After years of steady growth, the market for competitive video gaming — esports — has rapidly picked up steam in the last 12 months.

And it now sits at an interesting juncture for companies seeking to maximise commercial outcomes in the space.

A report on the sector earlier this year by consulting firm McKinsey called 2018 an “inflection point”, as esports moved from niche audiences to attracting material advertising dollars from traditional companies such as Coca Cola.

In financial terms, the esports industry now generates turnover of more than $1 billion. And in a commercial sense it intertwines closely with the huge video game market — a global industry valued at well over $100 billion.

Amid all that, there’s a cohort of ASX small-caps staying active in the space as they position for further growth.

For now, the sector has more of a micro-cap lean; of the eight companies tracked by Stockhead, seven have a market capitalisation below $US30m ($43.9m).

The ($US150 billion) gaming market

The outlier is Animoca Brands (ASX:AB1), which has climbed to a market cap of around $160m after a busy 2019 which has seen it land a series of new licensing deals.

Speaking with Stockhead back in January, Animoca chairman Yat Siu clearly identified the company’s strategy: team up with well-known brands to create multiple gaming channels, and use them as a vehicle to drive in-game purchases.

Interestingly, in-game purchases account for around $70 billion of gaming revenue each year — but that money is spent by just 3 per cent of the gaming population.

Another ASX company with similar ambitions is MSM Corporation (ASX:MSM), which recently purchased a 10 per cent stake in the Dubai-based Riva Group.

Among its various partnerships within the esports landscape, MSM’s deal with Riva gives it the opportunity to develop licensing rights for the Dreamworks Universe of Legends mobile gaming franchise.

Speaking with Stockhead, Tim Neesham from MSM said that represented “tier-1 intellectual property” within the market for online games.

And like Animoca, MSM hopes to use it as a vehicle to drive revenue from the small — but dedicated — consumer base of Dreamworks fans who will fuel demand for in-app purchases.

“The number metrics are quite exciting. We’ve had around 3.5 million pre-registrations — customers who have uploaded the platform onto their phones, and that’s via Google only,” Neesham said.

Assuming similar numbers via Apple’s app store, MSM hopes to build a user base of around 7 million. But that makes the 3 per cent of in-game buyers an interesting value proposition.

“They’re dedicated consumers who’ll spend a certain amount per day, so you end up with big revenue numbers over the life cycle of the user,” Neesham said.

 

Esports tide is shifting

Compared to the global market for online games and in-app purchases, esports is a smaller industry.

But the sector’s fast growth means there’s plenty of companies positioning in the space with innovative commercial strategies. And ASX-listed Esports Mogul (ASX:ESH) is one company that sees plenty of opportunity in the sector.

Speaking with Stockhead, Esports chief operating officer Jamie Skella pointed to the company’s work with Alliance, a popular Swedish esports team that won the 2013 world championship for Dota 2, a multiplayer battle game.

“We saw there was a hole in the market — no team was creating a membership,” he said.

“So we created a tech solution to enable these teams to build recurring revenue streams from their fanbase via membership.

“It’s about stimulating grass roots and catering for tier 2 and tier 3 players, because of course if you think about the number of people who play esports, the vast majority — although they compete at a high level — they’ll never be paid professionals.

“So that’s where our crosshairs are in terms of maximising participation and generating revenue streams.”

And while esports is a smaller industry in dollar terms compared to the $US150 billion global games behemoth, clearly the two industries don’t occupy two separate circles on a venn diagram.

“What esports wants to achieve is a crossing of those paths. There’s a huge opportunity to grow esports titles leveraging the overall player base,” Skella says.

Of the $US1 billion in revenue generated by the global esports market, around 70-to-80 per cent of that is from sponsorships and advertising.

Conversely, money generated from amateur leagues and micro-tournaments comprises just 5 per cent. But importantly, “it’s growing fast”.

“We see that as a big part of the growth opportunity — to convert more people from casual players into people that might like to dabble in competitive play,” Skella said.

“Our vision is that we can become a platform for all of those amateur players around the world — and because we operate in the digital space we’re not limited by geography.”

Overall, it’s clear that while the growth of both esports and online games continues to accelerate, the race is on among companies in the space to establish partnerships, licensing deals and regional footprints that will convert the industry’s huge participation rates into actual revenue.

Here’s a summary of how the listed ASX gaming stocks have performed over the past 12 months:

Code Name Price ($) Market Cap 12M Tot Ret 6M Tot Ret
KNM KNEOMEDIA LTD 0.039 $27.8M 70% 105%
AB1 ANIMOCA BRANDS CORP LTD 0.18 $161.4M 71% 80%
SHO SPORTSHERO LTD 0.063 $20.7M -55% -14%
ESH ESPORTS MOGUL LTD 0.011 $19.6M -48% -20%
EM1 EMERGE GAMING LTD 0.016 $10.5M 60% -43%
ICI ICANDY INTERACTIVE LTD 0.034 $11.5M -59% -56%
MSM MSM CORPORATION 0.017 $11.4M 55% 55%