Clifford Chance

This article addresses the monetisation of esports and how intellectual property (IP) rights (and the enforcement of such rights) will be of seminal importance for the key stakeholders involved, as well as shaping how the industry develops in the years to come.

This article was written for and first published by LawInSport.

For those readers who are not already familiar with the esports ecosystem, see our related article on the world of esports and the key stakeholders involved in the industry.

Monetising esports – revenue streams

The total annual revenue for the esports industry in 2019 was projected to reach c. US$1.1 billion; 42% from sponsorship, 23% from media rights, 17% from advertising, 9% from merchandise and tickets and 9% from publisher fees, representing year-on-year growth of 34%, 42%, 15%, 22% and -3.0%, respectively. The fastest growing esports revenue stream is excepted to be media rights, with a compound annual growth rate (2017 – 2022) of +39.6%, compared to sponsorship's +28.4%.1819 Esports' revenue generation therefore differs from traditional sports' widely recognised 40:40:20 revenue split model (covering media rights, sponsorship and gameday income, respectively), with the expectation that in the coming years esports will be far more reliant on media rights, and far less reliant on gameday income, than traditional sports.

Media rights

As the popularity of esports increases, the number of streaming services and traditional broadcasters seeking to secure distribution deals to broadcast esports competitions and leagues, and the value of those distribution deals, is expected to increase.

Distribution deals have already been signed for significant sums. In early 2018, Twitch secured exclusive rights to broadcast the first two years of the Overwatch League worldwide (bar China) for US$90 million, representing a higher annual figure than the US$300 million paid by BamTECH (Major League Baseball's video streaming company) to Riot Games in late 2016 for the streaming rights to League of Legends until the end of 2023. Facebook has also entered the fray, securing an agreement with ESL for exclusive broadcast rights for ESL's Counter Strike: Global Offensive Pro League.

One advantage that streaming services and traditional broadcasters currently have over publishers in negotiating distribution deals is that the esports industry is fragmented, with the IP for each video-game belonging to the relevant publisher. Thus, a traditional sports league like the Premier League or the NFL can collectively bargain on behalf of all teams within their league, in a way that isn't applicable in the gaming industry.

However, streaming services and broadcasters have had to adapt to address the challenge of seeking to monetise an industry which has always operated on a freemium model – i.e. esports have always been free to air. Implementing subscription models risks losing audience members – which has knock-on implications for sponsorship – thus making striking the correct balance a complex commercial path to navigate.

Sponsorship

Sponsorship is the primary revenue source for many of the key stakeholders mentioned above and lends credence to the suggestion that esports is currently over-reliant on sponsorship as a revenue stream, although this is expected to change as revenue from media rights increases. Sponsorship deals may be struck with individual players, teams, competition organisers and/or video-game publishers.

Until relatively recently, the vast majority of sponsorship of esports was from endemic brands (i.e. brands that create products required to produce or used to play esports), such as software manufacturers and consumer electronics brands. In 2017, approximately 65% of event sponsorship deals and 88% of team sponsorship deals were signed with endemic brands. In 2019, Intel extended its partnership with ESL through to 2021, with the two parties intending to invest over US$100 million over a three-year period.

However, as the popularity of esports has increased, the infrastructure of the competitions / leagues has become more established and non-endemic brands have improved their understanding of the esports industry, sponsorship has come from a broader variety of sources, with the interest of a greater number of mainstream brands piqued. The fact that esports audience members are a coveted demographic – with approximately 79% aged under-35 – has undoubtedly played a role in this increased interest, particularly given that this demographic is one of the hardest to reach through traditional media.

Thus, we have seen Mastercard become the first global sponsor of League of Legends (a game already sponsored by Coca-Cola), T-Mobile and Toyota sponsor the Overwatch League and Paypal partner with Rainbox Six Siege. Esports teams Cloud9 and Ninjas in Pyjamas are sponsored by Puma and Betway respectively (with the company's logos emblazoned on the teams' kit), whilst Jian "Uzi" Ziaho (a League of Legends player) has signed an endorsement deal with Nike.

Advertising

Esports currently offers a wide array of advertising opportunities, for a number of different stakeholders. Streaming services such as Twitch and YouTube Gaming generate substantial revenues through advertising, with streamers also able to monetise their activity, whether by charging flat fees or entering into partnerships with streaming services.

There is also a prospective line of monetisation for publishers: in-game advertising. This would require the video-game publishers to code adverts, or even team sponsorship, into the games themselves. This could be done generically or specifically for esports competitions.

At the end of May 2020, Riot Games announced that they would display in-game digital sponsorship banners (the "Summoner's Rift Arena Banners") during League of Legends esports broadcasts, with MasterCard and Alienware among the first brands that will feature. The sponsorship banner will appear in multiple locations across the in-game map and can change appearance throughout a match. Moreover, Riot Games have given each of its twelve regional leagues the ability to have different in-game sponsors. Riot worked with Nielsen to evaluate their approach to in-game sponsorship, with the data allegedly indicating that "it will become one of its most valuable deliverable assets."

In-game advertising is not currently covered by any specific broadcasting or advertising code, but issues remain that could affect this potential revenue stream for publishers, including:

• The extent to which publishers are reticent to change the aesthetic look and feel of their games by allowing in-game advertising;
• The potential backlash from gamers in response to in-game advertising;
• Limitations on the types of advertising allowed due to the advertising laws in certain countries (e.g. restrictions on advertising alcohol, gambling, tobacco, etc) and the demographic of video-gamer users (i.e. minors); and
• The hesitance of brands to advertise within certain types of games, such as violence-based video-games.

Riot Games' approach indicates they are particularly attuned to the first two issues referenced above. Whilst the sponsorship banners will be visible to those watching the esports broadcast, it will not impact the professional gamers themselves. In addition, David Higdon, Riot Games' global head of communications and esports, noted in response to fan concerns about the level of in-game sponsorship integration that: "We'll be very careful on how we innovate around it… Let us know what you think when you watch it this summer. We'll adjust as needed."

If in-game advertising grows as publishers seek to monetise further by leveraging in-game "real estate", this will create a host of issues surrounding advertising standards and the enforcement of IP rights.

Merchandise and tickets

Whilst a smaller portion of the annual revenue of the esports industry is attributed to merchandise and ticket sales, this is nonetheless a revenue stream that has seen strong growth. In 2018, the Overwatch League entered into a multi-year deal with sports merchandise company Fanatics, whilst for esports team 100 Thieves their apparel business line is one of their three primary revenue sources alongside competitive gaming and entertainment and media.

Monetising esports – the importance of IP rights and their enforcement

Esports has a notable advantage over traditional sports in respect of monetisation; the videogames underpinning the esports benefit from significant copyright protection. The Court of Justice of the European Union has held that the act of performing a sport cannot be a copyright work in and of itself as it does not satisfy the requirement of "originality".This has historically created major issues for traditional sports broadcasters in dealing with online piracy for unauthorised live streaming of fixtures. Broadcasters of traditional sports rely on the fact that the broadcasts of footage of sports events are protectable as copyright work. Broadcasters also bolster their protection through the inclusion in the footage of opening clips, anthems and trade marks to demonstrate a breach of IP rights.

In contrast, in the world of esports, the "sport" (i.e. the video-game) typically consist of a number of separate copyright works, each of which can be controlled by the owner and/or its licensee(s).

For instance, under English law, these may include:

• source code in the game or parts thereof - These can be protected as "literary works" (s. 3(1)(b) and (c), Copyright, Designs and Patents Act 1988 (CDPA)), provided they are the author's own intellectual creation. However, only the expression may be protected and not the idea or functionality behind the software (see SAS Institute Inc v World Programming Ltd [2014] R.P.C. 8)
• in-game text - In-game text may also be protected as "literary works".
• in-game images - The individual frames of a videogame may be protected as "artistic works" (s. 1(1)(a), CDPA), "graphic works" (s. 4(1)(a) and 4(2), CDPA) and in certain circumstances as unregistered and/or registered designs (see Nova Productions Ltd v Mazooma Games Ltd [2007] EWCA Civ 219)
• in-game films - Cut scenes and other films may also be protected as "films" (s. 1(1)(b) and 5B, CDPA
• characters - Characters may be protected as "graphic works", "artistic works", designs or trademarks
• musical score - A musical score can be protected as a "musical work" (s. 1(1)(a), CDPA)
• music recording - A music recording can be protected as a "sound recording" (s. 1(1)(b), CDPA)

In addition, logos and brands used to distinguish the video-games may be protected as trade marks (whether registered or unregistered).

Esports stakeholders are therefore afforded multiple layers of protection that can be used as part of an enforcement campaign to protect commercial interests. However, the competing interests of the different stakeholders (as highlighted below) is a major factor to take into account in relation to enforcement, and which may have a concomitant impact on the monetisation of the esports industry.

Further complexity is introduced where the video-games feature real players, who themselves may have rights in their likeness. In addition to rights under licences with publishers, esports leagues, competition organisers and broadcasters will also have their own distinct IP rights – for example, esports broadcasters typically film game screens and the players themselves, meaning they own copyright in that footage and broadcast (which in turn is dependent on the broadcaster having the rights to feature the game in that footage). There are therefore a broad variety of rights that may be infringed upon.

When you consider that the fastest growing esports revenue stream is expected to be media rights, the importance of stakeholders being able to adequately enforce their IP rights when infringed is underlined. However, given the myriad of rights and competing interests involved, it is critical that esports stakeholders have a clear understanding of and properly negotiate:

• The extent of (and limitations to) their IP rights;
• Their ability to take enforcement action when IP rights are infringed;
• Their responsibility to take enforcement action when IP rights are infringed; and
• The implications of taking, or failing to take, enforcement action.

Streaming

Streaming serves as a useful illustration in this respect. Unlike traditional sports, which have generally taken an assertive approach in enforcing their IP rights, enforcement activities in esports and videogaming have often been more restrained.

Publishers have been historically reluctant to stop what are known as "let's play" videos; videos distributed online where gamers commentate on themselves playing a particular game. For publishers, this constitutes free promotion and advertising and can boost the popularity of their games, which can in turn increase revenues by: (a) facilitating sales of the games; and/or (b) increasing the number of in-game microtransactions. Furthermore, assuming in-game advertising becomes a more widespread phenomenon, "let's play" videos will increase exposure to such advertising, which may lead publishers to try and leverage such exposure in contract negotiations with advertisers.

However, even for publishers, there have been limits to their tolerance for such videos. "Let's play" videos are typically governed by the terms of the relevant End User Licence Agreement, which often set out an exception for "non-commercial" use. Thus, in 2013, Nintendo began claiming all advertisement revenue on user-generated "let's play" videos uploaded to YouTube that featured Nintendo's content. Nintendo publicly positioned this as a reasonable balancing exercise; allowing fans to continue enjoying Nintendo content on streaming platforms (i.e. not blocking gamers in totality from using Nintendo's IP), whilst simultaneously asserting its right to monetise its IP. The gaming community disagreed.

Following an outcry, Nintendo set up the "Creators Program", which offered video creators between 60% and 70% of the advertisement revenue (depending on whether the creator registered and posted the video to Nintendo-specific channels) generated from the video. In 2018, Nintendo rolled-back even further from its position, announcing it was halting the Creators Program in its entirety and that – provided video creators followed a new set of "basic rules" – they could retain 100% of any advertisement revenue generated. In the associated press release, Nintendo seemed to acknowledge the role played by such video creators, stating: "We appreciate and encourage the continued support of content creators, and thank them for their dedication to helping us create smiles". Nintendo came to understand that the reputational damage of taking enforcement action outweighed the advertising revenue claimed.

By contrast, competitions and broadcasters may take a very different approach to enforcement than video-game publishers, which is reflective of their differing commercial interests. Esports broadcasters typically film both game screens and the players themselves; they therefore own copyright in the filming and broadcast itself and are able to use the content of the game under licence from the publisher.

In January 2018, esports competition organiser ESL had an exclusive deal with Facebook to stream ESL's Dota 2 competition. When gamers began streaming gameplay from the tournament (overlaid with their own commentary) on rival streaming platform Twitch, ESL elected to issue "takedown notices" pursuant to the US Digital Millennium Copyright Act (DMCA), informing Twitch that it was hosting copyright-infringing material. In order to shield itself from liability

Twitch removed the offending streams. However, Valve (the publisher of Dota 2) responded by announcing that only they were able to issue such takedown notices in relation to the "infringing" streams.

This confusion stemmed from the fact that whilst both ESL (the competition organiser) and Valve (the publisher) held IP rights in elements of the broadcast of the competition, the ability to issue a takedown notice was dependent upon the specific nature of the material being "infringed", as well as the terms of the licence provided by Valve to ESL. ESL held an array of copyrights in various elements of the broadcast of the competition, but the gamers were not violating these rights through their streams. Whilst the gamers were streaming the same gameplay that ESL was broadcasting (with its own commentary overlaid), they were not streaming the ESL broadcast (or elements of the broadcast) itself. Thus, absent the terms of a licence granted by Valve specifying that ESL had rights vis-à-vis the actual gameplay, ESL did not have the ability to issue takedown notices in relation to the streams.

This incident demonstrates the importance of esports stakeholders having a comprehensive understanding of IP rights and being aligned on the approach to enforcement. It stressed the importance of clear contractual and practical mechanisms to ensure the smooth exploitation and enforcement of the broadcast. It also highlights the attendant implications for the growth of media rights revenue in the esports industry:

Competition organisers

If competition organisers (ESL) can't enforce their IP rights, there is little commercial sense in broadcasters (Facebook) paying substantial sums for exclusive streaming rights. This will affect the monetisation of such competitions. Competition organisers therefore need to carefully assess their IP rights to ensure their commercial interests are adequately protected, as well as obtaining appropriate permissions from other rights holders to address any lacunae in such protection.

Video-game publishers

If video-game publishers (Valve) are unwilling to enforce their IP rights to protect the interests of competition organisers, or alternatively to grant competition organisers rights under the relevant licence that affords adequate protection to their broadcasts, the value of such licences substantially diminishes. At the same time, videogame publishers must also be careful not to alienate the gamers on whom they rely to promote their content and who may encourage criticism of the publisher within the gaming community. If publishers are unwilling to engage with this issue by formulating a clear policy on the permissible content of streams of competition gameplay, and continue to take a back-seat approach to enforcement, their interests will come into direct conflict with those of other stakeholders. This potential conflict is particularly pertinent in circumstances where the video-game publisher is also the competition organiser, and therefore has a direct relationship with the broadcaster.

Streaming platforms hosting "infringing material"

Streaming platforms (Twitch) should continue to comply with takedown notices when presented, as they are reliant upon the safe harbor afforded by the DMCA (and equivalent legislation elsewhere) to shield themselves from liability. There is simply too much content on streaming platforms to proactively identify all infringing content. Streaming platforms should also comply with any counter takedown notices properly filed by streamers. As an industry, stakeholders should cooperate to develop fast and effective mechanisms to identify illicit streams, building on work such as digital watermarking which has been done in the context of traditional sports broadcasting. This is particularly relevant in the context of Article 13 of the EU Directive on Copyright in the Digital Single Market, which will require service providers (i.e. streaming platforms) to implement measures to protect content and ensure effective content recognition technologies.

Streamers

Streamers should look to policies issued by publishers to understand the limitations on the content that their streams can contain. If a streamer believes their content has been improperly removed through a takedown notice, they should file a counter takedown notice.

What next for esports?

There is no sign of esports' rapid expansion slowing down. To the contrary, a recent report by Goldman Sachs highlights that the industry remains heavily under-monetised relative to its audience potential. According to the report, the total online population is over 3.65 billion persons globally, 2.2 billion of which are gamers; esports viewers currently represent only a fraction of the online population (c. 5%), suggesting there is plenty of scope for audience growth. As revenues increase, fuelled by larger audiences and audience engagement, we expect to see the industry mature, with further investment driving the implementation of greater organisation and more sophisticated infrastructure, the entrance of further major brands into the arena and larger prize pools. Activision (through Blizzard) and Tencent (through Riot Games) have led the way, targeting the investment of current owners of traditional sports teams, in order to utilise their knowledge of how to generate increasing financial returns, including revenues from those teams' regional support bases. As the professionalisation of the industry continues apace, increased monetisation will follow. Global wagering on major esports titles, already estimated at US$5.5 billion in 2016, is now projected to approach US$13 billion this year.

According to PwC's Sports Survey 2018, the traditional sports industry is keeping a keen eye on the esports industry; over 70% of participants from the global sports industry say that they would develop a strategy to enter esports, with the main reason for hesitation being a lack of understanding of the business model. Moreover, esports was identified by participants as the sport with the highest potential to grow revenues globally, comfortably beating both football and basketball into second and third place, respectively. When you consider the esports audience demographic, in conjunction with the fact that in excess of 70% of participants believe the biggest threat to the traditional sports industry is the shift in the consumer behaviour of younger generations, it is unsurprising that esports has now become too commercially relevant to be ignored.

The International Olympic Committee has now recognised esports as a "sporting activity" and is exploring the possibility of including esports in future Olympic Games. Esports may be a demonstration sport at the Paris 2024 Olympic Games and it will be a medalled event at the 2022 Asian Games. And in early May 2020, the Commonwealth Games Federation agreed an exploratory partnership with the Global Esports Federation to develop a Commonwealth Esports strategy.

The esports industry is an attractive and exciting market that transcends both sport and technology. However, the industry remains an emerging one. At this stage of its development, it is absolutely critical that adequate consideration is given to the legal and commercial issues raised by the interrelationship between, and enforcement of, various industry stakeholders' different IP rights.

The industry will need to wrestle with these complex issues as it continues its rapid expansion.

Jonathan Coote contributed to the writing of this article

This article was written for and first published by LawInSport.