Guest post by Sterling Campbell
Games and sports change the entertainment landscape for billions of people. For the first time, gaming revenue grew by greater than music and video income combined in 2019. More than 50 billion hours of game content is consumed on YouTube annually vs. 60 billion on Netflix. Netflix even notes in 2018 earnings report that they “competed with (and lost) Fortnite more than HBO.”
For the first time, gaming revenue grew by greater than music and video income combined in 2019.
Fortnite, a free cross-platform game that shook the world in 2018, generated $ 2.4 billion in revenue and destroyed a total of $ 1.3 billion in sales of Red Dead Redemption (at a price point of $ 60), signaling a shift from the “Hit model” “and towards freemium, the recurring income model. Somewhat surprisingly, Fortnite players spent averaging $ 84.67 on free-to-play games far above the traditional $ 60–and 36.78% reported spending money on in-game purchases for the first time.
This shift in behavior shows a desire to pay that exceeds the capacity of the traditional model to get value, as well as a desire for accessible connectivity and competition. Companies that can increase social connectivity, enable competition, and provide premium content have the highest possibility to succeed and reward early investors.
Ecosystems and Gaming Growth
The game value chain is a complex multi-channel system where money flows in various ways. Simply put, fans pay for games from publishers, publishers create a platform from which streamers are born, and professional and individual teams compete in tournaments funded by brand sponsors and, usually, produced by publishers themselves.
Sponsors and advertisements now constitute nearly 60% of all sports income, and Goldman Sachs claims that by 2022, media rights will cover 40% of all esports revenue. This growth comes on the heels of what is expected to be a CAGR of 15% in the size of a global audience, adding value to each component of the business.
The fan is short of money
Fans are the center of the gaming business but are largely ignored and underestimated in every sector. The average esports fan spends time in between $ 3- $ 5, compared to more than $ 35 – $ 85 per fan for traditional sports such as basketball, soccer and hockey. Everywhere free video game content and 24/7 access to streaming so far have made monetization difficult on a global scale. However, there is empirical evidence that game fans are willing to pay for a premium experience.
For example, millennials and Gen Z players spend between $ 51- $ 53 per month, on average, for streaming channel subscriptions and donations. Gamers are conditioned to spend money on content through in-game purchases and subscription models, and increasing offers in premium values above and beyond the current fan experience should significantly increase annual revenue per fan.
There are three main areas ready for venture capital: competition + connectivity, pick & shovel sports infrastructure, and game development technology.
Where to Invest Now
There are three main areas ready for venture capital: competition + connectivity, pick & shovel sports infrastructure, and game development technology. Each of these areas provides opportunities to capture untapped value and take advantage of the fact that most 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 the total gaming market) can play on the same server as Xbox, Playstation, and PC players. This improves connectivity between players and builds strong connections to the game. Individual match speed and sandbox style gameplay allow the game to soar to the forefront of streaming sites and make stars like Ninja and Shroud behind. The success of the game on the streaming platform translates well into the emerging esports market, culminating in the first time Fortnite Pro-Am.
While the appeal of competition will always attract fans to esports and games, research has shown that competitive attractiveness decreases most with the age of the player. Development has responded to this change, with most of the game moving away from the adventures of single players (Red Dead Redemption 2) and becoming a social platform aimed at encouraging connections between players (Fortnite). Almost 40% of gamers get 6+ friends a year through online games, and applications that can enable deeper connectivity between players can take advantage of less money groups with a high willingness to pay for content.
Companies that stand out very well in this category include digital party applications in games that make deeper online connections such as Dispute and Bunch, as well as allowing such friendly competitions Skillz and Player Room.
The most compelling aspect of the esports infrastructure is the market: 0.1% of the 500 million viewers of esports paying $ 4.99 a month will generate an ARR company of $ 30 million.
Select & Shovel Esports Infrastructure
The most compelling aspect of the esports infrastructure is the market: 0.1% of the 500 million viewers of esports who pay $ 4.99 per month will generate an ARR company of $ 30 million. Startups that allow large-scale broadcasting, tournament organization, and event sponsorship will generate exponential returns for investors.
Company likes Twitch, PlayVS, and Face it enabling the growth of the esports industry. These companies are less risky than investing directly in video game studios, and they appeal to several aspects of the industry: gamers, esports fans, professional players, and brands. Their solutions can be applied to the industry, not to certain games and their respective audiences. They are also easier to measure and monetize because they solve significant pain points in the industry.
Of the opportunities in the gaming industry, the most lucrative lies in providing a way for users to develop real connections with other players while also providing access to competitive games.
Game Development Technology
Company likes Genvid has enjoyed success by providing the industry with software development tools (SDKs) to make games more streamable. Otherwise, Unity has become one of the entry platforms for game development. This technology is changing the way games are developed, building an economy in games and new business models, utilizing a growing streaming ecosystem, and introducing new technologies to drive the industry forward.
Best Bets: Competition + Connectivity
Of the opportunities in the gaming industry, the most lucrative lies in providing a way for users to develop real connections with other players while also providing access to competitive games. These companies avoid the binary risks associated with individual games, and their serviceable markets include game publishers, streamers, brands, and billions of gamers and fans of esports around the world.
Sterling Campbell is Investment Scout at Lerer Hippeau, NYC-based early stage VC Fund. He is an MBA student at Columbia Business School, where he is the President of the VC Fellows program.