Guest post by Sterling Campbell
Gaming and esports are changing the entertainment landscape for billions of people. For the first time ever, gaming revenue grew larger than music and video revenue combined in 2019. Over 50 billion hours of gaming content is consumed on YouTube annually vs. 60 billion on Netflix. Netflix even noted in a 2018 earnings report that they “compete with (and lose to) Fortnite more than HBO.”
For the first time ever, gaming revenue grew larger than music and video revenue combined in 2019.
Fortnite, a free-to-play cross-platform game, took the world by storm in 2018, earning $2.4B in revenue and crushing Red Dead Redemption’s $1.3B in total sales (at a $60 price point), signaling a shift away from the “hit model” and towards a freemium, recurring revenue model. Somewhat surprisingly, Fortnite players spent an average of $84.67 on the free-to-play game—well above the traditional $60—and 36.78% reported spending money on in-game purchases for the first time.
This shift in behavior demonstrates a willingness to pay that exceeds the traditional model’s capacity to capture value, as well as a desire for connectivity and accessible competition. Companies that can increase social connectivity, enable competition, and provide premium content have the highest likelihood to succeed and reward early investors.
The Gaming Ecosystem and Growth
The gaming value chain is a complex, multi-channel system in which money flows in a variety of ways. Put simply, fans pay for games from publishers, publishers create the platforms from which streamers are born, and professional teams and individuals compete in tournaments funded by brand sponsorship and, typically, produced by the publishers themselves.
Sponsorships and advertising currently make up nearly 60% of all esports revenue, and Goldman Sachs claims that by 2022, media rights will comprise 40% of all esports revenue. This growth comes on the heels of what’s expected to be a 15% CAGR in global audience size, adding value to each business component.
The fan is being under-monetized
The fan is at the center of the gaming business but is largely ignored and undervalued in each sector. The average esports fan spends between $3-$5, compared to over $35-$85 per fan for traditional sports like basketball, football, and hockey. The ubiquity of free gaming video content and 24/7 access to streaming has thus far made monetization difficult on a global scale. Still, there is empirical proof that gaming fans are willing to pay for premium experiences.
For example, millennials and Gen Z gamers spend between $51-$53 per month, on average, for streaming channel subscriptions and donations. Gamers are being conditioned to spend money on content via in-game purchases and subscription models, and an increased offering in premium value above and beyond the current fan experience should increase the annual revenue per fan significantly.
There are three key areas ripe for venture capital: competition + connectivity, pick & shovel esports infrastructure, and game development technology.
Where to Invest Now
There are three key areas ripe for venture capital: competition + connectivity, pick & shovel esports infrastructure, and game development technology. Each of these areas provides an opportunity to capture untapped value and take advantage of the fact that the vast majority of esports fans are gamers themselves.
Competition + Connectivity
Part of Fortnite’s success can be attributed to another shift to cross-platform game development. For the first time, mobile gamers (50% of total gaming market) could play on the same servers as Xbox, Playstation, and PC players. This increased connectivity between players and established a strong connection to the game. The speed of individual matches and sandbox-style gameplay allowed the game to catapult to the forefront of streaming sites and created superstars like Ninja and Shroud in its wake. The game’s success on streaming platforms translated well to the burgeoning esports market, culminating in the first-ever Fortnite Pro-Am.
While the allure of competition will always draw fans to esports and gaming, research has shown that competitive appeal declines the most as gamers age. Development has responded to this shift, with games largely moving away from single-player adventures (Red Dead Redemption 2) and becoming social platforms geared towards driving connection between players (Fortnite). Nearly 40% of gamers make 6+ friends a year via online gaming, and applications that can enable deeper connectivity between players can tap into an under-monetized group with a high willingness to pay for content.
Companies that stand to do very well in this category include in-game digital party apps that create a deeper online connection like Discord and Bunch, as well as those that enable friendly competition like Skillz and Players’ Lounge.
The most alluring aspect of esports infrastructure is the market: 0.1% of 500M esports viewers paying $4.99 a month would create a $30M ARR company.
Pick & Shovel Esports Infrastructure
The most alluring aspect of esports infrastructure is the market: 0.1% of 500M esports viewers paying $4.99 a month would create a $30M ARR company. Startups that enable large-scale broadcasting, tournament organization, and event sponsorship will generate exponential returns for investors.
Companies like Twitch, PlayVS, and FaceIT enable the growth of the esports industry. These companies are less risky than investing directly in video game studios, and they appeal to several facets of the industry: gamers, esports fans, professional players, and brands. Their solutions can be applied to the industry, rather than a specific game and its respective audience. They are also easier to scale and monetize as they solve significant pain points in the industry.
Of the opportunities in the gaming industry, the most lucrative lie in providing users with the avenue to develop real connections with other players while also providing access to competitive play.
Game Development Technology
Companies like Genvid have enjoyed success by providing the industry with a software development kit (SDK) to make games more streamable. In contrast, Unity has become one of the go-to platforms for game development. These technologies change the way games are developed, build in-game economies and new business models, tap into a burgeoning streaming ecosystem, and introduce new technology to drive the industry forward.
Best Bet: Competition + Connectivity
Of the opportunities in the gaming industry, the most lucrative lie in providing users with the avenue to develop real connections with other players while also providing access to competitive play. These companies sidestep the binary risk associated with individual games, and their serviceable market includes game publishers, streamers, brands, and billions of gamers and esports fans worldwide.
Sterling Campbell is an Investment Scout at Lerer Hippeau, an early-stage, NYC-based VC Fund. He is an MBA student at Columbia Business School, where he is is President of the VC Fellows program.
Source: Forbes – Money