The Growth Of eSports No longer Child's Play

The competitive video game industry is becoming more mainstream, and real prospects abound for major investment returns.

Competitive video gaming still has a mainstream reputation for being a trivial endeavor, but even a cursory glance at the current state of eSports makes a compelling case against that view.

Last week saw the conclusion of the International, a prominent eSports tournament featuring a total prize pool exceeding $18 million and a viewership count of over 20 million. According to industry observers, over 40 million people around the world actively spectate eSports events; that is more viewers than last year’s NBA Finals, MLB World Series, and Super Bowl.

                

In total, the eSports industry is estimated to have generated over a staggering $600 million worldwide in 2014. If these figures come as a surprise, that is because eSports is still a nascent, and more importantly, niche market in the U.S. However, East Asia and other parts of the world present a very different picture.

Growing global and corporate interest

Currently, China and South Korea boast the most developed eSports scene — China by virtue of its massive consumer base, and South Korea through its advanced eSports institutions and internet infrastructure. Accordingly, teams from both countries tend to dominate the leaderboards across several international eSports competitions.

In recent years, however, several countries in the Baltics and the surrounding region have started to contest the Asian hegemony. This is not surprising given that Estonia, Latvia, and Romania are heavily wired countries with some of the fastest internet speeds in the world.

However, the most significant development is the rising trend of corporate involvement with eSports. Traditionally, corporate sponsorship and advertising for eSports were limited to computer hardware companies and niche brands appealing to the gamer demographic, such as Monster Energy.

In recent years, however, prominent brands such as Ford, American Express, and even Coca Cola have begun forming partnerships with game developers, teams, players, and event organizers.

From an advertising perspective, the growth of eSports presents an incredible opportunity. Major events are often held in large venues that attract thousands of attendees and millions more spectating online.

By advertising and sponsoring such events and even professional teams, brands can gain immediate access to massive potential consumer base at a much lower cost than if they did so through traditional advertising channels.

Political risks remain

Despite the attractive growth potential, political risk remains a key concern for investing in eSports because of its inextricable link to the internet and youth culture. During times of political and economic backlash, governments in emerging market countries often crack down on internet-related activities and hubs, such as internet cafes.

Earlier this year, the Uzbek government tightened control over internet cafes in Tashkent to ostensibly protect the youth from immoral content, including various media and video game sites.

In the Pacific region, the Philippines has emerged as the second-most popular destination for outsourcing, thanks to a young, highly educated workforce proficient in English and IT expertise. Unsurprisingly, the country is a major consumer of online gaming and Filipino teams have started to make inroads into international eSports competitions.

Last spring however, the Filipino government passed a nationwide bill that banned two of the most popular online games from being played within internet cafes. In the Philippine case, the bill was proposed after gaming related disputes led to violence in internet cafes across the country.

Even in South Korea, the so-called ‘Mecca of online gaming,’ the industry has been burned by restrictive public policies. Video game addiction has become a major social problem, and in late 2011, the government passed a controversial “shutdown” law that banned youth under the age of 16 from online gaming between midnight and 6 AM.

After heavy backlash from small business owners and eSports-related groups, the law was eased in 2014 to permit youth to play, provided that they receive parental consent. Still, the Korean eSports industry lost significant commercial dividends as several competitions and promotional events were cancelled.

In addition, South Korean eSports teams disconnected in the middle of international online tournaments as the ban took effect resulting in the loss of potential prize earnings and publicity for brands with sponsorship or advertising contracts with those teams.

Private equity and partnerships

As eSports continues to become more mainstream and related institutions develop, private equity firms will look to capitalize early on the action.

Recently, billionaire investor Mark Cuban and Elisabeth Murdoch, daughter of media mogul Rupert Murdoch, made waves by investing several million dollars into a Unikrn, a startup that provides a betting platform for eSports.

Last year, Major League Gaming, a U.S. based eSports firm, established its first international franchise in Latin America. This was achieved through a partnership with Grupo Águia, the Brazilian entertainment and tourism powerhouse that provided much of the hospitality and transportation services for the 2014 World Cup.

Accordingly, partnerships between established eSports firms, major brands, and relevant third party groups in target market countries will be another major avenue of growth. With the robust development of internet infrastructure and youth bulge across several emerging economics, investing in eSports will prove to be a risky but lucrative game for years to come.