Despite signs of near-term softness in the esports market, brands like Coca-Cola and Intel continue to pour money into the industry, and it’s gaining the attention of sovereign wealth funds. The rise of AI could make the sector even more attractive.
- Esports forecast to be worth approximately $4.8bn by 2030, but there are signs of softness in the near-term.
- Non-sport brand deals are likely to be a key driver of future growth and will help to legitimise the industry.
- How to invest in esports: the VanEck Video Gaming and eSports UCITS ETF is up 22.7% in the past six months.
‘Esports’, short for ‘electronic sports’, refers to multiplayer video game competitions. Until recently, it was not necessarily thought of as ‘real’ sport, but this is changing fast.
Participating may not require any athletic ability, yet professional esports gamers still eat, drink and train like athletes. Spending hours in front of a screen requires high concentration, the ability to manage stress in high-pressure environments and cope with sitting down for prolonged periods, as well as dexterity.
Such is the increasingly serious nature of esports, that the International Olympic Committee (IOC) launched the inaugural Olympic Esports Series in March, which will culminate in Singapore later in June. The competition focuses on nine areas: archery, baseball, chess, cycling, dance, motor sport, sailing, taekwondo and tennis.
David Lappartient, chair of the IOC Esports Liaison Group, said in a statement back in March that the event would help create “more spaces to play for both players and fans of elite competition”, and be an opportunity to explore “shared opportunities and lessons — across health and wellbeing, training and innovation”.
The esports industry will be worth more than $1.6bn by the end of this year, according to a GlobalData report, and is forecast to grow at a CAGR of 16.7% for the rest of the decade. It should reach a value of approximately $4.8bn by 2030.
Esports market shows near-term softness
In May, a sports shooting competition within the Fortnite game was added to the list of playable games within the Olympic Esports Series. Epic Games, which developed Fortnite, can earn millions in revenue through selling skins, which are cosmetic items players can buy and equip their characters with.
In the first week of June, AIM-listed Gfinity [GFIN.L] announced it will be exiting the esports arena due to a “soft” esports market in the near-term and “limited profitable growth opportunities”.
“By focusing on our core web offering for gamers, we are able to remove the capital-intensive businesses of software development and esports events, and focus on returning to a positive return on investment,” commented non-executive chairman Neville Upton in a regulatory filing.
As part of its restructuring, Gfinity has been leveraging artificial intelligence (AI) to reduce the cost of certain elements of content creation. This resulted in “an upturn in trading” in May, while “extensive cost savings'' have also been made. The monthly cost base is expected to be £185,000 in July versus a monthly average of £600,000 in the first half of the year.
Brands and sponsorship are key to growth
Other than skins, esports companies can generate revenue through a number of avenues, including publisher fees, streaming, merchandise, tickets, media rights and sponsorship.
Last year, Coca-Cola [KO] struck a multi-year agreement with Tencent-owned [0700.HK] Riot Games to sponsor the latter’s first mobile esports programme. The two companies have also just launched a special edition flavour for gamers. Fellow drinks brand Red Bull has its own esports division.
Chipmaker Intel [INTC] has a long-standing partnership with German esports production company ESL Gaming. Back in 2021, they inked a deal to invest more than $100m in esports through 2025.
The involvement of more non-sports brands is helping to legitimise esports and will be a key driver of growth in the years ahead.
Sovereign wealth funds will drive further investment
As more brands recognise the opportunity that esports presents, competition will increase. Earlier this year, Savvy Games Group, which is wholly owned by the Saudi Arabian Public Investment Fund, signed a $265m deal with Chinese esports agency VSPO. It’s the biggest single investment in the industry’s history.
The investment is part of Savvy’s $38bn strategy to turn Saudi Arabia into “the ultimate global hub for the games and esports sector by 2030”, Crown Prince Mohammed bin Salman said last September.
Meanwhile, VSPO, which has also received investment from Tencent in the past, is currently developing two AI products that CEO Dino Ying believes will transform the way esports competitions are broadcast live, along with cloud-based and 5G technologies. “The goal in the next three years is to replace more than 50% of competition production work with AI,” Ying told Beijing-based Pandaily.
AI to empower future esports players
On the AI theme, the esports live experience is likely to be revolutionised in years to come. It’s not beyond the realms of possibility that spectators attending esports events will wear mixed-reality headsets and be able to view real-time insights powered by AI.
Another aspect of esports that AI could transform is how competitive esports gamers prepare for contests. Today, most, if not all, rely on human coaches to advise them on what to eat and drink, and how to manage their health. But, in the future, AI tools could be used to provide personalised recommendations and advice based on their strengths and weaknesses.
How to invest in esports stocks
ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.
Funds in focus: VanEck Video Gaming and eSports UCITS ETF
The VanEck Video Gaming and eSports UCITS ETF [ESPO] has Nvidia [NVDA] as its top holding. This is unsurprising given the buzz around the chipmaker and the fact it makes some of the most powerful and advanced graphics cards for gaming. The fund has allocated communications services 61% of its portfolio, followed by information technology (IT, 27%) and consumer discretionary (11.7%). The fund is up 2.2% in the past year through 7 June, but 22.7% in the past six months.
The Global X Video Games and Esports ETF [HERO] has allocated communications services 87.5% of its portfolio, followed by IT (11.6%) and consumer discretionary (1%). The fund is down 14% in the past year, but up 6.4% in the past six months.
The BetaShares Video Games and Esports ETF [GAME.AX] is weighted in favour of interactive home entertainment (79.1%). Interactive media and services, leisure products and application software have allocations of 8%, 6% and 5.5%, respectively. IT consulting and other services make up just 1.4% of the portfolio. The fund is down 0.3% in the past year, but up 13.2% in the past six months.