What to Expect From Esports in 2018

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Esports has gone from a small niche to a mainstream business. There are now a number of mainstream places where consumers can watch programming in this space, and four of the six highest-paid YouTube personalities cover the subject.

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On this episode of Industry Focus: Tech, Dylan Lewis is joined by Motley Fool contributor Daniel Kline to break down what's next for esports. They also examine which companies have benefited from the growing trend as well as how those brands have made money off this emerging trend in gaming.

A full transcript follows the video.

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This video was recorded on Dec. 15, 2017.

Dylan Lewis: Switching gears over to another story that we have our eyes on, Dan, it's the continued rise of esports. This is something that I think maybe I'm a little more bullish on than you.

Dan Kline: We've been talking about this, not just you and I, at the Fool for five years. Every year, esports is the next big thing; it's going to break out. And I know the numbers have gone up, but I question with the ceiling for it is. It's not that I'm not bullish on growth; I just don't know that it's going to become the next NFL, or frankly, even the next NHL.

Lewis: I don't know that it needs to, though. I think maybe that's the important thing. I've been an esports skeptic for a long time. Going back a couple of years ago, I changed my outlook on this trend, specifically looking at the performance of the gaming sector, and also just understanding all the investments that are being made to support it. And I see these little stamps of validation left and right. You look at the top-paid individual YouTubers; four out of the six are online personalities that game and do game walk-throughs or group plays or things like that. I see that Westwood One, a major radio station, is launching a nationally syndicated esports talk show. Dan, you sent me a link the other day about this reality TV show based on a season of Madden.

Kline: Here's the thing. I'm not saying esports isn't poker at its height but with more long-term viability. My son will sit and watch YouTube videos. I think the challenge is, aside from the three or four biggest video game companies monetizing this with in-game sales, with tournaments, with building up a very long life cycle for some of these game titles, I don't see the ability for bigger media to do more than nibble at the ends of this. Yeah, ESPN will have a show at 3 in the morning, and TBS has a show, and there's a few things out there. But aside from Twitch, there really isn't a big monetization play outsize of EA and Blizzard and some of the big gaming companies.

Lewis: Which is why I continue to like Activision, Take-Two, and Electronic Arts. These are three companies that have been incredible performers so far in 2017. Activision Blizzard is up 75%. Take-Two is up 120%. And EA is up 33%. They've all crushed the market's return of 18% this year. They've also been multibaggers over the last five years. And I look at a couple of trends with this space, and some projections for where things might be going. The esports audience is estimated to grow by 50% between now and 2020, and it's believed that the market will double in revenue to roughly $1.5 billion in that year. Those are some big wins pushing the sales up.

Kline: And it's model-changing for these companies. If you look at what the video game model was a few years ago, it was very much movies. You put out a title; you hoped it sold a lot; maybe there were sequels. Now, if you look at a game like OverWatch that has a huge esports community around it, you buy the game, and there's additional spending and advertising and all sorts of opportunities within that game. And that's a life cycle that goes on theoretically for decades. There will be new versions of the game, but it becomes like football or soccer or any other sport, where your business is no longer selling the one-time sale and maybe a sequel. Your business becomes, people are just playing, and there's money to be made doing that.

Lewis: Something that blew my mind with esports was, I believe the purse for the 2016 DotA [Defense of the Ancients] championships -- DotA is a very popular online game -- was $20 million. And that was split between a team of six or seven.

Kline: That's slightly better than the pretzel that was a prize for the Ms. Pac-Man tournament that I played back in 1985.

Lewis: Yeah, you got into the wrong line of work there. But the idea that that much money is being put out as prize for one game's championship speaks to, I saw some article put it in the context of, the players on that team each took home as much as the person that won the Masters last year.

Kline: This is also going to tie into what we talk about next, with the changing face of television. As you have younger people who are cutting the cord, they're looking for other types of programming. If you play DotA or OverWatch, or, my son plays Star Wars Battlefront, one of the ways to feed your gameplay is to watch other people play. You and I can't watch the NFL and go, "We'll be as good as Tom Brady because we saw him, or, we'll get better because we saw him play." But if I see somebody show me how to get Batman to solve a puzzle in one of the Arkham games, I can actually apply that. There's a much more useful level. And that's an area that I think could grow. I think the social-media aspect of this could eventually be an even bigger driver.

Daniel B. Kline has no position in any of the stocks mentioned. Dylan Lewis has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.