Video Games for the Masses: eSports Finds an Audience

Wall Street Journal study this summer discovered that if you watch a three-hour baseball game, you get just shy of 18 minutes of actual play. Now don't get me wrong, those are good minutes -- more than the 11 minutes of football that get played in a game, though well shy of the 35 minutes of play in a rugby match. Even with all that action, some people are left wanting more competition. Enter eSports.


Source: WikiCommons.

Video game competition has picked up and companies are moving to turn that interest into cold, hard cash. Twitch -- an online video streaming site -- is now pumping out 8.5 billion hours of video each month to viewers. Just like YouTube, Facebook, or Twitter, Twitch is turning all those eyeballs into revenue through an ad-driven model. After all, why watch a guy hit a leather ball -- or, more likely, miss a leather ball -- when you can watch a bear that fires lightning from its claws maul a lizard man?

Source:Twitch.

Twitch's moat
What Twitch is doing has the benefit of very little overlap with YouTube's model. First off, Google's (NASDAQ: GOOGL  ) use of YouTube has recently trended toward two big areas -- off-TV productions and brand awareness. In its recent earnings call, Google called out some of the success that YouTube has had in acting as a whole new platform. The goal is to compete with traditional TV, offering advertisers a similar audience but on a new medium. That's been a clear success, and no one in their right mind would try to challenge the basic premise.

Twitch, meanwhile, is bringing live events to a specific audience. Instead of showing prerecorded productions, Twitch allows gamers to stream the games as they play them. Viewers can then watch those live games, or go back later and see the recorded  event at their own pace. That brings us to the second big driver of Twitch's success -- partnerships.

In order to get anyone interested in watching a live game, you have to have good titles and you have to make it easy for players to stream. Twitch has partnered with Intel, Microsoft, Sony (NYSE: SNE  ) , Valve, and other game developers to keep players interested by making it simple to stream content. In fact, both the PlayStation 4 and Xbox One will feature a simple "share" option for players, allowing them to quickly connect with Twitch.

So there Twitch sits, streaming all the gaming content a human could ever want, sucking up ad revenue, and growing its user base through partnerships. Now that it has the whole business locked down, how can other companies get a piece of the action?

Back to partnerships
According to Internet statistics site Alexa, Twitch's user base is heavily weighted toward college- and high-school-age users. That puts it in a perfect position to run targeted ads for games -- obviously -- technology, entry-level cars, and credit cards. The sweet spot is always going to be with games, and Twitch is taking full advantage.

By having a wide moat, a strong user base -- 44 million unique viewers last month -- and a specific user base, Twitch is able to build advertising partnerships with big names that want to get in front of gamers. For instance, right now the whole site has been branded by Activision Blizzard (NASDAQ: ATVI  ) in anticipation of its upcoming Call of Duty: Ghosts release.


Source: Activison Blizzard.

Activision recognizes the value of having a strong community of eSports players, and it has said that it wants to continue to foster the growth of that community. One of the company's biggest eSports titles is Starcraft 2. As I write this, there are more than 5,000 people watching Starcraft matches on Twitch -- along with another 10,000 or 11,000 between World of Warcraft and Hearthstone, both Activision Blizzard titles.

Already in the living room
While Twitch won't release current earnings information, a company representative told me that it was "financially healthy." Users have been growing and the company is working hard to keep its niche separate from YouTube's.

I asked if the company had any plans to tie in with cable or traditional broadcast, but its strength and flexibility may already have put that sort of business out of the question. Twitch might not need it, with the company saying, "With the proliferation of video consumption via consoles and other devices, Twitch already has a living room presence."

That means that eSports is moving into the living room, which is good news for game developers, advertisers, and console companies. As eSports grows, investors should watch for the dynamic of the gaming industry to shift -- not completely change, just shift. The move is going to be good news in the long run, as more people are exposed to games and more games are designed to be watched, not just played.

Twitch told me that it's also planning for the shift in consumption and that it is trying to ensure that "[if] a person or company is doing anything within the video game spectrum, there is a way to leverage the Twitch platform to shine a broader light on it."  If eSports -- and gaming as a spectator event in general -- has a center, Twitch might be it.

Beyond gaming
While the video gaming revolution is being televised, another war is raging just beyond sight. The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to rule the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here.


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