Clifford Chance

The Covid-19 pandemic brought traditional sport, on a global scale, to a standstill. As governments sought to control the spread of the virus, high profile leagues and tournaments (both international and national) around the world were cancelled, suspended or postponed. A void has emerged, as major international events like the 2020 Olympics and 2020 Euros have been moved into a packed 2021 calendar, with the hope that a sense of normality will have returned to the sporting schedule to allow them to go ahead.

This article was written for and first published by LawInSport.  The original is available to view here.

Introduction

Esports has not been immune to the consequences of the pandemic, with live events cancelled, postponed or replicated online and projected revenues down (although only in the short term). However, global interest in esports has intensified as sports leagues worldwide have turned to esports to continue their engagement with fans. NASCAR led the charge with its iRacing series, with drivers competing digitally through a simulation platform. Formula 1 launched the F1 Esports Virtual Grand Prix series (with virtual races running in place of every postponed Grand Prix) and the English Premier League's inaugural ePremierLeague Invitational (in which celebrities and Premier League players represented their team in a knockout tournament to raise money for charity) attracted 150 million viewers across platforms including YouTube, Twitch, Facebook, Twitter and Sky Sports live. It has even been suggested that Covid-19 may lead to the normalisation of esports, thanks to the "unprecedented (and accidental) adoption of esports by broadcasters, leagues and athletes seeking to engage fans".

This article provides an introduction to the world of esports, the key stakeholders involved and some of the challenges facing an industry that was expected to reach a global audience exceeding 440 million viewers last year and is forecast to generate between c. US$1.8 billion and US$3 billion in revenue by 2022. 

What is esports?

There is still no harmonised definition of esports. For the purposes of this article, we define esports as the playing of competitive video-games by professional gamers, in an organised format (a tournament / league) and with a specific goal (a title / prize money). Esports is an umbrella term for an industry covering hundreds of different video-games.

It is important from the outset to be cognisant of the difference between esports (as defined above) and "gaming". Indeed, conflating the two is a common misconception. Gaming is a far broader term, encompassing the playing of video games, whether competitively or non-competitively, whether offline or online and whether in single player or multiplayer mode.  To draw an analogy with football, gaming lies on a spectrum that encompasses a child practicing "Keepy Ups" in his garden, a local football team playing in a competitive 5-a-side tournament and a football freestyler duo streaming their latest skills and moves online. Esports is a competitive professional league or tournament, such as the Champions League, Bundesliga or the FA Cup.

This distinction is also important when considering the two types of professional gamers:

1. Competitive professionals – i.e. elite gamers who participate in esports, whether as an individual or as a member of a team, to win tournaments / leagues; and
2. "Lifestyle" gamers – i.e. skilled (but not necessarily elite) gamers who broadcast their dayto-day gameplay on digital channels and live streaming platforms to fans / subscribers, and whose ultimate goal is to entertain viewers, whether they win or lose.

Whilst there are gamers who transcend the boundary between the two types of professional gamer, the majority of gamers will fall into either one of the two brackets. In this article, our focus is on esports, and therefore the former rather than latter bracket. However, this is not to understate the importance of lifestyle gamers to the esports industry, who may nonetheless sign to professional esports teams, as part of those teams' broader business models – for example, to attract sponsors and fans, sell merchandise and produce entertainment content.

Esports, whilst a relatively nascent industry, challenges established conceptions of what constitutes a "sport" (although whether esports can be appropriately classified as a "sport" remains a controversial topic), but also offers new and varied investment opportunities to current and prospective market participants. Esports undoubtedly shares many of the fundamental characteristics of traditional sport, however its idiosyncratic features require a more bespoke approach in a number of respects, particularly in relation to monetisation.

[See our related article on the monetisation of esports and the role of intellectual property rights]

The rise of esports

In 1972, the first known esports event took place at Stanford University, with students competing at "Spacewar", a space combat video-game. The winner took home a year's subscription to the magazine Rolling Stone. Fast-forward to 2019, and 16-year old Kyle "Bugha" Giersdorf scooped US$3 million for winning the Fortnite World Cup solo final, the largest prize ever for a single player at an esports tournament. To place this into context, Bugha's prize exceeds that awarded to Novak Djokovic for winning Wimbledon 2019 (US$2.91 million) and Tiger Woods for winning the 2019 Masters (US$2.07 million). Moreover, the US$3 million won by Bugha was a mere fraction of the US$100 million prize pool set aside by Epic Games, creator of Fortnite, for all Fortnite esports tournaments held during the course of 2019. Less than one month after Bugha's victory, five-man team "OG" triumphed at The International (a Dota 2 tournament) in Shanghai, with the team sharing the US$15 million first place prize and captain Johan "N0tail" Sundstein becoming the top prize-winning esports player of all time, with estimated career winnings of almost US$7 million.

Esports competitions are played in front of spectators, who can watch in-person or via online streaming. These audiences can be vast. By way of example, 60 million unique viewers watched the Grand Final of the 2018 Mid-Season Invitational, a League of Legends tournament hosted by Germany and France. According to a recent report by Goldman Sachs, esports has been elevated "into mainstream culture as a legitimate professional sport with a massive global following". This global following includes major celebrities and professional sportspersons, which in turn further raises the profile of esports. For example, in early 2020, Real Madrid's Gareth Bale launched his own esports team, Ellevens Esports.

Who are the key stakeholders?

Video-game publishers

Video-game publishers produce, release and own the IP in the games they publish, and thus control the content of the games (including updates to the games subsequent to initial release). For publishers, esports represents a way of deriving revenue from their principal assets – their IP rights in the games – by licensing the use of those rights.

The primary purpose of such licensing may be direct (a distinct revenue stream under the licensing contract), indirect (using esports to generate interest in the game to drive sales) or a combination of the two.

Competitions and leagues

Publishers may also run esports competitions and leagues (for which they control the structure and rules) or alternatively license the rights to run and broadcast such competitions to third parties. High profile examples of the former include the creation of the Fortnite World Cup by Epic Games, the formation of the League of Legends Championship Series and the League of Legends European Championship (the North American and European leagues, respectively) by Riot Games and the subsequent launch of the Overwatch League by Blizzard. An example of the latter is ESL (formerly the Electronic Sports League), which is the largest organiser of esports competitions worldwide (e.g. ESLOne).

Team owners / franchises

For those video-games for which leagues have been created, the publishers can also sell "teams" that can participate within those leagues to third parties (similar to the US sports "franchise" model). By way of example, Activision (Blizzard's parent company) sold the first twelve teams in the Overwatch League for US$20 million, and subsequently sold eight further teams for a reported US$30 – 60 million each, with each team based in a global city, and the teams split into a Pacific division and Atlantic Division, respectively. Activision targeted current owners of major sports teams as prospective team owners, including Kroenke Sports & Entertainment (Los Angeles Gladiators) and the Kraft Group (Boston Uprising), who have experience in generating revenue from local and global fanbases.

Teams

In addition to the "teams" which are sold to third parties, teams exist in the more conventional sense, i.e. a collection of players competing on the same side against other groups of players. Teams often compete across various platforms and video games. The top three highest earning teams of all time are "Team Liquid", "OG" and "Evil Geniuses", with cumulative prize winnings totalling close to US$90 million. Team Liquid, which has multiple divisions dedicated to the most popular esports games, is majority owned by aXiomatic, an ownership and management group created by an array of top traditional sports team owners which offers investment services in the esports industry. Teams may seek to obtain IP rights in relation to their players under the contracts with those players. As with traditional sports athletes (such as elite footballers, golfers and tennis players) esports players have become increasingly attune to the fact that they are not just professional gamers, but also valuable media assets.

Players

The number of professional esports players has grown rapidly in recent years. They can earn income through sponsorship, prize money and team salaries (for members of a team which pays a guaranteed salary). Substantive player salaries are likely to encourage more gamers to consider pursuing esports as a professional career, which in turn results in higher quality gameplay and increased fan interest. Furthermore, unlike in traditional sports, lifestyle gamers can also earn income outside of the esports context through streaming services. The highest profile example is Richard Blevins, better known by his online alias "Ninja", who earns an estimated US$500,000 per month from streaming and commenting on gameplay.

Online streaming services

Major technology companies including Amazon (Twitch), Google (YouTube) and Tencent (Douyu and Huya) own or have heavily invested in streaming services which can broadcast competitive and lifestyle gameplay. Facebook has recently launched a dedicated Facebook Gaming app in an attempt to challenge these dominant players and firmly establish itself in the gaming and esports world. Twitch is the largest streaming platform, averaging in excess of one million concurrent viewers watching its subscription-based content every second over the course of 2018. Online streaming services contract with publishers (whether on an exclusive or non-exclusive basis) for the rights to stream gameplay. Live streaming platforms have experienced a surge in growth as a result of the Covid-19 pandemic; for example, Twitch exceeded 3 billion hours watched (in a single quarter) in Q1 2020 for the first time.

Traditional broadcasters

Some traditional broadcasters, in addition to online streaming services, have also begun contracting with publishers in order to broadcast gameplay. However, such broadcasters have thus far had a difficult task in converting the digital native fans of esports away from streaming services; research conducted by Nielsen found that 61% of esports viewers on Twitch did not watch TV on a weekly basis.17 Whilst Disney, ESPN and ABC began broadcasting the Overwatch League in 2018/19, it was exclusively licensed to YouTube by Activision Blizzard in early 2020.

Traditional sports team and leagues

Professional sports teams and leagues have also started investing in esports, capitalising on their unique IP rights (by licensing them to publishers), brand awareness and experience to find new audiences through esports. For example, NBA and Take Two Interactive (the publisher of the NBA 2K franchise) entered into a joint venture to create an esports league for NBA 2K; with 23 of the NBA's 30 teams currently participating in the NBA 2K League. In 2019, all NBA 2K League games and tournaments were livestreamed on the NBA 2K League's Twitch and YouTube channels, with the NBA 2K League Finals re-aired in China through Tencent.

Jonathan Coote contributed to the writing of this article

This article was written for and first published by LawInSport.  The original is available to view here.