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China's eSports Boom Moves Center Stage

The market for eSports and online games is rapidly growing in China, spurred by demand from consumers in the country's smaller cities.

Later this year, the world’s first purpose-built eSports gaming stadium is set to open in China’s Chongqing municipality with space for up to 20,000 excited fans. The municipality's plan is to make the region a destination for eSports fans and target the growing revenue in online games and entertainment.

The rise in eSports has helped invigorate interest for gaming in China. Games now account for 56% of the country's online entertainment.

A new report from Morgan Stanley Research suggests Chongqing may be on the right track.

Spending by Chinese consumers on online games, online video and live streaming is on track to surge over the next three years, from Rmb365bn (~US$54bn) to Rmb739bn (~US$116bn). “China online entertainment platforms are competing aggressively for traffic," says Equity Analyst Alex Poon, who covers China internet stocks. “We’re seeing strong demand across the board, but particularly in households in lower-tier cities where online games rank as their second most popular type of content accessed online.”

The Online Explosion

As a consumer marketplace, China has attracted a lot of attention. As China's economy evolves, its 1.4 billion people have more money to spend on items beyond housing and necessities. Although Chinese consumers spent 3.49% of their disposable income on entertainment in 2017, that's still well below their consumer counterparts in Japan and South Korea, who spent 7.25% and 7.08% respectively—suggesting robust growth prospects.

China Online Entertainment Market Size May
Hit Rmb739bn (US$116bn) by 2020E

Source: iResearch, Morgan Stanley Research estimates

Poon predicts that Chinese consumers will boost their entertainment spending by 8% annually over the next decade, with online entertainment capturing a good portion. While the live streaming industry has increased by 100% annually over the past three years, Poon thinks that pace could slow due to increased competition, growing host maintenance and marketing expenses, and users shifting to other entertainment channels such as short-video platforms. The real opportunity, however, may rest in games.

Gamers Dominate

eSports has transformed gaming into a professional sport replete with high-paid players, local teams and the chance to watch tournaments at an arena or streamed to a mobile device. This rise in eSports has helped invigorate interest for gaming broadly. Games now account for 56% of online entertainment revenue.

“While we expect the online game market to expand at a 20% compound annual growth rate (CAGR) through 2020 similar to the last few years, and we expect eSports and game streaming to drive higher user engagement and spending," Poon says. One reason: Online games create an entire ecosystem—the streaming attracts more players, and those players spend money, which powers the demand for streaming—what the report calls a “virtuous cycle."

Lower-Tier Cities Rise Up

While online entertainment has taken off across China, the country’s wealthy lower-tier cities could be the primary driver of the industry's growth.

Lower-tier City Households Are More Willing to Spend on Entertainment
(Discretionary and Lifestyle)

Source: AlphaWise, Morgan Stanley Research

In a separate report, Morgan Stanley Research forecasts that consumption in smaller urban centers is set to triple by 2030, accounting for two-thirds of the country's spending increase. This shift bodes well for online entertainment. “Households in lower-tier cities are more willing to spend on entertainment than those in higher-tier cities because they have a lower-housing burden," Poon says.

Finally, there may be additional market growth in the coming years. About 25% of residents in lower tier cities still rely on offline entertainment, compared with 20% in the larger, top tier places. As penetration of Internet and mobile moves people from offline to online, entertainment spending may be the big winner.

For more Morgan Stanley Research, ask your Morgan Stanley representative or Financial Advisor for the full report, “Online Entertainment: Spend Smartly," (March 27, 2018). Plus, more Ideas.