State of Gaming and Esports

Manatt Digital and Technology

It’s a Fortnite world, and we’re all just living in it. While the gaming and esports industries have continued to thrive, the 800-pound gorilla has been Fortnite’s continued dominance in the market. We haven’t seen anything like this since Pokémon Go in 2016. Even though Fortnite is garnering most of the well-deserved press and attention, there are lots of big developments in the space that shouldn’t be missed.

Fortnite Dominates

Before we get to the rest of the industry, let’s acknowledge how massive Fortnite has become. If you know any kids under the age of 14, they definitely know how to floss. Ninja, the world’s premier Fortnite streamer and buddy to Drake, just made the cover of ESPN the Magazine. David Price, starting pitcher for the Boston Red Sox, became embroiled in a brouhaha over whether or not his mild carpal tunnel injury was the result of his addiction to playing Fortnite. The dance moves have infiltrated NFL sack and touchdown celebrations all year. Josh Hart even had custom shoes made.

The point is that Fortnite has crossed over from being a wildly successful game to being something of a cultural phenomenon. This transcendence has boosted viewership, in-game sales and nongaming interest in the Fortnite ecosystem. Its ability to offer cross-platform connectivity gives users the freedom to choose their platform, while keeping the friction of customer acquisition relatively low. This past May, the game made an estimated $318 million, making it the largest single month for any free-to-play game ever. To put that in context, it’s 50% higher than Pokémon Go’s biggest month to date. With almost 80 million players as of August, the game has consistently attracted and retained customers, while earning more than $1 billion so far. The margin of Epic Games, the developer and publisher of Fortnite, has gone up since the company made the decision to sidestep the Google Play Store and distribute directly to Android mobile users, saving the standard 30% store take that publishers have come to expect and loathe. Fortnite has the unique opportunity to bypass this fee due to its already established place and ability to influence downloads without the need for Google Play Store marketing and placement. Unfortunately for Epic, the Apple Store can’t be bypassed for iOS users.

Epic has committed $100 million to prize pools for players and competitors. It is organizing a World Cup event in 2019 that will provide competition and opportunities to win some of that available cash. While that seems like a lot of money, there have been reports that sponsored partnership deals around the World Cup could run as high as $25 million each. That’s a nice potential return on investment for Epic.

Investment and Acquisition Landscape

There is still movement on the investment and acquisition side of the industry, fueled by bullish projections on the gaming and esports markets. Esports teams are still receiving substantial backing from institutional funds as well as high net worth individuals. Even though near-term revenues do not necessarily align with some of the investment check sizes, the thought is that these early leaders could someday turn into multibillion-dollar franchises such as the Yankees or the Cowboys.

Overwatch League has reportedly upped its expansion team franchise fees from $20 million to $30-$60 million per team. Team Liquid parent company aXiomatic raised $25 million in Series B funds earlier in the year, while Cloud9 just closed a $50 million Series B that will enable it to build a 20,000-30,000-square-foot training and operations facility in Los Angeles that may be used for team members and, potentially, community. TSM’s parent company, Swift, closed a $37 million Series A to help with its NA LCS buy-in fee as well as growing operations.

Esports teams weren’t the only ones raising capital, which is a good sign for the industry as a whole. Discord, the voice and text messaging service of choice for gamers, raised a new $50 million, effectively doubling its valuation from its previous raise in 2017. The company is now valued at an estimated $1.65 billion, making it one of the best success stories in the industry. Roblox, a Minecraft-like world-building game for kids and one of our Top 20 to Watch for 2018, recently raised $150 million to grow its international presence. Its current 70 million users have helped bring the company’s valuation to a staggering $2.5 billion. PlayVS raised a $15 million Series A to help organize and build out esports at the high school level, providing a potentially important service to the core demographic of athletes.

Acquisitions are taking place around the industry, and two key transactions this year have revolved around research and insights into the gaming and esports markets. Newzoo and SuperData Research, the two top sources for information and projections on the industry, were both acquired as strategic moves from larger and older companies looking to diversify and stay relevant. SuperData moved first, striking a deal with Nielsen for an undisclosed sum to provide a lens into the gaming industry and specifically insights into the digital gaming world. Newzoo followed up with news of its acquisition by media company Advance Publications, owner of properties that include Conde Nast and its assets such as GQ, The New Yorker and Vanity Fair. Both transactions signal a push from established multibillion-dollar companies to be on top of the ever-growing gaming and esports industry and a desire to create a foothold now as the go-to resources for research.

Niantic was a very active acquirer this year, bringing in three strategically important companies to help build out capabilities and enhance experiences. With the hotly anticipated Harry Potter Wizards Unite game still to be released, Niantic is bolstering its lineup with Escher Reality, Matrix Mill and Seismic Games. Escher Reality will help with cross-platform augmented reality (AR) functionality, Matrix Mill will provide an enhanced experience with AR occlusion technology (think AR characters moving behind real-world people and objects as opposed to sitting awkwardly in front of everything), and Seismic Games will provide an opportunity to bring a team that has significant experience with major licensed IP for development (it is well-known for Marvel: Strike Force, a mobile game with Marvel characters).

Final Thoughts

As the industry continues its upward trajectory, we’re seeing the natural separation between companies in the esports space. Established franchises with well-run leadership are seeing their hard work and hustle begin to bear fruit. Investment is still there for those that have shown a vision for the future with operational excellence. We are a number of years away from full market maturation in the esports industry, but the groundwork that has been set in the past 24 months has created a space that is built to last. The International, Dota 2’s global championship event, just gave away a $25 million purse. The U.S. Open is golf’s largest purse at $12 million. That type of money will continue to attract players, audiences and sponsors for a long time.

Finally, it’s hard to underestimate the effects of China’s actions around Tencent. The country’s crackdown on new gaming licenses has decimated Tencent’s market value, dropping it by $230 billion since January alone. Tencent has been the dominant gaming company in China and holds large stakes in major publishers worldwide. A weakened Tencent hurts the Chinese economy most, but it will be important to see whether there are ripple effects across the company’s portfolio if the freeze lasts into 2019 for any significant period of time.

While the quantity and diversity of content available to consumers today are bigger than ever before, the gaming and esports industry continues its growth trajectory unabated. Gaming has been shown to be universal and without boundaries across geographic and demographic lines. This type of open market opportunity continues to drive innovation in an effort to capture a piece of the ever-growing pie.



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