“Just one more turn” - Sid Meier’s Civilization franchise
Competition and sport are deeply rooted in human psychology, and in our increasingly digital world, online competition and sports are evolving at a pace unimaginable in the physical. The result is an ever-growing portion of the world identifying as “gamers,” with an estimated 3.5 billion gamers worldwide by 2024. Those gamers are your friends, neighbors, and co-workers – not the quintessential “nerds” of three decades ago. It’s the younger version of the crowd that for decades has religiously watched the Superbowl, driven multi-million dollar ad campaigns across traditional sports networks, and hoarded memorabilia. Esports, and web3-enabled esports, in particular, take that traditional spirit of competition up to the next level, and monetization is already following close behind.
Three powerful characteristics take esports from a niche after-school pastime into a powerful consumer experience and monetization engine underpinned by web3 technologies. Concretely, they are: digital asset ownership & fan identity, point-of-sale adaptive digital assets, and direct-to-consumer competitive microfinancing. Each of these three reinforces a core pillar of esports in the modern era and adds color to our thesis around supporting the infrastructure and brands building the future of competition.
Digital Asset Ownership & Fan Identity
Traditionally-minded sports fans are accustomed to collecting jerseys, sports balls, and trading cards that form a comprehensive self-image of their support of some set of teams. And it was not cheap. That spirit of ownership and identity has been headlined by massive sales over the past few years, including Michael Jordan’s 1998 NBA Finals jersey selling for over $10mn in 2022 and Diego Maradona’s 1986 World Cup jersey selling for over $9mn in the same year. But much lower-ticket high-volume retail sales that make up the bulk of transactions in the space follow a similar pattern. There’s serious dedication to sports teams, and fans are willing to pay for it.
Digitally-minded sports fans will (and already do) seek out similar ways to express their fan identity, largely through product vectors like skins, in-game assets, participation achievements, and “owned footage” (e.g. NBA Topshot). While brands have sampled these digital asset offerings lightly over the past decade, we expect consumer participation to increase substantially as marketing objectives increasingly focus on younger, always-online generations entering the workforce.
This will be complemented by the adoption of blockchain technology and a push towards digital sovereignty that enables consumers to buy, sell, and trade their collectibles. Arguably, the collectibles markets (including sports fan identity markets) are heavily participated in by retail consumers because of speculation and the notion that “this collectible may be worth much more someday.” Before the widespread adoption of blockchain technology, open-market distribution and trade of digital assets were virtually non-existent and entirely limited to walled gardens maintained by mercurial monopolies. It is our view that opening these digital asset collectible markets to a higher degree of personal ownership and free trade will drive substantial volumes in the sports fan identity space, which will lift revenues across esports titles over the coming decade, as well as enable consumers to feel a much stronger sense of ownership and personal connection with the purely digital experiences they interact with.
Infinite Monetization: Adaptive Digital Products
Digital products are infinitely reproducible, infinitely variable, and infinitely deliverable. This is a fundamentally more scalable paradigm than physical goods can address, and it’s a key differentiating market factor for the inevitable long-term success of esports, even when compared to traditional sports.
A complex analogy here for high school algebra fans is to consider the monetization opportunity of discretely produced & priced physical products as a “Riemann sum of monetization,” with coarsely carved buckets that capture the “area under the curve” of consumer interest. You create a baseball cap, you have a set cost of goods sold, and you have a target price to charge a consumer. It’s discretized, and you incur additional costs associated with creating the machinery and supply lines for each new product bucket.
On the other hand, digital products are notably infinite in the number of “product buckets” that can be conceived and priced. This provides adaptive monetization opportunities for brands, where consumer interest profiles can be predicted & met with exactly the right digital product at the point of sale. This presents a better capture of the monetization upside from consumer interest & dedication to brands because the coarse “Riemann sum” previously capturing the opportunity under the curve of consumer interest can instead be replaced with a much cleaner “integration under the curve” thanks to the infinitely adaptive nature of digital products.
For the consumer that is left to pick through the dizzying array of products advertisers wish to sell to them, the ability to establish provenance, market pricing, liquidity and scarcity will likely embolden them to allocate more of their discretionary income to the space.
The net is that as the world becomes more and more “online,” digital margins will continue their (already impressive) march towards higher margin capture as products are designed at the point of sale with exact consumer profiles in mind, similar to how advertising has evolved over the past two decades. Esports, sitting at the nexus of culture and advertising, will see substantial upside from these new rapid monetization opportunities.
Direct-to-Consumer Competitive Microfinancing
Football is the world’s most popular sport because of its simplicity. All you need is a semi-soft ball, a few sticks for goalposts, and a few friends to put a game together. Esports does not have the same luxury, as even low-level “esports” games require some capital outlay to purchase an operative computer or phone to play, a requirement that a decent portion of the world still cannot meet.
However, esports makes up for this near-term distribution shortfall by enabling instantaneous competition at a global scale and allowing advertisers and producers to reach demographics that would ordinarily be much more out of reach. This global sponsorship can easily reach very granular local levels, and the result is a plethora of tournaments and organic influencer opportunities for brands to deploy marketing capital faster than they otherwise could with traditional sports.
With the advent of blockchain, we’ve seen some early validation of direct-to-consumer distribution models for games and brands that rely on paying individuals to engage. These early experiments around “play to earn,” while unsuccessful in the short term due to extremely ill-conceived economics, highlighted the ease with which users could be incentivized globally to perform some set of actions for some arbitrary digital value. Blockchain rails erode some of the titanic grip payment processors have over global margins and may give just enough space and distribution breadth to permit new microfinancing opportunities for advertisers and esports brands looking to reach consumers directly and pay for that exposure with fewer middlemen.
A Question of Not “If,” But “When”
Esports will edge out traditional sports over the next few decades, primarily on the back of increasing corporate drive towards advertising efficiency, the ability of digital products to adapt and meet consumers at their preference point, and a disintermediation of existing mandatory online middlemen all underpinning a larger trend of greater esports adoption from both consumers and corporates. It is a net positive engagement as both the consumer and the corporate stand to gain from the measurable authenticable engagement. We believe that this is not a question of “if” esports becomes one of the dominant global industries (in the same vein as traditional sports media) but “when.” Our investments in the technologies and brands underpinning that colossal global transition highlight our conviction in an ever-growing digital future and paints a picture of a more interconnected and competitive world.