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Key Players

The esports landscape can be broadly segmented into publishers, event organizers, platforms and teams/players.

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Publishers

Publishers such as Riot Games, Valve, Activision Blizzard and Electronic Arts (EA), develop, market and distribute video game titles, and to the extent the game is shipped in physical form, publishers are also responsible for manufacturing. They also control commercial rights for games and license content to third parties and event organizers.

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Event and League
Organizers

While game publishers often fill the role of event organizer, competitions can also be promoted by third parties such as Electronic Sports League (ESL), a leading independent organizer of esports events and leagues.

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Platforms

Esports fans consume content almost entirely through online platforms, such as Twitch, YouTube and Major League Gaming (MLG), which stream live competitions, user generated videos, publisher generated videos and other events.

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Teams and Players

Esports teams and players earn revenue through prize money, merchandise sales, sponsorships and media rights (popular teams or players can be paid to exclusively stream on specific sites). For players, teams provide logistics, practice locations, coaches, and now salaries. Esports teams can compete in a single video game or field players across multiple titles.

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Dealing with the Glitches

In the rapidly maturing and evolving esports landscape, it is still important to understand the challenges the industry will face in the years ahead.

The ubiquity of programming, along with millions of hours of content on streaming sites, has created a cluttered and diluted landscape. The confusion makes the competitions less approachable for fans, as well as for potential sponsors and media partners. Going forward, publishers may seek to focus on a smaller number of titles and events.

Without unionization, esports leagues can be subject to antitrust lawsuits if they set rules around how teams transact for players.

Currently, there are no universally recognized organizations charged with setting standards or regulations for esports. Leagues can lack proper governance and in some cases teams and event organizers have accused publishers of exercising too much authority. At the same time, there are no set rules regarding player issues such as drug use or gambling.

For games such as Counter-Strike (CS:GO), sponsors may be reluctant to be associated with guns and violence. At the same time, there is no real consensus on how to insert commercials into an esports broadcast. A lack of reliable measurement is also a concern for sponsors looking to accurately calculate ROI.

In general, the monetization challenge for esports is identifying a revenue stream from a fan base that largely consumes its product online for free. Revenue until now has primarily stemmed from sponsorships. In order to grow, publishers and leagues will likely have to take a different approach to license and window content. Revenue growth towards the level of traditional sports leagues may also require streaming content on television.

Entering the Big Leagues

Despite the challenges, the esports playing field has hit notable milestones in becoming an established industry while continuing to expand and offer new revenue opportunities. Certain leagues, such as the Overwatch League (OWL) have utilized a traditional approach and adopted a professional sports franchise model with geographic-based teams. Economically, OWL is also structured similar to other sports, with separate revenue streams for the league and individual teams. Meanwhile, publishers like Electronic Arts continue to invest in competitive gaming and focusing the company’s strategy more on driving engagement through its entire player base rather than generating direct esports–related revenues. In the last few years, the company has expanded into more games, modes and events with corresponding live services monetization opportunities, which has driven strong engagement and profit benefits. Above all, the competitive gaming industry has forged its own path and has already grown larger than many have realized. By gaining traction among publishers, event promoters, platforms, teams and investors, all of whom see prime opportunity for monetization and growth, esports is well on its way to becoming a mainstream industry.

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