The Future of Esports
Part I: Beyond the Hype
Chinese: 中文 // Japanese: 日本語
By Jonathan Pan
Illustrations by Paul Reinwand
“Is this now their Baron? Yes, it is Riv. Yes it is. TSM waiting for the one team fight once again, and Team Liquid hand it to them on a silver platter. They start up the Baron just because Turtle is bottom. You are not late game yet. This is only 26 minutes in, you can’t burn through this Baron. An AD carry being bottom — OHHHHH MY GOD HE STOLE IT.”
If you understood the play-by-play, you were probably one of the 360,000 fans who watched this game live on YouTube, Twitch, or Azubu. For those of you who have no idea what Baron is, it is an objective in the competitive online multi-player game League of Legends.
League of Legends is one of a handful of video games where teams compete for fame and fortune in organized competitions. This is eSports. According to ESPN, “Resistance is futile: eSports is massive … and growing.” Many companies and investors are going bananas over the effusive and glowing headlines (examples 1, 2, 3). Mark Cuban, the owner of the Dallas Mavericks, has invested. David Stern, ex-NBA Commissioner, has invested. The narrative that helped spur these investments hails eSports as the birth of a new sport. I disagree with that narrative.
As an eSports fan, I want eSports to be successful. And in order for eSports to be successful, the ecosystem needs sustainable businesses and positive returns for investors. Comparing eSports to sports unnecessarily elevates the expectations of investors. The eSports-as-sports narrative started because of the superficial and selective reporting of eSports data. I’ll share three examples (viewership, sponsorship, and prize pools) of how the data has been hyped and what that means for investors. I’ll also argue for why game publishers should view eSports as retention marketing (keeping existing customers) rather than the birth of a sport over the next five years.
A wild disclosure paragraph appears! I used to work at Riot Games, but not in their eSports department. Riot Games is the publisher of one of the most popular eSports games to date, League of Legends. For the past three months, I have been exploring business opportunities in eSports and I’m sharing the information I have collected to inform others interested in entering this space. Specifically, I have spoken to professional eSports players, teams, leagues, game publishers, streaming platforms, YouTube Multi-Channel Networks, talent and sports agencies, advertising agencies, sports consulting firms, and major professional sports leagues in the U.S..
For Investors: eSports Data is Too Hyped
Example #1 (Viewership): “More people watch eSports than watch the World Series or NBA Finals.” (Source)
My Assessment: False.
In this example, the eSport referenced was League of Legends. The statement would be true if it stated, “there were 27 million viewers globally who watched the 2014 League of Legends World Championship online, which was more than the 15.5 million viewers (on average) who watched the five-game NBA Finals series on television in the United States, or the 18 million viewers who watched the clinching Game 5.”
This original statement is a faulty comparison because it compares global digital viewers versus U.S. television viewers. If you want to talk about NBA global viewership, you can’t ignore China, the NBA’s number one international market. While the NBA Finals viewership numbers in China are not disclosed, we can get a sense of the scope by looking at viewership numbers for the Chinese New Year NBA games. In 2013, there were 107 million viewers. In 2014, 116 million. If you add even a fraction of that figure, plus viewers in other international markets, the global viewership for the NBA Finals will almost certainly exceed 27 million viewers.
The more important question to ask is how much are the viewers worth? That depends on the value of the broadcast rights. The NBA’s U.S. broadcast deal is valued at $24 billion over 9 years, according to The New York Times. The NBA’s Chinese digital broadcast deal with Tencent is worth at least $500 million over 5 years. There are no publicly available eSports broadcast rights figures but my sources stated that the largest broadcast deals in eSports are in the low-six figure range.
Example #2 (Sponsorship): “As eSports continues to grow at a record pace, Warman believes it’s just a matter of time before big leagues like the NFL begin worrying about eSports as serious competition to sponsors.” (Source)
My Assessment: False.
Currently, the largest corporate sponsorship for an eSports league is in the low six-figure range annually. The NFL has between 25–30 eight to nine-figure multi-year national-level sponsorships (source: IEG). On an annual basis, NFL sponsorships are estimated to be worth $1.15 billion.
Neither the NFL nor any other major professional sports league needs to worry about eSports being a serious competitor to sponsors anytime soon because the infrastructure in eSports sponsorships doesn’t exist. Let’s look at one brand working with sponsorships in sports (State Farm) versus another brand working with sponsorships in eSports (HTC).
In the business of sports sponsorships, there are properties (leagues, teams, players), rights holders (brands), advertising agencies, and sports agencies (IMG, Octagon) that help rights holders activate their properties and help properties sell their rights to rights holders.
State Farm wants to use NBA stars like Stephen Curry, the point guard for the Golden State Warriors, for their commercials. They would start off by contacting his sports agency, Octagon. Octagon’s job is to find the best and the “right” deals for their clients. Once State Farm secured the commercial rights for the NBA stars they wanted, they used the advertising agency Translation to create the Born to Assist campaign.
HTC, a Taiwanese smartphone maker, wants to use eSports teams for their digital advertising. There is no prominent broker or adviser like Octagon to help HTC explore the options. HTC has to make a deal with team owners directly. Since there isn’t an advertising agency working in the eSports space, HTC has to use the eSports team’s video production resources or contracts out the work to freelance crews.
Example #3 (Prize Pools): “Dota 2 champs will be paid way more than Super Bowl, World Series winners.” (Source)
My Assessment: Selective Metric
The chart below shows that the winning team for the International, the final competition for the game Dota 2, received almost as much money as the 2015 Super Bowl champions. The five members of the Dota 2 winning team, Newbee, shared a portion of the $5,025,029 whereas each participating member (63) of the Super Bowl winning team (the Seattle Seahawks) received $92,000, which adds up to $5,796,000 (Source: CNBC).
Prize pools are often used to compare eSports to other sports but it also highlights the deep gaps in infrastructure of eSports.
$5 million is a lot of money, but what about the people who don’t win? Where is the player’s union, the collective bargaining agreement that provides for player minimum salaries, the draft and revenue sharing mechanisms to maintain parity and competitiveness between teams? The NFL and other sports have all of the above. Dota 2 has none.
VC-backed eSports startups that received Series A funding in 2015 are primarily focused fantasy or betting. eSports is the democratization of competition and fantasy and betting are ways to amplify that. However, these startups have zero to minimal impact on that evolution unless they pivot before their Series B round.
If you are an investor that is looking to invest in eSports, I recommend investing in ways that amplify the competition aspect of eSports.
For Publishers: Treat eSports as Retention Marketing
“Develop a 3 year road map and business plan which transitions our eSports program from cost center to profit generator.”
That is a goal taken from the job description for the Director of North America eSports position at Electronic Arts, a video game publisher. Compare this to the Director, Global eSports position at Blizzard Entertainment (also a publisher), which is looking for candidates who can, “work within budget while still producing epic experiences for the players of our games.”
Electronic Art’s goal of turning eSports into a profit generator is just not going to work in that timeframe. I estimate that it costs $40–55M to run a “full stack” eSports department. That sounds like a lot of money but it isn’t when you consider all the costs involved: league operations, broadcast capabilities, player management, event management, and more. And that doesn’t even account for team expenses, which are partially supported by sponsors.
How can you generate revenue from eSports as a game publisher? Broadcast rights, sponsorships, merchandise, ticket sales, food and beverage (F&B) at live events, and in-game purchases related to eSports. I already covered the state of broadcast right and sponsorships above. To be generous, let’s assume one million dollars annually. Publishers are unlikely to make $40+ million in merchandise, ticket sales, and F&B. However, if the revenue from in-game purchases related to eSports is allocated under the P&L of the eSports department rather than the business unit responsible for the content/product/service, breakeven is possible.
Another major problem with eSports being a profit generator is the lack of local revenues. The global and online nature of eSports has hindered the establishment of local teams, and with that the local revenue that sports depends on. As an example, the Green Bay Packers recently reported $149.2 million in local revenue, which accounts for ~40% of total revenue ($375.7 million, source). While a public breakdown of local revenue isn’t available, as a comparison, parking and F&B accounts for approximately one-third of revenue for a publicly-traded live events company.
If you view eSports as a profit generator in the next five years, it may breakeven at best. But when you consider eSports as retention marketing, it looks much better. Some games with eSports components are already billion dollar brands and franchises. Billion dollar brands, in games or not, typically allocate 10% of gross revenue to marketing. For a billion dollar brand, one can segment that $100 million by medium: (tv, print, digital, live events) or by customer base: (new or existing). Many consider eSports retention marketing because the games are so complex that brand new spectators can’t figure it out just by watching it, as you can with a sport like soccer.
According to data released last year, 58% of Twitch users spent almost three hours per day (20 hours per week) watching videos on its site. Not all of those users are watching eSports but if you logged into Twitch every day for a week, you will see that the top games have an eSports component: League of Legends, Dota 2, CS:GO, and Hearthstone. Spending $40-$55 million for a billion dollar brand to have your customers potentially watch up to three hours per day of your game in addition to playing it and spending money on it is huge. According to the Bureau of Labor Statistics, the average American spends 5.2–6 hours per day on leisure activities.
eSports is a great way for game publishers to monopolize that share of leisure time.
Conclusion
The growth of eSports is undeniable and is a great thing for gamers. eSports needs infrastructure investments from investors and sustainable business models for game publishers to evolve into the next level.
For investors, I recommend looking at startups that are helping build out the infrastructure of eSports (how to increase average player career length, ad-tech for eSports sponsorships, etc.) rather than monetizing the fanbase directly. Partnering with game publishers or buying ownership stakes in eSports teams are great options to consider.
For game publishers, I recommend putting the brakes on the eSports-as-sports narrative and consider eSports as retention marketing in the next five years. There is a lot of infrastructure to be built and no one is in a better position than the game publishers to build it. eSports departments might be in the red or barely breakeven, but that is a worthy price to pay to earn the customer’s media consumption.
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