E-sports takes off as a professional game in Asia with venture capital pouring in but returns are slow to arrive

The United States may have its National Basketball Association and National Football League but Asia has e-sports, which is attracting billions of dollars in investment, even though lucrative returns have yet to materialize.

E-sports, shorthand for electronic sports, is comprised of organized tournaments in which participants singly or as a team compete against each other at video games.

The largest contests are like any other major sporting event, with spectators buying tickets to watch in person or paying to see it broadcast on television or over the internet. Both the sponsorship deals from major companies and the prize money for winners can be worth millions of dollars.

On Aug 11, Allied eSports, a joint venture of the largest e-sports, sports and entertainment companies in China, announced a strategic investment partnership with Esports Arena from the US. The partnership will include investment toward new Esports Arena locations.

It's just the latest example of a flood of investments.

In July, Chinese outdoor advertising firm Focus Media led an $81 million venture capital round of investment in a three-month-old e-sports startup, Sport of the Heroes.

But while attracting investors, they are failing to generate any kind of significant return. For the time being, venture capital firms are just looking to break even.

"If you've even made $1 million (as a venture capitalistist in e-sports), I would say you're doing exceptionally well," says Alex Lim, secretary-general of the International e-sports Federation, a governing body for e-Sports founded in South Korea in 2008.

Last year, according to a stock exchange filing, Yinchuan International Game Investment, operator of the World Cyber Arena series, one of the larger global tournaments, lost 65.4 million yuan ($10 million).

Hero Entertainment, a competitive video game developer, lost 7.58 million yuan in the first half of this year, according to a company filing.

"You can't expect returns right away from an early stage. You have to be patient. They are trying to establish a strong brand with strong loyalty from the e-sports community. Only after maybe three to five years, they will start making more money," says Lim.

The global e-sports market generated $325 million in revenue last year and it is expected to hit $463 million this year, according to Newzoo, a market intelligence firm specializing in the digital games market.

In 2014, venture capital pumped $2.43 billion into 217 game companies. The following year, investments in 216 game companies halved to $1.02 billion.

But it should be taken into account that some of the largest investments in 2014 were an anomaly. For example, South Korean game company CJ Games raised $500 million.

"Venture capitalists want a large customer base, a large number of registered users, even if platforms are losing money right now," says Guan Wang, CEO of Ali Esports, which is part of Ali-sports, a subsidiary of e-commerce giant Alibaba. He adds that platforms are now exploring a self-sufficient business model, rather than relying on outside funding.

Despite all this money floating around, the e-Sports industry is still in its infancy. There are great expectations that it will generate more and more revenue, however.

Brokerage firm Industrial Securities estimates that by next year, China will have an e-sports audience of 148 million players, up from 48 million in 2015, when the whole industry was worth $4.2 billion.

Despite the slew of initial losses, many think there is a huge opportunity for investors to make handsome returns through channels such as merchandising, advertising, events, ticket sales and even lotteries.

Phenomenal growth

"We can't speculate as to the exact reason why venture capitalists are investing in Asian e-sports platforms and tournaments. That being said, we believe that e-sports continually shows phenomenal growth in the number of players and spectators," says Paul Chan, chief marketing officer at Hong Kong Esports, which owns a professional Hong Kong-based gaming team of the same name.

"We feel that an industry with such large-scale growth of active and engaged fans as e-sports is always a good place to invest, as eventually various different products and services can be offered to those fans."

And it is not hard to see why the whole industry is becoming hugely popular. China, for example, has a large population and a high penetration of both internet and mobile phones.

"I see people who are aged 40-something or more playing e-sports on mobile phones. Video platforms don't earn money in China. Instead, video platforms earn money in other countries. Chinese users don't need to pay for watching, and platform owners charge the business side, like the video content providers," says Wang Sicong.

The son of one of China's richest men Wang Jianlin, who owns Wanda Group, Wang Sicong has put 500 million yuan into the sector through his venture firm Prometheus Capital, according to stock exchange filings.

"In second or third-tier cities, people need e-sports. In Beijing or Shanghai, people have many places to go to, many things to do. But in other small cities, people don't have many choices, so they end up going online, as well as making friends through e-sports," he adds.

Aware of this trend, Alibaba made a $150 million investment and formed a strategic partnership with the e-sports federation, which has 47 countries as members.

The partnership has three goals. The first is to establish a tournament in "which all e-sports players and professional e-sports players can participate". The second is to get e-Sports recognized as an actual sport. And third, to create unique intellectual property rights.

Alibaba's investment includes a $5.5 million prize pool for an upcoming tournament, the World Electronic Sports Games, a Shanghai-based multigame e-sports tournament run by AliSports.

AliSports has also partnered with Singapore-listed e-commerce company YuuZoo to host similar events in six Southeast Asian markets - Singapore, Indonesia, Thailand, Malaysia, Vietnam and the Philippines.

Alibaba's competitor, Tencent, also recently announced it will host more than 600 e-sports competitions, and produce more games suitable for professional competition. Tencent, which develops games, has a fair amount of motivation to develop the space.

Government support

In addition, e-sports is generally gaining the support of authorities. In China, for example, the General Administration of Sport of China says it would work actively on the registration of professional gamers.

Even without prize money, professional e-sports athletes are already getting paid handsomely, sometimes even more than athletes in more conventional sports.

"Pro-gamers, I'm saying top progamers here, they earn a lot of money. Top gamers make the same amount as baseball players in South Korea, an incredibly popular game," says Lim.

Depending on the game, professional players can earn a minimum of $50,000 per year and for the best of the best, the sky is the limit.

"This is without factoring the money they make on the side from being on TV commercials, advertisements. It is exactly like sports," says Lim.

For China Daily