Level Up - Video Games Guide - ESports
The popularity of Esports has sky-rocketed in recent years, with more tournaments, players, streaming platforms and viewers than ever before. In 2022, the market globally was estimated to be worth US$1.38 billion and is forecasted to rise up to US$1.87 billion by 2025.
This growth represents enormous opportunities for businesses that are both endemic and non-endemic to the gaming community, with sponsors of Esports teams including big name brands such as PepsiCo, Intel and Red Bull. However, with the current global economic downturn post-pandemic, it has been reported that budgets across the Esports sector have been tightening and sports organisations are looking to expand their sources of revenue. Esports has grown to not just include competitions but also include sponsorship, streaming, advertising, merchandise and content by gaming creators on online platforms. Consequently, savvy stakeholders are looking to further explore these alternative revenue sources in order to maximise revenue streams from investments within the esports sector. However, stakeholders should bear in mind that the relevant regulatory authorities across the globe have been holding the esports sector under greater scrutiny, particularly where esports and gambling converge.
With the above in mind, we wanted to create an all-in-one legal guide for those that currently operate in or are considering entering the video games industry with the purpose of providing an overview of the life cycle of a video game – from the early stages of development, past the grind of regulatory compliance, through to the final stages of monetising the product.
In Levels 11 and 12 of the Guide, we look at esports and gambling, including revenue streams and the greatest risks that key stakeholders should be aware of before entering the industry.
LEVEL 11 ESPORTS
What is esports?
In essence, esports is 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). Although “esports” is often referred to as a collective (typically, for the sake of expediency), esports is an umbrella term for an industry comprising multiple video game titles. Critically, esports are not homogenous; for the vast majority of titles, the esports scene developed from the grassroots upwards, driven by the desire of the community affiliated to that particular title to watch competitive play within a more organised structure (i.e. a league / tournament). These communities remain integral to esports.
Additionally, it is important to be cognisant of the difference between esports and gaming. 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. This distinction is also important when considering the two types of professional gamers. The first type are 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. The second type are so-called “lifestyle” gamers – i.e. skilled (but not necessarily elite) gamers who broadcast their day-to-day gameplay on digital channels and livestreaming 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. Although our focus here is on esports, the importance of lifestyle gamers to the esports industry should not be understated, with some lifestyle gamers signing 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.
The rise of esports
In 1972, the first known esports event – the Intergalactic Space Wars Tournament – took place at Stanford University, with 24 students competing at “Spacewar”, a space combat video game. The winner took home a year’s subscription to the magazine Rolling Stone.
Fast-forward almost 40 years, and esports has become a central tenet of the gaming communities, affiliated to major video game titles. The growth in popularity of esports in the last decade, in particular, facilitated by advances in technology, a shift in consumer viewing habits (e.g., “on-demand” services, streaming online content) and substantial investment, has seen esports elevated “into mainstream culture as a legitimate professional sport with a massive global following”. It is estimated that the global esports audience grew to 495m in 2020, up from 226m in 2015.
With such a significant demand for esports content, it is unsurprising that revenues, tournament / league prize monies and player salaries have increased in tandem.
The esports industry – which pre-pandemic was forecast to break the US$1 billion barrier for the first time in 2020 – is still estimated to have generated US$950 million in revenue last year. Industry experts estimate that global esports revenues will total c. US$1.6 billion by 2023, with 76% of those revenues generated from sponsorship and media rights deals. Prize pools for major tournaments have skyrocketed – in 2019, over 4,000 official esports tournaments were held with combined prize pools exceeding US$211 million; notable prize pools included The International 2019 (over US$34 million) and the Fortnite World Cup Finals 2019 (over US$30 million).
Indeed, global interest in esports actually intensified from March 2020, as the Covid-19 pandemic pushed traditional sports leagues worldwide to turn to esports to continue their engagement with fans; this included Formula 1’s F1 Esports Virtual Grand Prix series and the English Premier League’s inaugural ePremierLeague Invitational.
There are now almost 100 esports professionals who have earned over US$1m from prize money alone, with Johan “N0tail” Sundstein earning almost US$7 million. Player salaries have also increased, with some leagues now mandating minimum salaries. Riot Games have a minimum annual salary of US$75,000 for players competing in the League of Legends Championship Series (although the average salary is reportedly in the region of US$300,000), whilst Blizzard requires that players competing in the Overwatch League are paid a minimum annual salary of US$50,000.
Who are the key stakeholders?
Key stakeholders within the esports industry include:
Video game publishers: video game publishers produce, release and own the intellectual property 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 intellectual property 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 and/or in-game microtransactions) 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., ESL One).
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 12 teams in the Overwatch League for US$20m, and subsequently sold eight further teams for a reported US$30 – 60m each, with each team based in a global city, and the teams split into a Pacific division and Atlantic Division, respectively. Activision selectively targeted current owners of major sports teams, who have experience in generating revenue from local and global fanbases, as prospective team owners, including Kroenke Sports & Entertainment (Los Angeles Gladiators) and the Kraft Group (Boston Uprising).
in addition to the “teams” which are sold to third parties, teams exist in the more conventional sense, i.e. as 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 m. 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 intellectual property rights in relation to their players under the player’s contracts. As with traditional sports athletes, esports players have become increasingly attuned 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, 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 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 comfortably the largest streaming platform, averaging in excess of two million concurrent viewers watching its subscription-based content every second over the course of 2020.Online streaming services contract with publishers (whether on an exclusive or non-exclusive basis) for the rights to stream gameplay. Livestreaming 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.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 invested in esports, capitalising on their unique intellectual property 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. In 2020, 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.
Due to the dynamic and idiosyncratic nature of esports, there are a wide variety of monetisation strategies open to esports stakeholders. These include:
Sponsorship is the primary revenue source for many of the key stakeholders mentioned above, totalling US$584m in 2020. This 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. those that created products required to produce or play esports), such as software manufacturers and consumer electronics brands. 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.
Some high-profile sponsorships and collaborations include:
- League of Legends and Mastercard: Mastercard became the first global sponsor of League of Legends in 2018, as well as the exclusive payment services provider for League of Legends esports events.
- Cloud9: North American esports organisation, Cloud9, has partnered with multiple sponsors, including AT&T, BMW, Microsoft, Puma and Red Bull.
- Fnatic and Gucci: British esports organisation, Fnatic, collaborated with luxury brand Gucci in releasing the “Gucci Dive”, a limited edition watch bearing Fnatic’s logo.
- Ninja and Red Bull: professional gamer, Tyler ‘Ninja’ Blevins, has entered into a number of long-term sponsorship and collaboration arrangements with Red Bull, including for the promotion of a new energy drink named after Ninja.
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. Media rights is anticipated to be the fastest growing esports revenue stream, having generated c. US$163m in 2020.
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$90m, representing a higher annual figure than the US$300m 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. In 2020, Activision Blizzard and Google signed a deal worth a reported US$160m, which granted YouTube Gaming the exclusive rights to livestream matches from the Overwatch League, Call of Duty League and Hearthstone Esports over a three-year period.
One advantage streaming services and traditional broadcasters currently have over publishers in negotiating distribution deals is that the esports industry is fragmented, with the intellectual property for each video game belonging to the relevant publisher. Thus, a traditional sports league like the Premier League or NFL can collectively bargain on behalf of all teams within their league, in a way that isn’t applicable in the esports 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. 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.
Issues have also arisen in the context of the enforcement of broadcasting rights, as was demonstrated in 2018 when ESL sought to issue take-down notices to Twitch for hosting the streams of gamers streaming gameplay (overlaid with their own commentary) of ESL’s Dota 2 competition, the broadcast rights to which ESL had exclusively licensed to Facebook. Whilst Twitch removed the offending streams, Valve (the publisher of Dota 2) responded by announcing that ESL were unable to issue take-down notices, as ESL’s licence did not grant ESL rights vis-à-vis the actual gameplay (these rights had been retained by Valve), such that ESL’s copyrights in various elements of the broadcast of the competition were not actually infringed by the gamer’s streams. This incident highlighted the importance of esports stakeholders having a comprehensive understanding of intellectual property rights and being aligned on the approach to enforcement, as well as the importance of clear contractual and practical mechanisms to ensure the smooth exploitation and enforcement of the broadcast.
In the context of esports, ‘publisher fees’ refers to the revenues paid by video game publishers to independent esports event organisers for arranging and hosting esports events. This usually excludes any investments or spending by game publishers on their own events, which are treated as part of publishers’ regular marketing efforts. Global publisher fees continue to climb year-on-year and are estimated to have totalled c. US$109 million in 2020, representing approximately 11% of global esports revenue.
Advertising plays a key role in generating revenue in connection with video games. As explained previously, brand owners may be willing to pay fees to use video games as a platform to market their brand, products and/or services (see Level 7: Marketing, Advertising and Content Ratings).
Esports currently offers a wide array of advertising opportunities for both endemic and non-endemic brands to reach a key demographic. Moreover, 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 publishers to code adverts, or even team sponsorship, into the games themselves. This could be done generically or specifically for esports competitions. Riot Games have led the charge in this respect, displaying in-game digital sponsorship banners (the “Summoner’s Rift Arena Banners”) during League of Legends esports broadcasts. 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.” Riot have also announced that viewers of certain live League of Legends esports broadcasts will be rewarded with Drops” – in-game items and promotions from brand partners.
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 intellectual property 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 predictable and reliable revenue stream that has seen strong growth. Unsurprisingly, the COVID-19 pandemic – which caused a number of high-profile esports tournaments and other events to be postponed, cancelled or held online – resulted in a drop in live audience numbers and a concomitant decrease in merchandise and ticketing revenue (to US$52.5m, a year-on-year reduction of 50%). However, given that online audience engagement with esports has increased over the last 12 months, it’s safe to assume that these revenues will bounce back following a relaxation of restrictions across the globe.
As with traditional sports, esports fans will want to purchase their favourite team or player’s merchandise to show support and feel closer to the experience; the increasing professionalisation of esports, with team kits produced and/or sponsored by major apparel labels, has increased the appeal of such merchandise. Furthermore, apparel can be a key component of an esports team’s broader business model; for esports team, 100 Thieves, in which artist Drake and entrepreneur Scooter Braun are invested, their apparel business line is one of their three primary revenue sources alongside competitive gaming and entertainment / media.
Similarly, fans want to attend live events and tournaments to watch their favourite players / teams battle it out on stage, to meet like-minded fans and experience the atmosphere. The 2017 Intel Extreme Masters, held in Katowice, Poland, attracted over 173,000 live fans to the Spodak Arena over the course of two consecutive weekends. In recent years, purpose-built stadiums have been constructed to host esports events, including:
- the HyperX Esports Arena – the first permanent esports venue on the Las Vegas Strip;
- the Esports Stadium Arlington – a US$10m venue covering 100,000 square feet, which holds 2,500 spectators and boasts a state of the art broadcast studio and an 85 foot long LED wall; and
- the Fusion Arena – a Philadelphia-based US$50m esports and entertainment venue that, once construction is complete, will seat up to 3,500 guests and be the largest purpose-built esports arena in the Western Hemisphere.
The rapid growth of the esports industry, combined with the variety of investment opportunities offered by the esports ecosystem (across a range of subsectors) and the chance to access a key demographic, has piqued the interest of investors. Although venture capital firms have accounted for the majority of investment into the esports industry to date, wealthy individuals and family offices have similarly jumped aboard, with indications that traditional private equity investors are also increasingly willing to enter this space as the industry shows signs of progressive maturation. Investment opportunities have also been offered to the wider public. In October 2020, Guild Esports (backed by David Beckham) completed its flotation on the London Stock Exchange with a market capitalisation of £41.2m. Two months later, Fnatic successfully closed a £2m public crowdfunding round (having initially targeted £1m), supplementing a recent £7.5m venture capital investment.
There is no sign of esports’ expansion slowing down. A report by Goldman Sachs highlights that the industry remains under-monetised relative to its audience potential, whilst a PwC survey of the traditional sports industry revealed that participants consider esports to be the sport with the highest potential to grow revenues globally. The value of the legitimate esports betting market is estimated to have totalled between US$13b and US$17b in 2020, with the illegitimate market likely to be worth many multiples of that figure.
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.
The esports industry is an attractive and exciting market that transcends both sport and technology. There are a wide variety of different opportunities to stakeholders and investors alike. However, as previously noted, there are a variety of multifaceted legal and commercial issues that may arise that require careful consideration. As such, it is critical to obtain appropriate legal advice prior to entering into any esports-related commercial arrangements.