The Oculus Rift.

For years DFC Intelligence has seen the hype and headlines that comes and goes around various segments in the game industry. In some cases, the market is excited by a new potential goldmine that turns out to be fool’s gold. Many times when a category reaches the headlines the opportunity has already come and gone. or often the excitement generated by a new category is premature. In these cases, investors rush in only to find out the consumer market was not ready. This happened with many online game investments in the 1990s before broadband was widespread.  Time to explore VR and eSports hype.

Among the most hyped areas in the game market today are eSports and virtual reality. In one case you have a fairly established new market and, in the other case, you have a technology that is clearly going to take some time to develop. In both cases, DFC Intelligence is working with investors and content providers to not just size the market growth potential, but look at where the opportunity may exist. Most importantly with these areas is helping companies avoid the many pitfalls of trying to invest in a “hot new fad.”

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In the case of eSports the area is not really new. Videos of gameplay have been extremely popular on YouTube for years. For major competitive video games having a live eSports tournament has long been firmly established as a crucial part of the success equation. Twitch was fought over by Amazon and Google because they had tens of millions of users to whom additional products could be sold. The audience is clearly already in place so where is the revenue?

It can be argued that eSports is a fairly mature business and much of the growth will come from capturing market share. This is why companies like Electronic Arts, Nvidia and Activision Blizzard are investing in eSports. These companies have major competitive products and the eSports component is necessary to keep their products competitive.

The fact that eSports already has an audience of well over 100 million consumers also means that there is substantial opportunity to deliver enabling technology to those consumers. For example, a company like Raptr with Plays.tv is trying to make it easier for gamers to record and share video of gameplay. Where the problem comes is with those that are betting on 1) rapid growth in the eSports audience and 2) rapid growth in advertising revenue for that audience.

Across the media board advertising revenue has become tougher to generate as a business model in the digital age. The audience for eSports is already huge so where is the revenue? In the last heyday of print about 15 years ago, the video game information magazine business generated more annual revenue than eSports with a small fraction of the audience. A print magazine with a circulation of barely one million could generate as much as $40 million in revenue. In the current landscape it would take an audience in the tens of millions to generate that type of revenue.

On the other side of the coin is the arrival of virtual reality (VR). VR is an untapped product segment that probably does have significant growth potential. However, once again that potential is likely to take some time to realize. There are simply too many unanswered questions mainly around how does a VR content play look… is it games, productivity, education, information? On the game side is it a novelty or will it open up an entire new world of content possibilities? Will it be VR or the less intrusive augmented reality (AR) that proves most attractive to consumers?

Elite Dangerous for the Rift.

For VR content there is a real chicken and egg question. How much do you invest in expensive new content knowing the installed base is only just being established? How much will this resemble the mobile game market where consumers simply will not pay upfront for content? Virtual reality products are primarily entertainment experiences that are not perfectly suited to a giveaway for free and sell add-on content model.

In short the hype around eSports and VR simply does not match the reality of the situation. In both circumstances there are growth opportunities if one realizes that these are not greenfield undiscovered areas (ie there is already likely to be lots of competition). Recently, DFC was pleased to see Deloitte brought some much needed investor sanity analysis to both eSports and virtual reality hype.

On a macro perspective it becomes clear that one of the biggest opportunities is selling the hardware to consumers that will allow them to engage in eSports and VR. These are segments that require high-end hardware and DFC Intelligence is forecasting that console and PC hardware are going to be major growth areas. In the console arena, the Sony PlayStation brand stands to benefit the most from this growth, while DFC forecasts that PC gamers will spend $29 billion on performance PC hardware in 2016. In other words, companies like Intel can sit back and sell a lot of enabling chips. As for other potential players…caution is the name of the game.