When UK entertainment & media consumers “play”, they’re engaging with companies in one of two subsectors: video games and esports. These two segments are closely interrelated and often looked at together. But in fact – as their differing experiences during the pandemic underlined – video games and esports have very different overall market sizes, commercial dynamics, business models and pathways to future success.
|Video games and esports in UK (GBP mn)||3,598||4,739||5,423||5,891||7,116|
|Esports (GBP mn)||12||27||30||37||65|
|Video games (GBP mn)||3,588||4,717,||5,399||5,860||7,060|
There’s good news across both segments. As Figure 1 shows, overall UK revenues across video games and esports jumped by 14.43% in 2020, with most subsectors registering a double-digit increase – bolstered by extended lockdowns requiring people to find different forms of remote entertainment, while maintaining a social connection.
But look beneath the headline figures, and the differences start to emerge. Take video games – in many ways the simpler of the two stories. To an extent, the strong rise in revenues in 2020 reflected existing gamers having more time on their hands. But the segment was also benefiting from a wider societal shift – one that was already underway pre-pandemic – as playing video games shook off its unwarranted label as an activity for unfair stereotypes and became seen as an indoor activity for all.
During lockdowns, parents whose own social lives had migrated online with Zoom became much more comfortable with their children doing the same through video games. And many former gamers in their 30s returned to the games they’d loved in the past, with Mario Kart enjoying a revival as a family pastime.
The result? Video gaming in the UK is emerging from the pandemic with a much broader and more diverse customer base, and a more positive perception in society and consequently a greater recognition of the opportunities games offer to businesses – with more companies working with video games for advertising and as part of brand extension.
Indeed, as brands and advertisers come to see greater value in targeting gamers online – whether through dynamic "in game" advertising, mobile app "around the game" advertising, content/streaming sites "away from the game", or other routes such as sponsorship – the commercial opportunities are growing. This is for both specific titles and genres relevant for specific brands, and also for mass-market games that attract large-scale audiences for brands to target. In response, many of the big media agencies have now formed specialist gaming divisions to help target this area of the market.
Together with gaming’s increasing recognition in the UK as a mainstream activity, all of this also makes gaming a more reliable Private Equity investment: witness deals like Carlyle’s investment in Jagex. Industry buyers are active too, as seen in EA’s acquisition of Codemasters. As such deals underline, the scene is set for the UK’s video games sector to see continued healthy growth in investment and revenues through to 2025.
Esports also enjoyed growth in the lockdown, albeit from a far smaller base and much slower than in previous years. However, what matters is the business model that generates those revenues. While video gamers are happy to pay for the experience of playing, esports is streamed free to its fan base via platforms such as YouTube and Twitch.
The consequence is that esports teams get most of their revenues from sponsorship and media rights, supplemented by merchandising and ticket sales from live events. And with live events shut down, the formerly headlong growth in these revenue streams slowed down dramatically, underlining esports relative infancy compared to video games.
Yet lockdowns also brought a silver lining for esports. With virtually all physical live sports shut down, esports was the only game in town. Meaning that the financial squeeze on the sector was accompanied by a surge in its visibility and popularity – including exposure for the first time on mainstream TV networks like Sky Sports and ESPN.
As the UK emerges from the pandemic, the close connectivity between these two “play” segments is coming to the fore. Because the reality is that video games and esports are mutually self-supporting, and their futures remain closely tied together.
“On one side, you have the rising popularity of esports fueling gaming, because esports fans want to emulate the global superstars they see playing video games in tournaments – much as the UK’s tennis courts are always full during Wimbledon. On the other, rising gaming feeds into esports: returning gamers who play Call of Duty or Fortnite during the day want to watch the world’s best players compete head-to-head in the evening at esports events.”
Andy Fahey - UK Esports Specialist Director at PwC
It’s a virtuous circle. But the problem for esports is it’s very unequal in revenue terms – because gamers pay and esports fans don’t. UK per capita spending on video games and esports (see Figure 2) shows there’s plenty of scope for growth in both segments in the UK, but also highlights the yawning differential in size.
Going forward, with cloud gaming available on millions of devices, there’s the potential for even wider reach and faster growth and an increasingly urgent need for esports to boost revenues through a new business model.
Why? Put simply, esports needs to become profitable to justify its large venture capital investments. But its current model, dominated by sponsorship and media rights, may be unsustainable in the long run for all participants.
The solution for esports could have several components. One is creating more competition and driving up media rights. Another is introducing subscriptions for access. While this might initially deter some fans, it’s a leap of faith that physical sports like test cricket and Premier League football have taken successfully in the past.
However, the final – and most crucial – element would be showing game publishers the true value of esports. This means convincing publishers that the increasing popularity of esports is influencing – and will continue to influence – the growth and development of highly popular video games titles. It’s up to esports teams to demonstrate this to game publishers to secure a commercial advantage.
Today, that’s the million dollar question in “play”: how can esports teams and leagues get game publishers to value them as fully as they should? The jury’s out on the answer.