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Esports in India: signal vs noise

Updated: May 24, 2021

In 2020, Lumikai has seen 292 deals, joined 30+ webinars and conducted 26+ media interviews. There’s no escaping the current buzz around esports in India. As India’s only interactive and games VC there’s never a time that we aren’t asked about esports. We’ve heard esports pitches associated with RMG, fantasy, cricket, chess, ludo and even gamified kids education.

The term esports has been overused, overhyped and much misunderstood. It’s time to bust some myths and take a closer look at where the real growth opportunities are.

What Is Esports?

For those of us who come from the video game world, esports is not a new phenomenon. In 1978, with Space Invaders, Atari laid the corner stone for the world’s first major esports tournament, at the Warner Brother building in New York, attended by 10,000 gamers, and which was, at that time, won by Rebecca Heineman (born William Heineman). Esports had modest beginnings. In the 1990’s, the emergence of LAN parties saw gamers slugging it out against each other in Doom, Quake and Starcraft with people cheering them on but that was mostly in an analog world. Late 90’s saw the emergence of early tournaments including the Nintendo World Championship, Blockbuster’s World Game Championship and a few others, which required physical attendance. By mid 2000’s, esports went online, became televised, prize money increased and viewership started to rise.

Fast forward to 2011 and beyond. The seminal event for esports proliferation was the emergence of online streaming services like Twitch and then Youtube Gaming. These platforms took something as niche as professional gamers playing a handful of competitive games in small arenas to being streamed inside the homes and onto devices of millions of people. To put it simply, esports is now mainstream. Two of the top five Youtube channels with the most subscribers worldwide are gaming-related, and 48% of YouTube gamers say they spend more time watching gaming videos than playing games. Even US Congresswoman Alexandria Ocasio-Cortez can attest to the power of games.

So, what exactly is esports in it’s current form? Esports is essentially like any other sport which has some “players (athletes)” play a competitive “game(sport)” and is a source of entertainment for “viewers(spectators)”.

In this the case, the player is a gamer, the game can be Counterstrike/Dota/Fornite/PUBG and the viewer is watching on Twitch/Youtube Gaming/TV.

Where Is The Investment Opportunity?

Gaming overall is now a $160Bn industry and fast emerging as an asset class that can no longer be ignored. According to Invest Game, the game industry has seen an estimated $20.5 billion in acquisitions, investments, and IPOs in the first nine months of the year.

Esports is still a fraction of the games market, and Newzoo recently downgraded its 2020 esports revenue projections to $950M. While there’s been a lot of VC investment in esports ($1.1Bn in 2019, excess of $7Bn over the last 4 years), the majority of these companies are yet to meaningfully monetise.

This is because while the reach of esports rivals professional sports, monetisation lags 10–15x (on a per viewer basis).

As more and more startups, particularly in India, plunge into esports, it is ever more important to understand the value levers and value creation opportunities of this complex industry.

In order to do that, it’s important to identify the key stakeholders who extract value in this space:

1. The IP holders, or game publisher e.g. Riot (League of Legends), Blizzard (Overwatch), Activision (Call of Duty), Epic (Fortnite) and so on.

2. The distribution/streaming platforms e.g Twitch, Youtube Gaming, Mobcrush etc.

3. The organisers i.e. leagues & associations which own teams.

4. The enablers i.e. gaming hardware providers (ASUS, Razr); tools (Discord) and tech (e.g. wearables, esports analytics etc)

Unlike regular sport, where no one “owns” the concept of cricket, in esports Counter Strike and PUBG (India’s most popular esports titles) have IP holders. The majority of the esports revenue accrues to stakeholders across value points #1 and #2, with the biggest chunk of the revenue being commanded by the game publishers.

Ultimately all competitive play is dependent on the IP holder. All gameplay, all rules, all characters in the game essentially depend on the whims of the game publisher. Globally, the most popular esports rest with a handful of titles-Fortnite, Overwatch, CS:GO, Dota 2, and League of Legends. With India being a mobile-first esports market, mass popularity remains with PUBG (prior to the ban), Free Fire and Call of Duty Mobile, which still account for majority of players, spectators and revenue. With IP holders controlling the key value levers it becomes incredibly difficult for young companies to create venture scale. The ability to make an original IP which will eventually become a popular esports title is a sustained long term challenge for even the most established gaming companies.

Owning, managing and effectively running teams is a very expensive proposition, and market leaders like Team Liquid ($35M in gross winnings) leverage power laws to continue attracting the best talent. Player costs typically eat up half of a company’s operating budget. The vast majority of companies are cash-flow negative as they continue to spend money to build their rosters and brands — only a Cloud 9 (with estimated valuation of $400M) is known to be profitable.

Team revenues and winnings are just a very small part of the esports story. This is why team ownerships have been largely the domain of billionaires and celebrities to help teams attract brand sponsorships e.g. Dan Gilbert, founder of Quicken Loans and owner of NBA’s Cleveland Cavaliers invested in 100 Thieves last year. Soon after, Quicken’s Rocket Mortgage announced a historic seven-figure sponsorship with 100 Thieves. This doesn’t happen too often.

Similarly, tournament organisers/platforms target a very minuscule portion of the overall value pie, acting essentially as intermediaries hoping to achieve scale on platform commissions. Tournament organisers are also often vulnerable to changes impacting games publishers (e.g. the ecosystem has seen PUBG Mobile’s ban adversely impacting a multitude of tournament organisers in India). Further, questions like diversity of the platform’s network of gamers, titles, viewers and how easily liquidity and players can be matched often come into question.

Let’s leave aside the companies targeting esports fantasy, esports data analytics, esports supplements, wearables etc. who are all struggling to create revenue let alone break even.

If you look from the above lens, investing in esports rarely looks attractive and prompts articles like this.

Will It Ever Get There?

That’s the billion dollar question. There is no denying the tailwinds in this industry and the flywheel is already starting to turn. Game publishers are seeking to increase IP longevity by embracing esports very aggressively and gaining access to new markets. More players means more tournaments, which means more viewers. More eyeballs mean more interest from brands, advertisers and interest from broadcasters. This translates to more prize money, and potentially better distribution terms for leagues. This finally filters down to team earnings, which in turn motivates more gamers to turn pro. There is a virtuous cycle.

At Lumikai, we believe three things need to happen to accelerate this:

1. Games have to become more broadly accepted as a professionally competitive pastime. Not just with core mobile users, but across the full value chain of decision makers, from brand CMOs to broadcasters.

2. Even the most popular esports titles like Call of Duty, DOTA and Overwatch are opaque to 99% of the aggregate video audience, and can be difficult to play and follow. There needs to be greater diversity in content — snackable esports for a more casual audience, simpler rule sets for new mass audiences.

3. Fresh content approaches/IP that can activate much wider audiences i.e. new demographics, new geographic markets, female audiences, and traditionally defined non-gamers. This will enable games publishers to expand their remit of esports activities, targeting a new blue ocean IP opportunity looking for competitive but fun experiences that represent the thicker wedge of the demand pyramid.

We already see early signs of the above with the growth of platforms like Skillz, currently preparing to go public.

Esports in India

India is now emerging as the new digital battle ground for the next 1 billion users, and this is a massive white space.

Gaming, game viewership and game broadcasting is steadily becoming mainstream in India. The Indian gaming market is expected to grow at 47% by FY22 and is estimated to go from $1.1B+ in 2021 to $3.7B by 2024. India has over 350M active online gamers, with 67% of India’s millennial audience being active gamers. There is no denying the growing relevance of this industry.

Esports as a market is in its infancy (estimated 150,000 esports players in India vs 3M registered cricket players) in India but we already see some interesting trends.

1. India’s mobile esports market has been transformed by PUBG & Free Fire, with an unofficial estimated market size varying between 50–100M esports viewers. As per Nodwin, PUBG Mobile Pro League South Asia attracted 60M views (heavily overweighed by India). Similarly, the summer season of the Nodwin ESL Indian Premiership, aired on Disney+ Hotstar, India’s leading OTT platform this year saw an 1866% increase in registrations and 325% in watch time as compared to last year. Esports also was trending #3 on the OTT platform in India, after cricket & football.

2. Esports in India is driven by regional markets. It’s not the English speaking markets driving esports but Hindi (Stream of PUBG Mobile World League in Hindi peaked at 449K concurrent viewers in August 2020) and surprisingly Tamil i.e. local language speaking gamers. In 2020, Tamil gamers were the fastest growing category of PUBG players in the country. At ~70M Tamil language users, subscriber/population is growing fast.

3. While the nascent esports community has taken a hit due to the PUBG sized absence, other non- traditional titles have been beneficiaries amongst streamers. The most popular titles now include newer titles such as Fall Guys, Raji, and Among Us, along with regulars like Call of Duty, Free Fire and GTA 5. This reveals an encouraging openness towards experimentation with new content and more diverse gameplay.

4. Non-endemic brands are showing interest in becoming major participants in the esports ecosystem e.g. Acer, Red Bull, Airtel, Dell to name a few.

Thus, while PUBG’s ban was a shock to the rapidly growing ecosystem, instead of this being a systemic risk to the system, we believe there is headroom for growth.

Lumikai View

For Indian start-ups to succeed in esports, they need to dig deeper and clearly identify their value proposition, differentiation, and moat. More importantly, companies need to crack monetisation at an early stage. Globally, there are already well-funded incumbents who are actively eyeing the Indian market.

Esports business models built around viewership due to the massive size of the market leveraging media/broadcasting rights, streaming solutions and creating lifestyle/aspirational brands for India gamers are very much on our radar.

Companies involved in content creation, leveraging games streamer networks and gaming influencers for India’s growing regional gamers, businesses targeting amateur esports players/casual gamers and companies generating value from players and viewers both becoming B2B plays are interesting for us. So if you are building any of the above, we would love to hear from you.

Now more than ever, it’s important to separate the signal from the noise to foster a sustainable future for esports. As India’s gaming ecosystem and landscape develops, Lumikai looks forward to seeing local category defining market leaders take the stage.

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