Idan Ofer never dreamed of owning a European football team. He wasn’t even a fan of the game. But the London-based Israeli industrialist and principal of Quantum Pacific found himself in 2017 sharing a long airplane ride with the agent for the Brazilian star player Reynaldo dos Santos Silva. For seven hours, Mr. Ofer says, the agent “chewed my ear” to get into football (or soccer, as it’s called in the United States).

“He said, ‘You can make billions, and it’s fun,’” Mr. Ofer recalls. Soon after, he found himself visiting in Club Atletico de Madrid, one of the three top teams in Spain. In November 2017, Quantum Pacific, a private holding company, acquired a 15% stake in the team, and three months later, it increased its stake to 32%. Now, he jokes, “Nobody cares about what I do except this Atletico Madrid business.”

Mr. Ofer was able to purchase the team at what he calls a “very good valuation.” The team has doubled in valuation since then (in part because his firm injected badly needed capital, and because it won this year’s European title.) There are also substantial revenues. “It’s a great asset to have,” he says. In 2018, he added a stake in a Portuguese soccer team to Quantum Pacific’s portfolio.

Valuations for sport teams have grown faster than the S&P 500 for the past five and 10 years, increasing the allure of owning teams for other companies and wealthy families. Few are likely to be able to buy one, however. There just aren’t many teams in any one sport, and some, such as Real Madrid and Barcelona, are associations owned by members. Current high valuations are also an obstacle.

For would-be owners of traditional sports teams, electronic sports—or eSports—may be an alternative. They are remarkably similar to traditional sports in some regards—and quite different in others. For one thing, owning an eSports team isn’t likely to confer the same social prestige within the owner’s social circles, though it can make the owner seem quite cool to his or her children.

To many parents, the word eSports conjures visions of their teen- or tween-age sons and daughters locked in the basement all weekend playing video games. But eSports isn’t just for kids. These multiplayer video games involve serious competitions for gamers of all ages around the world. Skilled players can play in eSports college leagues and win college scholarships. The best players join professional teams, which include trainers and managers, and which have large global audiences. Players and audience members come in all ages, but skew to the young.

Consider the Overwatch League, a professional league built around the game Overwatch (a team-based action game made by Activision Blizzard). Over two days in July 2018, 22,000 players and fans attended the league’s Grand Finals at Barclays Center in Brooklyn (home of the Brooklyn Nets basketball team), according to Nate Nanzer, Commissioner of the League. Attendees watched the world’s best Overwatch teams play on giant, high-quality screens.

People go to such events for the same reason they go to the Staples Center for a Lakers game, Mr. Nanzer says. “It’s way more fun to spend time and connect with other people that share your passion, and feel like you’re a part of the community.”

At the Overwatch Grand Finals, attendees ate, drank and cheered with friends, family and strangers, as if 2,000 home Super Bowl parties were gathered in one location—or as if they were watching the Nets compete in the arena. But a Nets player at the tournament told Mr. Nanzer he had never heard Barclays Center so loud when he was playing basketball.

And eSports offers an immediacy and accessibility that traditional sports don’t have. Fans who watch eSports on platforms such as Twitch, YouTube, WhoYa [phonetic] and China’s Bilibili can interact with other viewers during games. And when Tyler “Ninja” Blevins, a celebrity Fortnite player, livestreams games, he sometimes reacts to audience comments, making fans feels like they’re his friend. LeBron James, by contrast, doesn’t livestream how he makes baskets.

The investment opportunity arises, in large part, because eSports is relatively new, and game companies realize they need partners to build their games into a spectator sport. “We knew how to make great video games, but we didn’t know how to build a fan base in a local market,” explains Mr. Nanzer, who helped develop the Overwatch League as an executive at Activision Blizzard. “We didn’t know how to sell local sponsorships, sell tickets or build venues.” To gain those competencies, his company found partners like Kraft Group, the Kroenkes, and Anschutz Entertainment Group (AEG), which have developed those skills over decades. “We need them to build out the infrastructure,” he adds. “We know the audience is there.”

The global audience for eSports was about 300 million in 2016, and an estimated 400 million in 2018, according to the newZoo October 2018 Global eSports Market Report. It is forecasted to reach 600 million in 2021, for a compound average growth rate of nearly 16%.

CHART 1: TOTAL GLOBAL AUDIENCE IN MILLIONS A bar chart showing audience growth from 2016 to 2018 with projections to 2021. In 2018, the audience was approximately 400 million. It is projected to reach approximately 600 million by 2021. CHART 2: 2018 eSPORTS REVENUE STREAMS—BREAKDOWN BY REGION In 2018, eSports accounted for approximately $900 million in revenue. This bar chart shows that South Korea accounted for 6% of the total ; China for 19%; North America for 37%; and the rest of the world for 38%.
Global revenues of about $900 million in 2018 were up about 37% from 2017, and are widely distributed geographically, with 37% coming from North America, 19% from China, 6% from South Korea and 38% from the rest of the world, according to the newZoo report.

CHART 3: 2018 REVENUE STREAMS PIE CHART: A pie chart showing the percentage of $900 million revenue earned from individual eSports elements. In 2018, sponsorships accounted for 39% of the total; media rights provided 20%; advertising, 18%; game publisher fees, 13%; and merchandising and tickets, 10%. Total 2018 eSports revenues increased 37.4% over the prior year.

The largest single revenue stream comes from sponsorships, at 39% Advertising, food and drink in the stadiums, and a variety of branded goods make up the rest. Fans can express their loyalty by buying team jerseys they can wear in real life, and another for their avatars in the game.

Seeing a game live in the arena led several investors to commit to eSports, Mr. Nanzer says. They can see the fans look and act like fans in any other sport, the production values are high, and the sponsors are first-class companies such as T-Mobile and Toyota. “Brands like that are moving dollars toward eSports because it gives them access to a new and attractive audience,” he explains. The average eSports fan is in his or her early 20s, he says, with about 85% male and 15% female. The average Major League Baseball fan in the United States, by contrast, is in his or her late 50s.  

AEG studied eSports for three years before buying a stake in the Overwatch League’s Los Angeles–based Valiants as well as the Immortals team, says Steven Cohen, a Managing Director at AEG, the world’s largest owner of traditional sports teams and events. AEG looks at sports teams generally as unique content that has a stickiness factor and is compelling for various demographic groups, and that brings communities together.

With eSports, AEG looked at how it touches a certain demographic and how it interplays with the other things that AEG does with its 200 venues around the world, Mr. Cohen adds. “We wanted to be at the forefront of defining the experience in its venues, and it works closely with publishers, fans, players and sponsors to do so, because there is real economic upside to that.”

There are risks, of course. Barriers to entry for new leagues are low, and the barriers to long-term success and sustainability are high. “You need to know that the publisher of the game is meaningfully invested,” he says. With respect to Overwatch, it helped to have Activision Blizzard, a company with $50 billion in revenues, say, “We care about this game.” If you’re going to get involved in a league, he adds, it’s also crucial to be confident that the other league owners and team owners are in it for the long term, because “if the partners turn it into something cheap, it could really hurt you.”

Skeptics note that hockey, football and baseball have been around for many decades. Parents play ball with their children and take them to games a tradition that has lasted generations. Video games are a newer phenomenon, and only a few games have been around for more than 20 years. Mr. Nanzer responds that the first video games came out in 1972, and StarCraft debuted in 1998. Though the latter is now 20 years old, hundreds of thousands of people simultaneously watched the StarCraft tournament at Activision Blizzard’s annual BlizzCon event this year.

As for intergenerational playing and watching, Mr. Nanzer says, “My generation of dads is the first who can’t remember a time in our lives without video games. I’m 39 years old.” People his age and somewhat older comprise the first generation that grew up playing both traditional sports and video games, as well as watching other people play. Now, they do both with their children. Family groups like his own typically make up about half the crowd for Saturday events at the Blizzard Arena in Burbank, California.

Some investors question whether it’s better to own the stadiums rather than the teams, because stadiums will retain value even if the popularity of a game and its teams fades. Mr. Cohen notes that AEG’s 200 venues are attractive businesses, but it couldn’t simply replace one game with another because each game and team have a distinct brand and audience. “That’s fine for an event here and there, but it’s not building underlying value that unlocks all sorts of other revenue streams.”

To Gerry Cardinale, the Managing Partner at RedBird Capital Partners, eSports poses a conundrum. Buying a team may offer compelling synergies for companies such as AEG that own traditional sports teams and arenas, and can benefit from the synergies. But for wealthy individuals and families who don’t gain from using assets (such as stadiums or ticket-sales systems) in new ways, the economics may be less compelling.

It’s also harder to have confidence in data that is mostly private and short-lived. If you buy a National Football League team, Mr. Cardinale notes, you know the history of that team playing in its hometown for decades. There’s nothing comparable for eSports. And if you decide to buy one of the league’s 32 teams, you own 1/32nd of that league’s ecosystem. That’s why owning teams has been so profitable, and what he has liked from a risk perspective for over 20 years as an investor and advisor on sports-related assets. But eSports has been set up differently, he notes. The economic pie isn’t divvied out to the teams in the same way.

“Ultimately, I think the economic proposition is the intellectual property,” which resides with the game publisher, Mr. Cardinale says. “The only way I’ve found for individuals to invest in eSports is to buy Activision stock.”

But some individuals do buy. Former eBay and HP CEO Meg Whitman recently purchased a stake in the Immortals.  

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