The disruption of everything

It’s no wonder big brands including Amazon, Audi, Coca-Cola, Mercedes Benz, McDonalds and American Express are sponsoring esports events and teams. Big brands can no longer afford to ignore this massive market, neither can other spectator sports competing for viewers and neither, we would argue, should investors.

Harvard Business School identified esports as an example of disruptive technology that is changing the professional sports market. According to Harvard’s Matt Gavin, “In true disruptive fashion, esports grew by meeting the needs of a tech-savvy audience looking for an interactive digital experience that many sports media companies failed to deliver.” The growth of esports, as a disrupting innovation, goes beyond meeting the tech needs of its audience.

According to Clayton Christensen, the Harvard professor who coined the term, a ‘disruptive innovation’ should either, “originate in a low-end market and move upstream to higher value markets” or create a “new market foothold”, meaning it creates a new market where none existed.

In a recent research paper, Leveling up: An investor’s perspective on the disruptive impact and potential for continued growth of esports and video gaming, VanEck highlights that the history of esports is an attribute Christensen cites.

The first informal esports events were competitions held at local arcades. These were as low-end as you could get. There was no formal seating, people were crammed in and it was hard to get a good view. Yet these were well attended. Today, esports events are held in purpose built arenas such as Fortress Melbourne, Esports Stadium Arlington and the HyperX Esports Arena Las Vegas.

This is the very trajectory of a disruptive innovation.

It’s important to remember, disruption is a process. The first video game companies and arcades struggled for many years to get their business models right. So too has esports. Paul Chaloner highlights how esports sputtered in the wake of the 2008 global financial crisis finding it difficult to survive as investment was pulled. Esports respawned, better than before. No more hastily built tournaments on backlots, no shortening of games to cater for ad breaks, and now rules and games are determined by audience choices not the whims of producers and game promoters. There are now analysts, roving reporters and massive live crowds (prior to COVID-19). Events and teams are sponsored by big brands. Tickets are sold to a growing audience.

The rise of esports, as a spectator sport, has taken decades, and companies, like Amazon playing straight out of the Christensen playbook, are buying into its potential. Amazon purchased Twitch in 2014, and its average monthly viewership is now on par with several cable news networks. The rise of Twitch, a platform that allows users to livestream gameplay and engage with other players online, unlike the linear format of traditional sports broadcasting, creates a more engaging viewer experience.

Professional spectator sports too have responded to the disruption. Notably the NBA responded to the disruption in 2018 when it partnered with Take-Two Interactive to form the NBA 2K League, the first official esports league operated by a US professional sports organisation.

Professional sports further embraced the disruptive innovation during the COVID-19 lockdown. Formula 1’s F1 Esports Series is one such example. The series achieved 30 million views during the 2020 lockdown period of March to June. The series was created to allow fans to have a Formula 1 race weekend experience in the absence of real races. F1 drivers and other sportspeople and celebrities duked it out virtually on accurate depictions of real-life racetracks. Esports has created new markets over a period of many decades and the growth over the past few years is likely to continue as technology continues to improve the experience for users.

So why should investors care? Growth potential. According to the VanEck research paper, beyond the audience growth, revenue growth is also increasing. It has tripled over the past three years and is coming from a variety of sources.

Another indicator of the potential growth of esports, according to the research paper, is observed through the total revenue per fan, it shows how well a sport is ‘monetized’. Since 2014, the global average revenue per person of esports enthusiasts has increased by 175%.

According to Paul Chaloner, despite having far bigger viewership esports is still valued at roughly a sixth of what both F1 and the tennis industry are valued at.

One way for investors to access this potential growth is via Australia’s first and only video gaming and esports focused ETF, the VanEck Vectors Video Gaming and eSports ETF (ESPO). ESPO was launched in September and tracks the MVIS® Global Video Gaming and eSports Index which includes companies which generate at least 50% of their revenues from video gaming and/or esports. As always we world recommend talking to a financial adviser about what investments are right for you.

And for the record in This is esports (and how to spell it), Chaloner argues the correct spelling is ‘esports’.