By Anastacia Gordon, MBA Summer Associate
Interest in eSports has exploded over the past few years. The Supreme Court’s recent ruling to overturn a national ban on sports betting, however, has only just opened up opportunities to bring betting to eSports games, players, and leagues.
I decided to spend part of my three-month MBA summer internship at Lerer Hippeau doing a deep dive on the industry to discover what investors should know about the nascent category. Growing up, I loved playing video games (anything from Pokémon to Zelda) and this project allowed me to see the sector in a new light, while reliving those fond childhood memories.
I set out to define the current size and state of the eSports betting and gambling market. In my research, I explored the risk factors limiting it, the growth factors promoting it, as well as potential areas of investment for VCs seeking opportunities in the space. Here’s what I found.
eSports Market: Size and Scope
eSports (also called competitive gaming) is an emerging genre of entertainment where professional gamers play video games against each other on computers or consoles in front of a live or online audience. First-person shooter and multiplayer online battle arena games are the most popular, accounting for almost 75% of eSports tournaments. Several stakeholders exist within the eSports ecosystem (including fans and sponsors), but publishers reign supreme as the owners and creators of the video games that make the eSports ecosystem go ‘round.
The global eSports market has been growing at a 32.6% CAGR since 2012, with North America and China leading the charge. Global revenue is expected to top $900 million by the end of this year and exceed $1.6 billion by 2021. Growth of the eSports audience isn’t far behind, nearing almost 400 million viewers and projected to reach half a billion by 2021. Over 75% of eSports enthusiasts are males and almost half of that group fall between the ages of twenty-one and thirty-five years old — a notoriously difficult demographic for brands to reach. This fact explains why sponsorship fees paid to teams and organizers will account for the largest share (40%) of this year’s total annual revenue.
eSports Betting: Overview
Since the beginning of time, betting and gambling cultures have naturally emerged around spectator sports — and eSports is no different. Total eSports wagers will reach $7 billion globally by the end of the year and almost double by 2020. Though U.S. legislation has historically kept sports betting at bay nationally, recent legislative changes have created new opportunities for the eSports betting market.
Last May, the Supreme Court struck down the Professional and Amateur Sports Protection Act (PASPA), which previously outlawed sports betting nationwide since 1992. The ruling allows states to regulate sports betting on their own. Four states have now completely legalized sports betting on the back of this legislation: Nevada, Delaware, New Jersey, and Mississippi. The trend is expected to continue, creating a domino effect, as additional states evaluate their course of action.
eSports betting falls into two main categories: cash betting and skin betting. “Skins” are virtual items used within video games to change the look of a player’s weapon, equipment, or avatar. Players trade skins via betting sites and use them as virtual casino tokens. While skin betting has been the most popular of the two, recent controversies and legal challenges have put downward pressure on the skin betting market, paving the way for cash betting to emerge.
Players using cash tend to place bets in three types of games: eSportsbook, Fantasy eSports and Head-to-Head.
- eSportsbook betting is similar to traditional sports betting where players bet cash on the outcome of eSports matches.
- Fantasy eSports resembles traditional fantasy betting.
- Head-to-Head refers to players betting on the outcomes of the eSports matches they play against others.
eSportsbook betting is by far the most popular of the three, accounting for almost half of skin betting and over 90% of cash betting. These dynamics will shift towards Fantasy eSports and Head-to-Head as the market matures.
Risks and Obstacles
Aside from legislation, two factors threaten the growth of eSports betting: access to player performance data and match integrity. eSports bookmakers require better access to more accurate tournament and player data, as well as a common standard of collection across games in order to set odds for gamblers and correctly price risk. On top of that, a betting ecosystem should be free from cheating, whether that means doping, match-fixing, online attacks that slow or disable opponents, or software cheat codes.
Momentum and Drivers
On the flip side, continued growth as a spectator sport means growth as a betting category. National recognition as a sport creates awareness and a pipeline of competitive talent. The past few years have seen an increase in the number of tournaments (4,058 in 2017), and the number of dedicated venues for hosting them.
Prize pools have also grown significantly, with the largest tournament prize pool in 2017 reaching nearly $25 million. High schools and colleges across the country are creating teams and leagues for their students to compete. Some even offer scholarships to the most gifted players. Furthermore, the International Olympic Committee is considering including eSports as an Olympic event in 2024.
Venture capital firms have noticed this activity and are investing in the space at increasingly rapid rates. Venture investment in U.S.-based eSports startups surged by roughly 1,125% over the past five years, putting nearly $160 million to work across roughly 40 deals in 2017 alone. With very few major eSports bookmakers, the larger gambling category holds the most opportunities for growth in the U.S.
Such opportunities to support the eSports gambling ecosystem include:
- Real Estate: eSports tournaments require a curated environment for players and fans alike. As the sport continues to grow in viewership, event hosts will require dedicated spaces to maximize both the player and fan experience, whether that looks like new arenas or eSports cafés.
- Analytics and Performance Measurement Tools:
— Coaching/Training — Players need the ability to evaluate and improve their game play using data and standardized metrics. Data could range from game-play to biometric.
— eSports Bookmaking — eSports bookmakers need access to similar data in order to compile statistics used to accurately set odds and make match predictions that facilitate gambling in real time.
- Video Production Software: Better visualization during match play means increased fan engagement.
- Cheating Detection Software: Cheating poses a major threat to a healthy eSports ecosystem and especially an active betting culture. Players, fans, tournament hosts, and sponsors all stand to benefit from software that improves the integrity of the competition.