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Esports Investors May Get Bloodied

esports competition for 'League of Legends' in Los Angeles
"League of Legends" world championship competition, 2013. Photo by Chris Yunker.

A financial planning conference was not the place I expected to encounter unbridled esports enthusiasm, but the reach of competitive video games is growing.

Last month I attended a conference for the Financial Planning Association of Georgia. At that conference, a representative from the Metro Atlanta Chamber of Commerce spoke about esports and the industry’s growing impact on Atlanta. Given the response from most of the attendees, I suspect it was a topic unfamiliar to most FPA members. The speaker expressed enthusiasm for the rapid growth of esports in general and mentioned that more people watch esports than watch NBA, NFL and MLB games combined. I was skeptical of this, but I did decide to give esports a closer look.

Esports is an umbrella term for competitive multiplayer video gaming, usually in front of an audience. Here in the U.S., the most popular platforms for watching esports are Twitch (an Amazon-owned streaming platform) and YouTube. Esports are also massively popular in China and South Korea, where spectators often gather in physical arenas to watch everything from expert demonstrations of how to pass difficult video game levels to top-tier players going head-to-head.

Much like traditional sports fans, fans are drawn to esports for a variety of reasons. Some enjoy watching players test their skills against one another at the highest levels. Some become attached to individual players due to their public personas. Others watch from a pure love of a particular game, or type of game.

Consider “Overwatch,” a popular team-based first-person shooter. The Overwatch League is now a professional enterprise, with 20 permanent teams and regular season play. Prizes total $5 million, according to the league’s website. Activision Blizzard Inc. – the company that publishes Overwatch – signed a $90 million two-year deal with Twitch to exclusively distribute Overwatch League events in North America. Sponsors are also on board; some of the League’s backers include T-Mobile, Intel, Coca-Cola and Toyota. Game developers hope that major esports events will become as lucrative as the World Series or the Super Bowl, in both media rights and sponsorship revenue.

Esports fandom is growing. According to Forbes, esports events now account for around 9% of gaming companies’ revenue. The bulk of the money in esports currently comes from corporate sponsorship, though many observers are optimistic about the growing revenue from media rights. As Kenneth Rapoza wrote for Forbes, the ideal esports model is “Sort of like being the ESPN, NBA and a team sponsor rolled all into one: the distributor, the platform brand, and the gamer team.” Newzoo, an analytics company focused on gaming and esports, reports that this year esports revenues are expected to surpass $400 million in the U.S. and Canada, and $1 billion worldwide.

The rapid growth of esports has attracted a lot of capital. Many esports enterprises are backed by venture capital and angel investors. Yet as the sector grows, opportunities for other investors to get involved have also arrived. Some individual companies involved in esports are publicly traded, including Overwatch publisher Activision Blizzard. And vehicles with a focus on esports have begun to arrive too. The VanEck Video Gaming and Esports ETF launched last October, and a second esports exchange-traded fund – the Roundhill BITKRAFT Esports & Digital Entertainment ETF – launched earlier this month.

Most venture capitalists are used to betting big and getting it wrong most of the time, with a few significant winners making up for any failures. But this isn’t a great approach for individual investors. So while the investment community is optimistic about putting money into esports, there are reasons to be wary. As journalist Cecilia D’Anastasio recently argued at the video game website Kotaku, there are serious indications that esports might be a bubble. Frank Fields, the sponsorship manager for gaming hardware manufacturer Corsair, said that the industry’s value “as of now, is optimistic at best and fraudulent at worst.”

Part of the problem is the current balance – or lack of it – among esports’ revenue streams. About 34% of esports revenue comes from sponsorship, according to Newzoo. This is much higher than traditional sports, where sponsorships generally account for around 10% to 15% of a professional league’s overall revenue. If major sponsors decide they are not getting a useful return on investment and withdraw, it could start a domino effect. The results could be disastrous if esports does not figure out a way to monetize viewers before then.

A report from Goldman Sachs predicts that media rights will be the biggest source of esports revenue by 2022. But YouTube and Twitch are both currently free to watch, though viewers can tip through Twitch if they like. It is not self-evident how many esports fans will be willing to pay to stream matches, or to attend them at arenas in U.S. cities.

Jason Lake, the founder of compLexity Gaming, told the Sports Business Journal that the gap between capital raised and revenue earned for esports teams should give industry participants pause. “When you’re seeing teams right now raising over $300 million valuations on revenues under $25 [million], you’re kind of like, what?” Lake said. Newzoo analyst Jurre Pannekeet told Kotaku that the majority of esports teams currently operate at a loss.

We can also revisit the comparison I heard at the FPA conference between esports’ audience and that of traditional sports. Newzoo estimates that the global audience for esports will reach 453.8 million in 2019. But it is unclear how to compare this number with viewership for traditional sports. The MLB, NBA and NFL usually measure TV viewership for a season in a per-game average. The origin of those numbers is straightforward; for Nielsen families, a viewer must watch an event for six minutes to count. But in esports, how long must a viewer watch to be counted? If a fan streaming at home watches for 10 seconds, disconnects and then comes back to the same event a few hours later for another 30 seconds, does that count as one viewer? Two? Zero? If my Wi-Fi keeps crashing and I have to reload an esports stream over and over, could I be counted as dozens, or even hundreds of viewers?

While there is no standardized method for calculating viewership, the gaming industry has every incentive to report engagement in the most generous terms. The main U.S. professional sports leagues measure viewership using independent third parties like Nielsen, but esports has no such equivalent for online views. Instead teams, streaming platforms and publishers self-report viewers. Newzoo, one of the main sources of esports data, has drawn criticism from some insiders for opaque calculations that cannot be independently verified. Several sources that spoke to Kotaku said that many esports viewership numbers and projections, from Newzoo and elsewhere, were “at best rosy-eyed and, at worst, inflated, unverified, or misleading.”

It is true that many rapidly growing companies can be unprofitable but still popular among investors. Just look at Uber. But investors should avoid letting enthusiasm about esports cloud their judgement in the absence of reliable evidence that it is an industry worth investing in. There are enough red flags that, for now, investors would generally be better off supporting their favorite esports teams by watching them on Twitch while investing elsewhere, waiting to see if the industry bubble will pop.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 12, “Retirement Plans;” Chapter 15, “Investment Approaches and Philosophy;” and Chapter 19, “A Second Act: Starting a New Venture.”

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