Why There's Plenty of Money to Go Around in E-sports

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On this segment of Industry Focus: Consumer Goods, the cast looks at e-sports and how the various stakeholders in this space are looking to bank on its growing popularity.

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Amazon (NASDAQ: AMZN) has taken over Twitch; publishers are selling more titles than ever; and even professional gamers are getting salaries, benefits, and pieces of million-dollar prize pools.

A full transcript follows the video.

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This video was recorded on Aug. 29, 2017.

Vincent Shen: Amazon spent $1 billion acquiring Twitch three years ago. What is the story there? 

Danny Vena: With Twitch, they will charge users a monthly fee to be able to stream on their platform. Twitch is a wholly owned subsidiary of Amazon, it's the leading video game streaming site for gamers. It currently has about 10 million daily active users. Now, users on that platform will watch about 106 minutes of video per day. Just to give you a comparison, if you look at YouTube, YouTube is about an hour of video per day that users watch. So this far exceeds usage that YouTube enjoys, and YouTube is one of the world leaders.

Shen: Yeah, they're known for their engagement.

Vena: Absolutely. Amazon also offers, through Twitch, tools for developers so that they can include game broadcasting services into their apps. I think this is only going to get bigger from here. I think, currently, Amazon will charge, I believe the fee is $5 a month for these streamers, and people that are watching it will pay $5 a month, and the people who are actually streaming and playing the games will collect about half of that.

Shen: I think what's really special with the Twitch platform is the potential here for two-way interaction. That means between the players who are broadcasting their gameplay, and also the viewers. I know there are plenty of athletes out there, tennis players, golfers, basketball players, who love to play the sport and love watching professionals do it the best in the world. But now imagine being able to connect directly with the players, in this case, who are potentially the best in the world. An example in Twitter is, you can see how powerful it can be to have that connection between the viewers and the content creators. 

Other than Twitch, there are also some traditional media companies that are taking the plunge with e-sports, and that includes, as I mentioned earlier, ESPN, NBC, TBS, and others. So if you read about what industry insiders have to say about the e-sports opportunity, a lot of them will mention a point in the future where e-sports eventually reaches mainstream audiences, and then the revenue potential that comes with that. But I actually think we're already at the point where we're talking about millions of viewers in the U.S. You mentioned something like 300 growing to 500 million viewers worldwide. Among younger consumers, e-sports viewers, the viewer base is already enough to rival established sports like hockey and baseball. So I think it's only natural that cable networks want to test the water to find out what the advertising potential and revenue potential is for this kind of programming.

They'll just ultimately have to compete with the likes of Twitch and YouTube and other digital alternatives for it. The thing is, Hollywood right now is kind of squaring off against tech companies like Netflix and Amazon, as well, for content and talent. These Silicon Valley companies and tech companies have very deep wallets, and they're willing to invest a lot to build out that viewership, to build up the market share in the industry. Let's talk about the business model a little bit for the content creators in this industry, the game publishers. How are they monetizing and leveraging these huge audiences?

Vena: There's a couple of different ways. The easiest way to think about this is comparing it to professional sports. Professional sports teams will make their money by selling media rights, advertising, players will have sponsorships from major corporations, you have tickets sales, and of course the game publishers themselves. So what's happening with the game publishers is, first of all, they're going to make money by not only collecting those fees for these channels to be able to use their games, but also, as the games become more popular, they get out there in the limelight, people say, "Wow, I've been meaning to pick up this game and I haven't," so they're going to sell more games. But then, in those games, there's also -- and this is where some of the big money is -- microtransactions, virtual currency, downloadable add-on content, where you can buy more weapons or buy specialized items within the game. So game publishers make a lot of money doing that.

Shen: I really don't think it's possible to overstate how important it is now for game publishers to essentially maximize what is the shelf life for their most popular titles. In the past, it used to be, the main revenue stream for these companies was the initial sale of the game. So it was great to have a blowout first week or first month where you're setting a record for the number of sales. Even now, the more copies of your title that you can sell, the better. But now, you also want as many players as possible playing and being engaged because there's so much money to be made with those in-game purchases and the downloadable content that you mentioned. These add-ons, like weapons, special items, maybe new levels or gameplay modes, they amount to billions of dollars. So for Activision Blizzard (NASDAQ: ATVI), for example, the company reported a record $3.8 billion of in-game purchases in 2016. That doubles their tally from 2015 in just one year. Digital revenue now makes up the majority of the top line for companies like Activision, Electronic Arts (NASDAQ: EA), and most other competitors in this industry. So if e-sports can essentially help these games reach wider audiences, recruit new players, the publishers will naturally want to grow this opportunity as much as possible. I think that's why we're seeing a lot of the publishers establish specific teams and segments within their corporate structure that are focused on the e-sports opportunity.

Will, I think we've covered most of the business model for e-sports. I'd like to close out the conversation talking about the players who are cashing in. You don't have to be a pro, necessarily, at these mega tournaments to be making money enjoying your favorite video game. Danny, can you tell us a little bit else about the opportunities if you're a good player and you're interested in getting into this? What's out there for the gamers?

Vena: The best example that I found was with the company Riot Games, which is owned by Tencent Holdings. They are the sponsors of the League of Legends championship series. What they've done is provide each team with several players with a stipend, and they require that team to pay each player a minimum of $12,500 for their participation. Now, it might not seem like very much, but that's also the minimum. I was able to find one instance in Dec. 2015, a North American Challenger team that went by the name Ember. They became the first professional e-sports team to pay their players as employees rather than as contractors. They released their players' salary figures, in which case that each of their players received compensation between $70,000 and $92,000 per year. They also provided them with housing, office space, healthcare. So there's a lot of opportunity there. When you're the big player in the DotA league or Riot Games, you could make millions. But for the average player who's just really good, you can still make five or six figures just by doing what you love, playing video games.

Shen: Yeah. It's really an incredible growth in this space. Right now, the thing is, we're still in the early stages. However you think it pans out, we're getting a glimpse of it now with these licensing deals, these partnerships with professional leagues. But even on the small guy level, if you want to call it that, there's still a lot of opportunity out there. Overall, it's a really cool space. I very much intend to follow it going forward, hopefully with your help, Danny. But otherwise, that's all the time we have for today.

Danny Vena owns shares of Activision Blizzard, Amazon, and Netflix and has the following options: long January 2018 $25 calls on Activision Blizzard. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon, Netflix, and Twitter. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.