The Dollars and Sense of eSports Growth

“Prediction is always difficult, especially about the future.”

— Niels Bohr

Recent estimates from SuperData Research put eSports earnings at $892M by end of 2016 – boosted mostly by continued investment from game publishers and brands (see image below). SuperData also shifted estimates for the $1B mark to 2017, and $1.23B by 2019E. So while the implication that eSports growth has slowed is understandable, it’s missing exactitude. A clearer picture is that the eSports industry – built on digital business models –will consistently exhibit exponential growth patterns throughout its lifecycle.

Courtesy of SuperData Research
Courtesy of SuperData Research

Understanding exponential

At first, suggestion that a nascent industry, which has yet to crack $1B in total revenues, should be associated with the term exponential may seem confusing. Mostly, this is because the term exponential is confused with continuous “fast growth.” In reality, exponential growth can be fast. Or it can be slow. Or it can be anywhere between. While linear growth is a constant amount of increase over time. Exponential growth is a constant percentage increase over time.

“Digital business models use network effects to create what Ray Kurzweil describes as accelerating returns to scale. The key difference is that industrial models are linear while digital models are exponential”

— Mark Bonchek, Harvard Business Review, July 2016

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Courtesy of Mark Bonchek

It’s incredibly challenging to anticipate future growth for early-stage, digital business models that currently comprise the eSports industry. However, these digital-age enterprises display a general tendency towards exponential growth, e.g. slower growth preceding rapid acceleration (see image above). Meaning, the wider competitive gaming industry is susceptible to a similar trajectory. Additionally, the following common characteristics of developing industries – all exhibited in eSports – indicate that 2016 levels are the early stages of exponential growth:

  • Strategic uncertainty – lack of recognized business practices
  • Embryonic companies – scarcity of established companies
  • Undefined customer models – figuring out who’s willing to pay for what, and how much
  • Subsidization – game developers still subsidize a significant portion of revenues

Accelerating returns

So what are fundamental drivers for exponential growth in the eSports industry? Well, as a “sport” directly wired to the digital world – and enabling technology – eSports will benefit from futurist Ray Kurzweil’s “Law of Accelerating Returns.” Which says technology (computing) is accelerating exponentially such that,

“We won’t experience 100 years of progress in the 21st century — it will be more like 20,000 years of progress (at today’s rate)”.

— Ray Kurzweil

21st century advances have already given rise to market expansion for competitive video games – 213.8M people watch competitive gaming in 2016, according to SuperData. Given that video games are integrally tied to computing, continuous technological progression – virtual/augmented reality, continued evolution of artificial intelligence, etc. – will create massive accelerators for eSports industry growth; even more so than traditional sports, which are bound to the physical realm.

Likewise, technology’s relentless and exponential growth, described by Kurzweil, will continue to shift consumer habits towards digital and online realms – where competitive video games thrive as a native inhabitant. Just as widespread smartphone penetration has enabled popular mobile games, e.g. Pokemon Go, to generate massive revenues for game publishers.

Additional technological advances will increase scope of competitive video games, and grow its burgeoning industry.

Waiting for the boom

With absolute size of the eSports industry still relatively small in comparison other domains – the North American sports industry generated $60.5B in 2014 alone – it’s natural to question when faster growth rates will take effect. In that light, here are some potential key indicators:

  • Emergence of a market for rights. Live electronic sports are making their way to linear TV. However, a media rights market is non-existent. Sustainable demand for eSports rights – both digital and linear – will further validate the wider industry ecosystem.
  • Consistent profitability from MTGx. It has been a year since Modern Times Group’s (MTG) acquisition of a majority stake in Turtle Entertainment GmbH; parent company of the Electronic Sports League (ESL) – the largest eSports company in the world – for $87M. The MTGx division, which operates ESL and other eSports divisions, reported a loss of $11.4M in operating income for the first half of 2016. This following a net loss of $12.9M over 2015. The speed with which MTGx becomes profit center is an industry-wide catalyst.
  • Sale of an established competitive gaming club. While an individual team slot in Riot Games’ League Championship Series (LCS) costs over $1M, which has led to private investment flowing into eSports organization ownership. The outright purchase of a long-standing, successful multi-gaming club has yet to occur. Investor willingness to acquire ownership in a legacy club – with an established fan base and brand – is a strong indicator of increased market strength.

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