It was one of the sporting events of the year. Athletes at the top of their game battled it out in front of screaming fans, with an audience 43-million strong cheering on every moment at home.
But this wasn't baseball's World Series or the deciding tie of basketball's NBA finals – both of those events attracted smaller television audiences. In fact, it was the 2016 League of Legends World Championship in October.
The huge audience for the tournament underscores the massive potential of electronic sports as a form of digital entertainment – not just for players but even for spectators.
Its growing importance is underscored by the inclusion of eSports – a term that has featured in the Oxford English Dictionary since 2015 – in the programme for the 2022 Asian Games in Hangzhou, China.
eSports is also a profitable business. Riot Games, developer of League of Legends, said the multiplayer game alone reaped $1.7 billion in sales last year, topping the total revenue of high-flying technology companies like Snap and Line.
Other hugely profitable online games include World of Warcraft and Dota 2, which reported sales of $814 million and $238 million respectively in 2015.
According to market research firm Newzoo, the eSports industry is expected to create a gaming audience of 190 million consumers and a core gamer base of 145 million people by the end of the year. Those two figures combined are close to the population of the United States.
Taking eSports to a bigger stage
The eSports industry is ripe now that a number of Asian companies are finding their ways to the public market and prepare to raise funds from initial public offerings.
The closest to become a public company is Razer, which has already applied for an initial public offering in Hong Kong last month. San Francisco-headquartered Razer sells premium gaming devices such as high-precision mice, customisable keyboards and audio equipment.
Once popular only with professional gamers, Razer raised its public profile in April after receiving a $25 million investment from Horizon Ventures, the venture capital firm backed by Hong Kong billionaire Li Ka-shing. The endorsement by Asia’s second richest man is also seen as a vote of confidence in the development of eSports in the region.
Razer’s preliminary IPO prospectus shows Horizon Ventures bought a 1.29% stake in April through the company’s series D fundraising. Based on that figure, the company is valued at about $1.9 billion.
Garena Interactive, a Singapore-headquartered digital content and video gaming platform, is also tipped to conduct an initial public offering in the US as soon as this year. Garena is the exclusive operator in Asia for online video games including League of Legends and soccer hit Fifa Online 3.
Similar to Razer, Garena also completed a new funding round in May, drawing commitments from Hillhouse Capital, Cathay Financial and Farallon Capital Management. Garena also counts Malaysian sovereign wealth fund Khazanah Nasional and Chinese e-commerce giant Tencent among its shareholders.
New gaming mode
Stock market investors in Asia already have experience with online gaming companies. Hong Kong’s IPO market witnessed an online gaming boom between 2013 and 2014 when a number of mobile game publishers, including IGG, Boyaa Interactive and Forgame, sold shares to the public and experienced a huge lift in market valuations within months.
The online gaming boom happened at a time when mobile games were becoming popular amid the increasing penetration of smartphones. Mobile games such as Candy Crush and Clash of Clans took a large slice of the market from computer game operators, which had lost their appeal to casual gamers because their games were confined to desktop and laptop computers.
Nevertheless, most of these mobile game developers were short-lived and saw their share prices plummet from 2015 onwards, when investors began to question their business models. In particular, many of them failed because they relied heavily on one particular game, making them vulnerable to rapidly-changing consumer tastes in the world of mobile and free-to-play games.
The eSports industry is more sustainable because game developers create a gaming ecosystem that reduces the turnover rate of gamers, according to people familiar with the industry. That ecosystem is boosted by a steady flow of regular events, live streams and competitions, among other factors.
At the same time, higher complexity and a stronger element of competition ensure multiplayer online games have a longer lifespan. In general, these games last longer because they are not released as frequently as mobile games.
But from a financial standpoint, the key difference perhaps lies in the gradual transformation of eSports as a spectator activity.
According to Newzoo, 42% of eSports viewers do not actually play the game themselves. This suggests that the target audience are no longer confined to the gamers. Similarly, the income stream is no longer limited to in-game purchases and advertisement.
For instance, game publishers can potentially explore new income sources such as event tickets and merchandise, as well as sponsorship and media rights which are not applicable in other form of games.
As gaming becomes a spectator event, game publishers could also potentially gain from broadcasting rights for their events and tournaments – just as sport event organisers make a big slice of their profits.
The eSports ecosystem is also evolving in a way similar to a real sport. Professional eSports teams now recruit coaches, trainers and strategists to help with their match preparations, creating a new pool of jobs besides game designers and marketers.
At the same time, tournament prizes are also hitting new highs.
The overall prize pool of Dota 2's 2016 International annual championship was about $21 million, more than double the amount two years ago. By comparison, the NBA awarded the 16 teams that reached the playoff round a total of $15 million last year – already the largest prize pool in the league's history.
While it is very much debatable whether video gaming should be considered a real sport, the eSports industry is undoubtedly a potential new sub-sector in Asia’s equity capital markets that technology investors might just want to try out.
