It’s time for esports 2.0

Esports is the RAGE. Everyone is looking to cash in on the billion dollar industry connecting video game competition to the multi-billion dollar video game industry. As a result, the esports vertical has exploded with every major media group in the world lining up to figure out who is going to win the land grab as the space matures.

Gaming: The Space

Gaming is MASSIVE. And it’s not a passive enterprise. Audiences are playing more and more games and esports is growing along with that trend. In an interview with Netflix CEO Reed Hastings, he commented that Fortnite, the massive battle royale game produced by Epic Games was more of a threat than TimeWarner’s HBO. Not sure if he feels differently about Disney+, but you get the point. YouTube had an outage back in October and the Netflix viewership and sign-ups spiked in that window. Wikipedia has a page on the “Highest grossing media franchises” in history. It may or may not surprise you to know that the number one most valuable franchise in the world is Pokémon, which is primarily a video and card game at a $95 billion dollar value. For those keeping score at home, Mario is #9 at $35 billion narrowly beating out the Marvel Universe ($35b) and Harry Potter ($32b).

If you have been living under a rock for the last few years, welcome to the world where video games are the most dominant force in media.

Esports –Good

With so many people playing these games and investing their leisure time, it makes some sense that they would also consume content this way. Esports is HUGE. Both the audience and the revenues are growing quickly.

Wharton has a magazine cover that declares “The Billion-Dollar Business of E-Sports”. Goldman Sachs has a division that focuses exclusively on the space and ESPN has invested everything from specific content on their channel to the space to holding their own esports events to signing a huge deal with Activision to land the rights to broadcast Overwatch league events. Traditional sports team owners and players have lined up to invest and own esports teams. Everyone wants a piece of the pie.

Esports — Bad

With all of this hype, top end esports teams have driven HUGE valuations for their organizations. Publicly, C9 has raised $50m in a series B. TSM raised $37m in series A (wut?) and Team Liquid, a team I used to work for, raised $25m for its parent company aXiomatic. They then entered into a partnership with Marvel to bring the MCU world to the esports community.

These teams represent the cream of the crop so it makes sense that they would have strong valuations, but it’s a tough world in esports. It’s not because the money or the audience isn’t there. On the contrary, it’s the strongest media arm that exists today. The problem lies in the esports MODEL for revenue generation. The revenues of these teams do not support the valuations they have received. Esports teams make money lots of ways. Prize winnings, payments from publishers, sponsorships, merchandising, ticketing and media rights for television. Let’s break those down;

• Prize winnings are a bit of a mirage. When teams win tournaments, they win money from the publisher and sponsors of the event. However, most of this money is a dollar bill in the front door and $0.90 (or worse) out the back. Tfue, one of the biggest and best streamers of Fortnite, warned players from working with a team that takes any cut at all (see below). The reality is that the players and the community believe that most of this money should go to the players and if any significant amount doesn’t, you get real problems. Click here to see Tfue Comments
• Payments from Publishers are tough as well because you rely on the publisher to provide opportunities to generate revenue here. Publishers can make skins, items and champions that are all branded for a team. Charge a little extra and ask their audience to support the team by buying the item. And it works. The problem is, the publishers mostly prefer to make that monetization fuel a prize pool, like in the case of Dota 2. And why wouldn’t they? By crowdfunding the esports events, they reward the best players and get a marketing bump to boot. At the end of the day, the publisher owns the IP, a point I will talk about later in the article.
• In traditional sports, Ticketing or gate revenue is shared between the two teams competing. In esports, you share the gate revenue with ALL of the teams that are there, but in addition to that, you share half of the revenue with the publisher of the game, a cut that doesn’t exist in traditional sports. Its also worth noting that revenue for ticketing has been going down as a percentage of revenue in the NFL for the last decade. According to Investopia, only 8% of revenue comes from ticket sales.
• Merchandise is a big part of traditional sports, accounting for about 20% of revenue (via a PriceWaterhouseCoopers report looking at all sports). However, merchandising is about distribution and about the maturity of the product. This will be a big part of how esports teams monetize someday, but it isn’t today.
• Sponsorships are the primary way that teams make money. In my estimation, anywhere from 80–90% of revenue from large esports teams is through sponsorship revenue. This is incredibly problematic because of the eco-system. The graph below shows how everyone makes money in esports, including the publisher. Teams are even more heavily skewed toward the sponsorship model.

What really is esports?

Esports content creators exist in one of two places. Either they are content creators on Twitch or YouTube and spend all of their time marketing themselves there (Tfue, Ninja, Shroud, DrDisrespect as examples) or they are top competitive players on esports teams and they spend all of their time focusing on being the best player and teammate they can be. Top streamers like NickMercs and Ninja are huge content creators and both didn’t qualify for the Fortnite cup final. DrDisrespect and Summit1g didn’t even bother trying to qualify and Tfue is the only big streamer who even placed at the Fortnite Cup solo event (he finished #67). Here is a Forbes article that stated that, at least initially, none of the top 10 streamers made the cut.

The problem is that you can scrim against top players and hone your craft…. or you can 360 no-scope noobs and play games with only a shotgun for entertainment value. But its really hard to do both. Ninja is an outstanding professional esports athlete. He used to be on Team Liquid’s Halo team back in the day. Its not like he couldn’t be a top 100 player of Fortnite. It just doesn’t pay as well as his current day job.

So what does this all mean? Who cares if the best streamers are the biggest? Well, esports teams are running the esports 1.0 hype train telling people they want to be the best in their game, but unlike regular sports, that isn’t how you get the biggest audience. Remember that the New England Patriots don’t CARE about actually winning. Its a means to an end, which is the biggest and most valuable audience in the world. That’s how you do it in traditional sports. Always follow the money.

So what do teams find a way to owning the audience? Through their players? Tfue was a member of FaZe Clan and at some point, he decided he didn’t want a team between him and his sponsors. So he publicly divorced the team and sued to get out of his contract. As a result, FaZe clan went from being the #2 team for minutes watched on Twitch (700m+/mo) to the #9 team on Twitch (sub 300m/mo). An astounding 60% drop.

So to be clear, the teams don’t own the audience, the IP or even their reach. This causes HUGE problems in monetization moving forward.

Media Rights are where the money is at. Any look at traditional sports revenue trends will tell you that this portion of the revenue is trending up. The problem you are going to have here leads to the biggest issue esports has right now. The media rights can only be signed by the company that owns the intellectual property of the league. That means that, unlike traditional sports, where the league is collectively owned by the teams, it’s the publishers who decide what deals to sign and what the rules of these deals are. So, in addition to the fact that there is another organization cut in on these deals (likely 50/50), you have to ask yourself what deal the publishers will actually make.

Blizzard doesn’t have a financial incentive to make the esports teams worth a lot of money. In fact, it makes no sense to them that the value of the brand should be locked up in teams they have no stake in, who play other games and who engage in other revenue models. When Overwatch signed their first television deal, there was a split created with the teams that participate. The figure isn’t public and I have no direct knowledge of the actual number, so Ill refrain from passing on hearsay in the article. But its safe to say that the teams have a financial interest in the profit of the league.

The problem here is that the league is owned by Blizzard and they can flow whatever expenses they want through the league. They can decide if the league makes money or loses money. This is similar to the old Hollywood dodge that the movie studios have done. They cant afford an actors rate, they get them to agree on some kind of backend on profit and then they flow expenses through the project until it makes no money. Is Blizzard doing that? At this point, its really hard to say, but that doesn’t change the fact that they CAN do it and precedent from other industries where this has happened say that the temptation to do so will be strong.

What I can tell you is that Overwatch decided to squeeze their shoutcaster talent to take 30% pay cuts for the next year and there was a mass exodus from the position. The problem here is that Overwatch, as an esport, is actually tough to watch, even if you know the game. The action moves fast and the shoutcasters are CRITICAL to making sure the audience understands what is happening. I bring this up not to criticize Blizzard, but to point out that the teams had no say in this. Unlike traditional sports, ESPN had no say in this. Usually broadcasters are paid for by the media arm broadcasting the event. This is another way in which the publisher is pulling strings on the ecosystem.

My point here ISN’T that this is wrong. The reality of the situation is that I can’t see a world where this goes around the publisher. They developed the IP and have a right to protect it, create the ecosystem and manage it. In fact, large publishers have been burned badly NOT protecting their IP (but lets leave that for another article). That leaves teams trying to find their way in an immature ecosystem, having taken on tens of millions of dollars in investment and trying to find ROI.

The Ecosystem

Traditional sports has two groups of people who make money. The company that owns the audience (ESPN, Fox Sports, Comcast, etc.) and the people who own the IP or the league (in the case of traditional sports, that’s the teams).

Esports teams are never going to own the IP, so the strategy will be to target the audience. This makes sense since in traditional sports, Tom Brady doesn’t own his audience like a Ninja or a Tfue does. They don’t tune in 4 times a week to watch him smash scrubs. Esports can do that and in fact has done so successfully.

The best game launch in history doesn’t belong to Fortnite. It actually belongs to a competitor, Apex Legends. Apex devised a launch strategy that targeted the larger streamers on Twitch and it hit 1 million players in 8 hours. 10 million was hit in three days and 25 million players logged in after the first week. It made it to 50 million in about a month. Comparing that to Fortnite, it was about 125 days before they hit 50 million players. And while Apex hasn’t kept up with Fortnite thereafter, you can’t argue with the launch campaign.

As another data point, Tfue spoke about his monetization and mentioned that the 40–50k he makes from Twitch on Subscriptions was not his largest revenue stream. Rather it was the Fortnite Support-a-Creator program that pays him 5% of Vbucks purchased in Fortnite that was his larger earner (he declined to mention how much he made).

Regardless, the point here is simple. The future of revenue for large streamers and esports teams is about the ability to own the audience. When you have a launch like Apex Legends, it becomes apparent that any game launch or content patch needs to incorporate an esports or large influencer strategy. And that is the point. Esports 1.0 is a ridiculous notion that treating esports like traditional sports is the way to the promised land. We even assigned cities to Overwatch teams (ugh) in an attempt to copy the traditional sports model. It won’t work. Esports brands are global and build audiences based on entirely different models than traditional sports.

It’s time for Esports 2.0. Where teams use technology and marketing to own their audience in a way that media companies have never done. There is NO question that esports has unbelievable potential. The audience is massive and growing. The dollars are flowing like crazy but the model is completely broken. We need to get the teams pointed in the right direction so they can take esports to heights we haven’t even dreamed of yet.