The Esports Reckoning

By Bryce Blum · Mon, Jan 29, 2024 10:41 PM

The Esports Reckoning

By Bryce Blum, Avi Bhuiyan and Jake Lyon

Introduction

By Bryce Blum & Avi Bhuiyan

It’s no secret that the esports industry has come upon hard times. As layoffs have rolled across the industry and underlying economic problems have come to the fore, many fans have been left wondering what is happening, how bad this is going to get, and even whether esports as we know it will survive. There's been a ton of public conversation around these questions, but Twitter isn't designed for nuance and we feel that a good faith explanation of what's going on in the industry and analysis of how to move forward requires diving deep.

This series of essays is a labor of love by friends who’ve spent much of their careers working in the games industry alongside publishers, live streaming platforms, professional players, esports organizations, tournament organizers, and non-endemics like brands and professional sports teams.

While we have some meaningful differences in opinion, we hope our takes collectively can create a shared framework for future conversations and business-building. We also aim to socialize learnings we’ve personally developed through experience, as well as others that are more commonly-held but whispered about behind closed doors rather than stated frankly in public.

The first step to solving any problem is recognizing it exists. These essays extensively diagnose the existing structural challenges and execution failures that have prevented various esports stakeholders from realizing their full potential, particularly with respect to monetization. We also take on the much trickier task of proposing constructive strategies for moving past the various problems identified, though solving these problems will neither be easy nor quickly handled. The industry needs to experiment, iterate, and evolve. That can’t happen within a series of essays–as such, we suggest which trees are worth barking up and which are not, instead of drilling down to provide concrete, detailed plans.

Achieving our goals requires us to speak some hard truths. We’re not interested in dunking or criticism for its own sake and aim to be both fair and respectful, but are well aware that some of our commentary may ruffle feathers.

That isn’t ideal, but it is the only way that we can establish a common framework that will help the industry to adapt and ultimately create a stronger, more sustainable esports ecosystem. We also want to help non-endemics educate themselves about the dynamics of the space in order to enable them to find opportunities in our evolving industry that align with their business interests.

We love esports and want nothing more than the industry to grow and thrive. It is our sincere hope that these essays will jumpstart a conversation and ultimately drive action to ensure we do just that.

The Dawning of the Modern Era

By Bryce Blum

In order to understand what is happening in the esports industry right now and where things go from here, we need to set the stage.¹

When the history of esports is written, we’ll refer to 2012-2014 as the dawning of the modern era of Western esports.

The concept of playing video games competitively for a living became a reality in the 1990s, though it was niche to say the least. Esports began as a hobbyist subculture then slowly but surely transitioned into a marketing engine for the games industry. Beginning around 2013, that marketing engine transformed into a standalone, independently monetized set of spectator sports. Marketing was still a big part of the equation, but the industry had grown to a point where direct monetization of an esport showed real promise.

In 2011, this is what the worlds championships looked like in some of the biggest games (League of Legends and Dota 2):

Three years later, they looked like this:

There are many reasons why this transition occurred between 2012-2014, and reasonable minds can disagree on which are the most important.² It’s impossible to encapsulate them all in a short oral history, but it’s worth outlining a few in more detail.

Riot Games

During this same period, Riot Games, a Los Angeles-based game studio founded by two hardcore gamers with high conviction in gaming trends in Asia, fully embraced esports as part of its core strategy for engagement with its flagship title, League of Legends.

After experimenting with a tournament-centric model for a few years, Riot launched multiple full-time esports leagues around the world, including the League Championship Series in North America and Europe, in January 2013. These leagues included minimum stipends for player salaries to ensure its pro players could focus on the game full-time.³ Nine months later, it took less than an hour for Riot to sell out one of North America’s most famous sporting venues, the Staples Center, for its World Championship.⁴ It also inked a global sponsorship deal with Coca-Cola⁵ and began to more meaningfully commercialize its esports product.

Notably, Riot’s decision to heavily invest in a publisher-run esports ecosystem where it played an extremely active role in governance, product development, and monetization stood in stark contrast to the way in which other publishers handled the most popular esports before the rise of League of Legends, such as Valve’s Dota 2 and Counter-Strike, Nintendo’s Super Smash Bros., and Blizzard’s Starcraft. There are no public numbers on how much money Riot was burning on live event infrastructure and salaries for esports staff in 2013 to fund its esports ambitions, but it certainly eclipsed the revenue of ticket sales from selling out Staples and its sponsors for that year.

Twitch

Twitch launched in 2011 as an offshoot of the YC-backed lifecasting platform Justin.tv and quickly became the primary hub for live-streamed gaming content in the West. Twitch’s growth was explosive in its earliest days, particularly in 2013 when the number of unique viewers, viewed minutes, and broadcasters on Twitch all more than doubled.⁶ Twitch was originally intended to be a vertical underneath the more all-purpose Justin.tv, but gaming content dominated the platform to such a degree that Justin.tv shuttered its other services and transitioned its full focus (and company name) to Twitch by early 2014.⁷

As Twitch’s vice president of marketing Matthew DiPietro put it, "When video game historians look back on gaming a decade from now, 2013 will be the year they cite as the tipping point of streaming. Every major event, publisher, developer, and media outlet in the gaming industry had a presence on Twitch, and streaming became an ever-present piece of the gaming experience."⁸

Viewed in this light, it’s pretty easy to understand why Twitch was acquired by Amazon in August 2014 for roughly $1 Billion–the largest acquisition in the history of Amazon at the time.⁹

Valve

Counter-Strike: Global Offensive, which has remained one of the three largest esports for the past decade, was released in 2012. A year later, Valve effectively launched a second era of Counter-Strike esports by getting directly involved in the esports ecosystem and investing in Major championships.¹⁰ This effort included a pivotal shift in Valve’s thinking, offering revenue sharing: “A portion of all sales from the eSports Weapon Case will be redirected to fund prize purses at upcoming CS:GO eSport events worldwide.”

In this same timeframe, Valve began organizing a single esports event annually–a world championship event for its other popular esports title, Dota 2, called The International. The first International occurred at Gamescom 2011 with a prize pool of $1.6 million.¹¹ Two years later, Valve began selling a Battle Pass where 25% of the sales contributed to the prize pool. By 2014, the prize pool of the International surpassed $10 million. ¹²

Valve’s approach of subsidizing esports competition with in-game revenue despite having no interest in running its esports ecosystems in-house created a vacuum which allowed for many different types of independent esports businesses to grow.

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These were wild times.¹³ Esports had garnered mainstream attention before (e.g. Championship Gaming Series),¹⁴ but this was the first time that a game publisher had made such a heavy and long-term commitment to a competitive ecosystem. Esports needed to professionalize, and quickly. It was time to overhaul expectations for all of the key stakeholders–publishers, distribution platforms, competition organizers, teams, and players.

This started at the most basic level. From my extensive personal experience speaking with non-endemics (e.g. outside investors, brands that operate outside the gaming space, etc.) at the time, the stereotype of the overweight, cheeto-dusted, basement-dwelling gamer was still very much a part of cultural zeitgeist. Esports needed to kill that stereotype in order to be taken seriously by those non-endemics, which was a necessary condition to the type of growth industry insiders envisioned.

The industry did that brick by brick. A few notable examples of this include the implementation of more formal training regimens, an increase in the quality and quantity of support staff, and broad-based adoption of the gaming house model.¹⁵ Player contracts and sponsorships transitioned from handshake deals or one-pagers into actual agreements.

The esports OGs–the folks who had been in the space for years when there was practically no money to be made–felt the shift. Their hobbies could become businesses. But that opportunity was equally clear to outsiders paying keen attention to the space.

The writing was on the wall that outside investment was about to explode, but not everyone noticed, and not everyone who could read it was interested. As the opportunity crystallized for those who were able and willing to see it, the dollars started to pour in. Now that esports had “arrived”, monetization was not only sure to follow, it would explode. The way people thought about and talked about esports shifted dramatically. The modern era of esports had begun. It was now time to start building the businesses that would attempt to deliver on the promise of this burgeoning industry.

What happened next is the subject of this series of essays.

The Esports Winter

By Bryce Blum

The esports industry is going through some rough times. In the past six months, dozens of esports-related companies have undergone massive layoffs. Most of the biggest teams and leagues are struggling. Engagement is down, and so is monetization. Many investors are getting burned, and some will never come back. Same with many of the hardworking, talented people that helped build some of the best companies in the space. Colloquially, this is becoming known as the “esports winter”.

This essay series makes frequent use of the word esports because it’s a useful umbrella term to refer to the entire industry, but it’s important to recognize that esports is not a monolith. Esports refers to a broad-based, highly diversified group of businesses and individuals that operate across different aspects of the industry and within the confines of different games. We don’t analyze the business of sport as a whole, as if the sins of baseball (being boring) can be held against basketball. We shouldn’t do the same for esports.

When this project began, I set out to encapsulate every cause of the esports winter into a single piece. My attempts to do that failed for reasons that have become obvious in hindsight—the esports winter is far too complex for hot takes or half measured analysis.

In order to understand how the industry set itself on this path, the challenges it faces now that the esports winter has come, and where the industry goes from here, the different aspects of the ecosystem must be analyzed independently. This is a conversation that requires all the nuance it can get. It also needs expertise on a wide array of interrelated topics, such that no single industry stakeholder can possibly tell the whole story.

This essay series is our attempt to discuss many of the biggest variables, though undoubtedly others are worth considering as well. This essay is my attempt to tie all of it together in order to better understand the current state of the industry without rehashing all of the topics that are covered at length in the other essays in this series.

Understanding the esports winter is necessary to ultimately get through it. When the dust settles, the esports ecosystem will be infinitely better situated for sustainable, long-term growth. The problem was never the underlying thesis that a real business can be built around competitive gaming; the problem was the approach to building those businesses undertaken over the past decade and the bad expectations many industry stakeholders set surrounding when and how those businesses would reach scale.

The Esports Gold Rush

Before the winter, there was a summer.

Buoyed by a massive esports hype train, general economic growth, and easy access to capital (e.g. low interest rates), a veritable gold rush of esports investments occurred between 2015-2018. During this period, esports-related properties were some of the hottest investments in the world. According to Deloitte, the number of esports investments grew from 4 in 2014 to 68 in 2018.¹⁶ Nearly $4.5 billion was invested in esports in 2018 alone. ¹⁷

Esports businesses were flush with cash, but that cash came with strings attached. Investors demand returns. Though those demands vary by investor and certain types of investors were willing to play the long game, essentially every investor expected to see significant growth in the short run.

As the saying goes, you have to spend money to make money. The complexities of a business running numerous business lines and revenue strategies required additional headcount and hands on deck to accomplish the goal. As such, esports businesses started hiring like crazy to build whatever it is they sold.

Thousands of esports fans found their way into business roles for the first time in their lives. Problematic veterans in the space received opportunity after opportunity, despite their failures, because esports expertise was hard to come by. Startups routinely built out the type of high-tech, high-perk offices that were becoming commonplace throughout Silicon Valley. In short, esports transitioned from a mom and pop niche hobby culture to big business virtually overnight.

All of this is true for esports teams as well, though there was another layer to the problem: player salaries. As more and more teams received a massive influx of capital, all of them felt the pressure to win. Whether an established powerhouse or an up-and-comer, winning was seen as the primary tool for growing a team’s fan base and in turn its monetization prospects. Winning required signing the best players, so the best (and most popular) players often found themselves in the driver’s seat when it came time to negotiate their new contracts. While revenues were growing steadily during this time, for many organizations flush with venture funding the calculations around player salaries were decoupled from revenue generation; it became more about winning ruinously expensive recruiting wars to impress fans, publishers, and investors in the short term, which impacted the market for everyone.

During this period, it was not uncommon for five or more teams to engage in a frenzied bidding war for a player. This was virtually unheard of prior to 2016.

While esports salary information isn’t generally publicly available, North America’s largest League of Legends league (the LCS) has disclosed average player salaries throughout its recent history. From 2017 to 2019, the average LCS salary ballooned from $107,000 to $300,000.¹⁸ This further increased to more than $410,000 in 2021.¹⁹ Though not every esport has seen this level of growth, the trajectory of massively increased player salaries is an industry-wide phenomenon.

Of course, rising costs aren’t unusual for growing businesses. They’re also not inherently problematic. If costs rise by 10x but revenues grow 20x, no one is going to worry about mounting expenses.

The problem for many of these businesses is that (1) the addressable market was still far too small to rapidly scale revenues, (2) the business models too often mimicked traditional sports businesses and failed to account for unique challenges in the esports space, and (3) core stakeholders often failed to execute at the level required to find success. As a result, most esports-related businesses struggled to reach profitability and fell far short of generating the returns investors needed to deem their investments a success.

As mentioned at the outset, this essay will not attempt to rehash each of these topics, as they are extensively fleshed out throughout this series of essays. With that said, one topic that hasn’t been covered in another essay and is a crucial piece of the puzzle surrounds the misalignment between investors and stakeholders surrounding the short-term growth trajectory of the industry.

Setting Bad Expectations

The prevailing sales narrative throughout the esports gold rush was that the industry was poised for explosive, immediate growth, both in terms of the number of fans and the monetization of those fans. The future that was promised is still very much on the table, but the time horizon for that future was drastically overstated.

Neither fandom nor monetization was going to grow exponentially in the short term. Sure, the industry had some short-term catching up to do. Esports rapidly leveled up its infrastructure in a manner that supported increased engagement and fandom during the transition to the modern era of esports. There are lots of people out there like me who grew up as passionate sports fans and/or gamers and later adopted esports fandom in their teens, 20s, and 30s²⁰ in large part thanks to this transition. But once stakeholders grabbed that low hanging fruit–which largely occurred before the esports gold rush (2015-2018)–growth throughout esports was never going to be exponential in nature.²¹

This matters for our discussion because it helps give a sense of the addressable esports market in any given period of time. I often joke that every day a baseball fan dies and two esports fans are born. It’s hyperbolic, but you get the idea. Traditional sports such as baseball and football face serious headwinds related to their aging demographics. Esports have the opposite problem. Our core audience is so young that only 2% is over 50.²² We need time to grow up. Literally.

Put differently, everyone alive today had the opportunity to become a soccer fan, no matter where or when they were born. That doesn't mean everyone will be a soccer fan, but it's hypothetically possible. The same can't be said for any esport today, but in 50 years when the oldest people alive were part of the gaming generation and virtually the entire world population grew up with exposure and access to video games that will change. The most popular sports in the world will be soccer and a video game. We don’t know what that game will be–it likely doesn’t exist yet. But a massively popular esport has the potential to reach the global ubiquity of soccer, something that isn’t true for any other traditional sport.}

When you put this puzzle together, it becomes clear that every passing year creates more potential for the esports industry. Esports are nowhere near their peak market cap. This should’ve been the sales pitch.

It’s a compelling narrative, and an honest one. It’s also very different from virtually every pitch deck that came across my desk between 2016-2018. And it wasn’t just the pitch decks.

While there were a lot of good faith actors who were simply optimistic on timeline, many startup founders, team owners, game publishers, and other stakeholders throughout the industry drove a hype train they knew to be misleading.

They showed sold out stadium images, but failed to provide context that across all game titles fewer than twenty stadiums were being sold out annually worldwide. They pushed factually incorrect headlines from theoretically reputable publications such as ESPN and CNBC stating that “'League of Legends' ratings top NBA Finals, World Series clinchers”²³ or “This esports giant draws in more viewers than the Super Bowl, and it’s expected to get even bigger”,²⁴ even though they knew that comparing Nielsen Ratings to the total unique viewers of a broadcast isn’t so much an apples to oranges comparison as it is apples to lug wrenches. They used aggregated data surrounding the size and scope of the entire esports industry to pitch something that would exist within a much smaller subset of the ecosystem because the audience wasn’t sophisticated enough to tell the difference. These are just some of the many sins committed during this period of time.

On the other side of the table, some investors made disciplined bets in the interest of learning or had strong conviction driven by informed optimism, while others were motivated by a fear of missing out on a gold rush. The latter group didn’t do the legwork to develop a nuanced viewpoint on the industry or distinguish between gold and garbage before deploying capital, exacerbating the issue. If we want to keep it real, it’s also fair to say many early investors were incentivized to be every bit as misleading as bad faith esports endemics when the time came to attract new investors in later rounds.

The end result was a highly exaggerated narrative about the immediate future of esports that was not supported by the data or realities of the ecosystem. Fan growth would come, but that growth would be steady, not explosive. Monetization growth would also be limited, both because of the slower-than-anticipated fan acquisition and because business models needed time to evolve in order to be optimized for the nature of the esports industry, which is quite different from traditional sports in several important ways.²⁵

The Esports Winter

The esports winter is chickens coming home to roost. If an investor is sold on a dream and isn’t remotely on track to be realized, it’s going to be hard to convince them (or any other rational actor) to continue pouring money into the project. You have to spend money to make money, but you certainly don’t throw good money after bad. If costs increase far beyond potential revenue generation, it’s impossible to make that business work.

It’s also worth noting that much of this has been exacerbated by broader economic dynamics that have nothing to do with esports. The global economy is struggling; we’re heading for our first recession in 15 years, if we’re not there already. Layoffs are hitting a wide array of industries, especially tech.²⁶ These worsening economic conditions reduce appetite for riskier investments. Coupled with rapidly rising inflation, it’s not surprising that venture capital investment plummeted.²⁷

Some esports businesses were always doomed to fail, but that’s true of any emerging industry. There are plenty of reasons why this may happen: poor management, bad strategy, failure to execute, culture issues, bad luck, etc. Such failures say nothing about esports as an underlying investment opportunity. The fact that AltaVista failed didn’t mean search engines were bad business–Google seems to be doing ok.

More esports businesses are going to fold or reduce in scale because they shot themselves in the foot. They underestimated the costs of creating direct to consumer commercialization. They overestimated the commercialization of the assets they built, expecting faster returns when they have longer gestation periods. They raised from investors with expectations that fundamentally misaligned with the growth trajectory of the industry. They modeled their businesses 1:1 after traditional sports counterparts when they needed to innovate. Such failures, while more esports-specific in nature, don’t necessarily mean there is no underlying investment opportunity.

Viewed in this light, one thing becomes clear: this is a market correction, not an extinction event. What comes next may not look identical (or in some cases, even close) to what came before, but this is a chapter ending, not the epilogue. That said, it’s going to take time to play out.

The underlying thesis that people want to watch other people play video games competitively has been definitely proven at this point. That’s why Riot Games is continuing to double down on its commitment to esports in spite of the current turmoil.²⁸ As long as that thesis remains true–which it will–there will be opportunities to build businesses in the space. The scope, nature, and challenges surrounding those business opportunities are extensively discussed throughout this essay series.

Conclusion

Contrary to the prevailing public narrative right now, there are many good businesses remaining in the space–businesses that have found product-market fit, have clear prospects for sustainable growth, and are poised to evolve along with the industry itself. These businesses are already hunkering down to survive the winter and will undoubtedly find opportunities within the chaos. Distressed assets are going to become available in many sectors of the industry. Consolidation is not only inevitable, it’s good for the long term health of the space. The savvy actors are already seeing this as an opportunity to get scrappy, innovate, and grow.

I know the esports industry is feeling the pain right now and I don’t want to diminish that pain. Hundreds, if not thousands, of people have lost their jobs. Investors, sponsors, and other non-endemics who were bullish on the space are now bearish.

This problem is only just beginning to take shape. It’s going to get worse before it gets better, as it will take time for the economics of the industry to recalibrate to levels that are sustainable. The length of this recalibration period will hinge on a number of factors, including general market recovery, remaining runway of existing companies that are unlikely to survive, and responsiveness of key stakeholders to changing market conditions.

Esports stakeholders also need to learn the lessons of the past decade to ensure that they’re rebuilding in a manner that will last. That’s the underlying purpose of this entire essay series. If the industry can have an honest conversation about its flaws, learn its lesson, and look for opportunities for innovation moving forward, I’m confident the esports winter will go down in esports history as a blip on the radar, not a death knell. Our best days are still ahead of us.

The Incentives of Esports

By Avi Bhuiyan

Author's Note²⁹

/// INTRO ///

”Show me the incentive and I’ll show you the outcome.” – Charlie Munger Esports today could fairly be described as an emerging industry with highly entertaining products but heavily constrained business models. In fact, much of the hype and controversy around runaway investment in the esports industry in recent years stems from confusing the ability to fill stadiums and draw impressive viewership with the ability to cultivate sustainable, large-scale, independent businesses. To many, especially fans, this may sound like a failure of imagination if not an outright impossibility. How can products that attract so much viewership and sell out arenas³⁰ possibly struggle to generate scalable, sustainable value for everyone involved?

Image that launched a thousand pitch decks (via Riot Games)

The short answer is that popular esports are built on top of existing video games that are definitionally ³¹even more popular and already have existing, robust business models which overshadow the upside that could reasonably be expected from esports revenue as it exists today.

The fact that esports are companion (rather than standalone) products results in distorted incentives for all major stakeholders in the industry.

To contextualize, the total global esports industry generated roughly $1.3 billion last year, with Asia accounting for more than half of that.³² Growing from a niche pastime to a $1B+ industry is impressive. However, it’s worth keeping in mind the scale of the underlying video game titles:

Fortnite :³³ $5.8 billion (2021)

Call of Duty :³⁴ $3 billion (2020)

League of Legends :³⁵ $1.75 billion (2020)

Counter-Strike :³⁶ ~$600+ million (2022)

Free Fire :³⁷ $440+ million (2022)

And of course we’re talking about a parent industry that is simply gigantic.

These are some of the most valuable entertainment properties in the world, several of which generate more revenue by themselves than the entire global esports industry in aggregate.

Imagine a world where selling basketballs is ~100x more lucrative than the NBA, and basketball maker Wilson owns the underlying IP of the sport. The NBA has to revshare when they broadcast basketball games and lobby Wilson if it wants to make any rules changes to the game. If Wilson ever decided to not renew the NBA’s basketball license, the league would be toast.³⁹

That’s a close-if-imperfect analogue to where most esports are today. In such a world the NBA would have very different economics and be much less in control of its own fate.

Just as the NBA, Steph Curry, and RDC World share connective tissue in the basketball ecosystem while having different incentives, so do publishers, pro players, and streamers/YouTubers.

The last decade for professional esports has seen a spectrum of publisher approaches to building a competitive gaming ecosystem, led in many ways by Riot Games’ Apple-like centralized approach vs. Valve’s Android-like laissez-faire philosophy.

These experiments have been seeking to answer many questions, but from a business perspective three in particular have loomed large:

(1) Are esports ecosystems basically loss-leading marketing programs meant to delight players and drive engagement and retention in video games? The gaming equivalent of Costco rotisserie chickens?

For the overwhelming majority: yes. However, there are outliers!

(2) If esports can become sustainably profitable entertainment products, can they also grow to a scale comparable with top-tier traditional sports like football and basketball?

In the long run it’s possible, but it’s also a bit of a trick question: traditional sports are a misleading business analogue for esports since among other reasons individual video games generally don’t have the longevity of sports.

(3) Of the esports that can scale to that level, is it realistic for third parties to expect meaningful participation in the upside alongside publishers?

It depends on how you define the upside. Esports-specific upside? Yes, there’s plenty of precedent there. Upside in the underlying video game? Barking up the wrong tree.

The early returns are in, and they strongly suggest that much of our conventional wisdom about esports is probably wrong: sustainability doesn’t lie on the other side of simply mimicking traditional sports products like the NFL or NBA, nor by doubling down on esports as marketing to justify more revenue share from video games.

We’re going to answer all of these questions and more, but first we need to set the table: how the esports industry operates, where it generates value, and what the incentives of its major stakeholders are.

Correctly mapping the incentives of key actors is crucial for identifying realistic ways forward rather than getting bogged down in wishful thinking or bag-pumping narratives, both of which have contributed to this latest cycle of hype and collapse. Third parties essentially building sandcastles on publishers’ private beaches has not proven to be a great recipe for generating sustainable returns, but alternatives that don’t align with publisher incentives are just talk.

Let’s kick it off by examining the most common analogy about the industry: that esports are the natural digital extension of traditional sports.

/// ESPORTS VS. TRADITIONAL SPORTS ///

The typical explanation for why esports should look to traditional sports for how to professionalize and scale goes something like this:

Esports feature the most skilled pros in the world competing in front of cheering fans to determine who’s the best and raising a trophy at the end. That’s literally the exact same dynamic as any sport like football or tennis. Esports are sports–it’s literally in the name! Esports currently monetize fans at a much lower rate than traditional sports do, but if they can catch up to their analogue siblings the industry will not only explode, but compete with FIFA/NBA/NFL in the not-too-distant future.

While there are many 1:1 similarities between traditional sports and esports on a product level (fans chanting in arenas, trophies, referees, etc.) from a business perspective they are crucially distinct. Blurring the similarity in product characteristics with the differences in business incentives is where many smart people get tripped up when drawing comparisons between esports and traditional sports.

There are many ways that the business conditions for esports and traditional sports are distinct– way too many to list here– but two in particular stand out: lifespan and the publisher incentive to prioritize the interests of a game over an esport.

/// LIFESPAN ///

"Consumer preferences for games are usually cyclical and difficult to predict. Even the most successful games remain popular for only limited periods of time, and this popularity is increasingly dependent on the games being refreshed with new content or other enhancements." - Activision Blizzard (Form 10-K 2022)

This is the big one.

The pace of fandom change in traditional sports is measured in decades or even centuries, while in video games it’s measured in years, if not months. It’s comparing ocean liners with rockets– both get things from point A to point B, yes, but similarities break down quickly from there.

The time horizon for esports businesses to create value before the underlying game hits a plateau or begins terminal decline is completely different than the dynamic for traditional sports, which makes long-term investment in individual games much riskier.

The single greatest challenge for any esport trying to match or surpass the trajectory of traditional sports goliaths like football and basketball is that it’s unlikely to be popular enough for long enough to build critical mass, cultivate intergenerational fandom, and imprint in cultural consciousness for the long haul.

As well, even for games which don't plateau in the short-term, the endless stream of new games released into popular genres like first-person shooters means the battle for mindshare and relevance with direct competitors is material and never-ending.

In 2000, the most popular traditional sports in the United States were football, basketball, and baseball. By 2023 they were… still football, basketball, and baseball. ⁴⁰

If we look further back, boxing was extremely popular in 1900 but by 2000 had fallen out of fashion⁴¹ as sports like basketball and football rose up the ranks. Similarly, baseball had become much less popular relative to football. While there were major trend shifts, they happened over the course of many decades.

(via Gallup)

Esports looks a bit different.

In 2010 StarCraft II was viewed by many as the pinnacle of the industry after its predecessor had been a cultural phenomenon in Korea for years.

By 2013, Starcraft II was grappling with “dead game” memes while League of Legends— a debut release from co-founders that had never worked in the games industry before— sold out the Staples Center for its world championship and spun up dedicated regional leagues all over the world.

By 2016, Overwatch was gaining meaningful market share on League of Legends in Korean PC bangs (cafés), an event hailed by some industry observers as a passing-of-the-torch moment. By 2017 it was attracting a stampede of high profile investors from the traditional sports world to join a franchised Overwatch League (OWL) with city-based teams and hailed as the future of esports.

Bobby Kotick (Activision CEO) and Robert Kraft (Owner of the New England Patriots) on OWL (via Bloomberg)

By 2018, Fortnite dances were commonplace goal celebrations by FIFA stars and Drake played games with Ninja in an internet-breaking moment. An unprecedented $100 million competitive prize pool was put up for grabs in a Fortnite Competitive ecosystem that rebuffed partnership with esports teams and actively avoided using the word ‘esports’ at all.

By 2020, Valorant emerged from Riot’s R&D lab and immediately began jockeying for pole position with top-dog tactical shooter Counter-Strike, drawing chart-topping viewership on streaming platforms and luring away many high profile CS veterans.

By 2021, the Overwatch League was suffering from low viewership, hemorrhaging sponsors in the wake of scandals,⁴² and by all outward appearances giving up on its highly-touted strategy of playing live matches in city-based studios around the world in a fashion reminiscent of traditional sports.⁴³

In 2023, Valve announced that Counter-Strike 2 was being released with a suite of major updates, resulting in record-breaking player counts⁴⁴ and strong optimism that one of the greatest esports of all time was starting a bright new era. Several months later, Activision Blizzard announced an upcoming owner’s vote on potentially dissolving the not-yet-decade-old Overwatch League.⁴⁵

All this to say…

When a professional sports team is weighing whether to lay concrete to build an arena, a critical assumption that makes that investment justifiable is that the sport that the arena is intended to anchor will still be popular by the time construction is finished.

If football could reasonably be eclipsed by pickleball which in turn could be overtaken by Calvinball– all within the space of a decade– capital allocation decisions around traditional sports would look completely different.

Though there are a handful of outlier games and franchises that have proven they can sustain competitive scenes over the span of decades such as Valve’s Counter-Strike or Nintendo’s Smash Bros, the overwhelming majority of games begin ramping down in viewership and revenue within a year of release.

We have little idea what a century-old esport looks like because personal computing hasn't been around that long, so there’s natural temptation to lean into analogies. However, we should be extremely cautious about drawing 1:1 business analogies between esports and traditional sports given their dramatically different life cycles.

Products driven by short-term incentives tend to develop very differently from ones which have the luxury of optimizing for the long term.

/// THE GAME WILL ALWAYS COME FIRST ///

Publishers own the IP of underlying video games which gives them a level of control that doesn’t exist for traditional sports like basketball and football, where inventors do not own the underlying IP.

Combined with the fact that esports aren’t the publisher’s core product, the incentives between players, publishers, and third parties like teams aren't as simple or aligned as “do whatever it takes to increase the size of the revenue pie” as is generally the case for traditional sports leagues.

Publishers have a finite amount of dev resources and strategic focus, and when there are meaningful trade-offs between an esports ecosystem generating several million dollars in revenue annually and a flagship 10,000 hour game that generates many times that with better profit margins, it’s not a mystery which one the publisher will optimize for.

There are truly countless examples of this, but several immediately come to mind:

• Following development of an esports community in Super Smash Bros. Melee, generally considered one of the greatest esports of all time, Nintendo toned down mechanical skill expression in later titles in the franchise. This decision was widely panned by the competitive community and generated significant controversy. Legendary producer Masahiro Sakurai famously responded that top-level competition is simply not at the core of his philosophy for the design of the Super Smash Bros franchise, which is intended to be an accessible party game first and foremost. When asked about this controversy in 2018, Sakurai remarked “I think a lot of Melee players love Melee. But at the same time, I think a lot of players, on the other hand, gave up on Melee because it’s too technical, because they can’t keep up with it... and I feel like a game should really focus on what the target audience is.”⁴⁶

• Overwatch was released as a 6v6 game in 2016 but shifted to 5v5 gameplay for its sequel in 2022, in part to make the game more accessible to casual players by lowering the cognitive load of a match.⁴⁷ This decision was well thought-out by Blizzard devs but dramatically changed the competitive metagame and more importantly eliminated one starting roster spot for every team in the Overwatch League. Yet the change wasn’t voted on by teams or players: they were simply informed what the latest iteration of the flagship product was going to be and expected to adjust. This makes perfect sense from the publisher perspective given that game developers are optimizing for a player base in the tens of millions, not just professional players or hardcore fans of competitive content, but therein lies the point.

• Valve has long been the industry leader of using bundles of in-game goods to fund prize pools such as DOTA 2’s Battle Pass. However, this year Valve announced that they are sunsetting their iconic Battle Pass and more generally de-emphasizing the role of esports in the game’s product roadmap. As they explained in a blog post “Last year, we started to ask ourselves whether Dota was well-served by having this single focal point around which all content delivery was designed… Most Dota players never buy a Battle Pass and never get any rewards from it. Every Dota player has gotten to explore the new map, play with the new items…"⁴⁸

Esports are ultimately companion products— some might call them side businesses for publishers— which means that while opportunity exists to build them into world-class entertainment properties, they face major constraints and instability for which there is no analogue in traditional sports.

So if traditional sports aren’t the right analogue for esports, how about video games generally?

/// GAMING REVENUE VS. ESPORTS REVENUE ///

A popular investor pitch about esports over the past decade goes something like this:

The games industry is so big and gaming’s cultural impact is widening every year! If esports can capture just X% of the industry’s output, it will be massive and sustainable. Betting on esports is a bet on gaming– and how can you bet against the long-term trend of gaming?

(via Chartr)

While there’s a kernel of truth in there, it’s not exactly the right mental model.

It is true that video games are a massive entertainment industry and trending upwards culturally, which definitely is a long term tailwind for the esports industry. However, it’s important to be clear why conflating the overall games industry with esports is a first-order mistake that warps understanding of esports’ total addressable market size (TAM) and incentives as they relate to the games industry.

The global games industry is currently estimated to generate north of $200 billion annually.⁴⁹ Esports is projected to account for less than 1% of that⁵⁰ through direct monetization, which is unsurprising when you consider (1) how few games can sustain esports ecosystems, and (2) the limited nature of direct esports monetization today.

Esports are built on top of a tiny pool of games that are not only popular but have hit a hat trick of wildly challenging conditions, namely that they:

(1) are fun to play

(2) offer competitive multiplayer⁵¹ with 10,000+ hours of replayability

(3) are compelling for spectators to watch

This is, to put it mildly, an uncommon achievement.

A person taxonomy of some of the best games of the past decade

Esports occupy the very bottom of a gigantic gaming funnel: creating a 10,000 hour game that is competitive, fun to play, and compelling to spectate is excruciatingly difficult and rare to pull off… and yet that’s the minimum requirement for an outlier (top-tier)⁵² esports ecosystem to develop.

If large competitive ecosystems could develop around unpopular games (or once-popular games that have fallen on hard times) that would be a game-changing dynamic for the industry and third parties in particular… but to this point there are no successful examples to point to.

This dynamic frames the perspective of many of the most prominent game publishers of top esports, which often⁵³ goes something like this:

Our wildly profitable 10,000 hour game is a golden goose which we prioritize above all else. That said, we care deeply about our IP and are intrigued by the idea of building entertainment properties on top of it, including but not limited to competitive ecosystems to give the IP more depth. We want to make sure that any entertainment properties built on top of our IP adhere to our standards, don’t dilute our brand, and are run with our best interests (e.g. not benefiting competitors) in mind. If you don’t like that, feel free to build on top of someone else’s IP or make your own game.

It’s worth emphasizing: successful publishers of 10,000 hour games tend to deeply care about their IP. Given their high-profile status and use of game IP, esports are an important part of the IP flywheel independent of how much revenue they directly generate. This makes most publishers reluctant to give full freedom to third parties who definitionally don’t have the same long-term incentives and strategic context to steward the IP effectively.

From the publisher’s perspective, the overwhelming majority of value created for games and their esports originate from the fact that the developer/publisher built a game good enough to sustain a vibrant competitive ecosystem in the first place. That belief is well-supported by the overflowing graveyard⁵⁴ of esports where third parties and publishers tried to force a professionalized ecosystem around a game that didn’t hit the fun-to-play/compete/spectate trifecta.

If esports teams or tournament organizers were able to resurrect a game from the dead or catapult a game from humble beginnings to the top of the charts with esports content, that would change the industry landscape dramatically: truly undeniable value creation that would get every publisher in the industry paying attention. Unfortunately, no such attempt has yet worked out.

Interestingly, by contrast, there are several examples of gaming content creators catapulting well-designed games from a quiet start to the top of public consciousness such as AmongUs⁵⁵ and Apex Legends.⁵⁶ That’s a rabbit hole we’ll come back to shortly.

The blunt truth is that it is orders of magnitude harder to develop and publish a 10,000 hour video game than it is to run a great tournament or build a strong roster of players. That doesn’t mean there’s no value in the latter, but it drastically weakens leverage and arguments crediting a significant portion of a game’s success to the competitive ecosystem.

The graveyard of unsuccessful games that tried their hand at esports as a marketing strategy is also very crowded– even the most diehard esports fan would readily admit that the magic formula is great game + great grassroots competitive interest. There are no great esports without great underlying games.

Third parties commonly respond that esports deliver value later in a game’s life cycle rather than at the beginning: that is, even successful games eventually fade in popularity but esports ecosystems keep them dynamic and engaging to the broader player base by extending their prime, sort of like the gaming equivalent of a Lazarus Pit.

It’s a compelling theory on its face– but is it true? And more importantly: even if true, would it incentivize publishers to actually share more upside in the underlying game with third parties?

So far the answer has been “unclear, but probably not.” Let’s delve into why that is.

/// DIRECT & INDIRECT VALUE ///

As far as value generation goes, esports generate most of their revenue in three ways, which we’ll classify as direct, indirect, and hybrid.

1. Viewership and attendance of professional competitions (direct)
2. Increasing engagement and non-esports-specific purchasing in video games (indirect)
3. Increasing esports-specific purchasing within video games (hybrid)

Direct revenue is pretty straightforward to calculate, and since it doesn’t implicate video game revenue, it’s usually not a hot-button issue. Stakeholder incentives are generally aligned when it comes to direct esports revenue: everyone benefits from an increase in value of media rights, sponsorships, etc. and the revenue coming in is easily attributable to the ecosystem.

Examples of direct revenue include fans paying for tickets for live events, merch, concessions, access to gated content or perks, etc. On the B2B front, platforms (e.g. Twitch, YouTube) pay for broadcast rights, while brands pay to have their products featured in the competitive ecosystem.

Indirect revenue is… not so straightforward to calculate.

Publishers generally focus on player acquisition, engagement, and retention when measuring the performance of marketing strategies for video games. Esports typically provide value by boosting retention and engagement but do little for acquisition, since people unfamiliar with a game are unlikely to follow its hardcore competitive content.

Indirect value generation can play out in a variety of ways. A college student who had previously churned out of the game might be inspired by watching a hype championship finals and decide to reinstall. A teenager might watch a pro player dominate in a tournament using a particular champion and start playing it themselves, and over time buy cosmetics for it. You get the idea.

Attribution for this kind of value generation is generally pretty challenging to measure.

Legendary Counter-Strike professional s1mple is infamous for his knife kills in pro play– when he uses a knife skin at a tournament, it’s common to see its aftermarket value jump in the Steam Marketplace. (via ESL)

Most games also offer in-game bundles or cosmetics specific to their esports ecosystem, which we’ll refer to as hybrid revenue since it implicates both the underlying video game as well as the appeal of the esports ecosystem specifically.

This brings us to one of the most important and controversial questions in the industry: how much **revenue do esports indirectly generate for their underlying video games?

The answers generally look something like this:

“Esports Can Be Standalone Entertainment Properties” Publishers: Esports may have some impact on in-game revenue, but the long-term value is in building new entertainment products that highlight our IP while generating revenue independent of the in-game store. There’s real money and cultural capital at the end of that rainbow, so we’re willing to burn cash in the short term and partner with third parties who are experts at building brands and entertainment/sports properties to get there.

“Esports Is Just Marketing” Publishers: Esports do not materially impact in-game revenue. They’re niche products that mostly appeal to hardcore fans rather than the broader player base. They can be useful engagement and marketing mechanisms, but they’re not a core pillar of our strategy for in-game monetization. Making our competitive ecosystems profitable isn’t a major priority– we’re committed to supporting them and even sustaining losses up to a point, but we’re not interested in unsustainably hyping them up to be more than what they are: marketing programs that don’t need to make a profit to be strategically valuable.

Third-Party Stakeholders: Esports are a cornerstone of video game marketing! They’re crucial for retention and extending the lifespan of games. Publishers get millions in free exposure from esports competitions, and we should get our fair share of that immense value creation.

Stakeholders generally agree that esports deliver marketing value, but there is no general agreement on how to quantify that value.

Game publishers understandably tightly guard specific metrics about their games, particularly those relating to revenue. Data surrounding the impact of marquee esports events on in-game revenue generation may exist, or it may not. If it does, the game publishers aren’t sharing that information externally. This leaves third parties in esports data-blind on how much value they generate for underlying games and understandably mistrustful that publishers are valuing their contributions fairly.

Anecdotally, the broad range of enthusiasm levels among publishers of popular esports titles suggests that the data on how much indirect value esports deliver probably doesn’t point to an obvious conclusion one way or the other. It’s also possible that the impact varies widely by game. If the narrative that esports generate enormous amounts of revenue that publishers are pocketing for themselves were obviously true, you would expect to see near-universal embrace of esports by publishers, but that’s definitely not the case.

Calculating how to reward indirect value creation is a high-stakes question between video game publishers and other esports stakeholders because again: the TAM of the video game’s player base is significantly larger than the fanbase of the esport, meaning even mild impact on in-game revenue will typically far surpass what would be a considered a huge win in direct esports revenue generation.

This dynamic often leads to a sort of Dutch disease [27] where the easiest answer to increasing esports revenue (just get more revshare from the game!) crowds out focus and innovation on other potential revenue streams, including the most empirically promising path: doing whatever it takes to increase direct monetization, e.g. by making media and sponsorship rights more valuable and the viewership experience more interactive and monetizable.

But is this question a red herring?

Zooming out, it’s important to recognize that publishers have multiple avenues by which to market their games and drive indirect revenue outside of esports (e.g. working with content creators who can expose games to much broader audiences since their content is generally more approachable to players who aren’t already fans of the game), which further complicates resourcing questions and diminishes the bargaining power of external esports organizations and sometimes even publishers’ internal esports departments.

/// VALUE OVER REPLACEMENT MARKETING ///

In 2021, popular Spanish content creator TheGrefg shattered Twitch’s concurrent viewership record when he revealed he was partnering with Epic to release his own in-game cosmetic in Fortnite.

It’s hard to overstate the optics of a single content creator’s literal advertisement for a Fortnite skin attracting more viewers to a single Twitch broadcast than every esports event ever broadcast on the platform,⁵⁷ including Fortnite’s own World Cup.

It’s fair to say that Fortnite’s publisher, Epic Games, may have taken note.

Epic is the emblematic example of a world-class game publisher with an iconic 10,000 hour game that made a massive investment into competitive content,⁵⁸ experienced results far short of expectations (missing esports revenue targets by $154 million in 2019),⁵⁹ and has subsequently shifted focus⁶⁰ and marketing dollars in other directions. This includes ramping up collaborations with celebrities like Ariana Grande and LeBron James as well as content creators such as TheGrefg, Loserfruit, and Ninja. It also includes dynamic in-game tie-ins with the owners of iconic IPs like Marvel and Attack on Titan.

“Kneel before [the player retention-boosting powers of] Galactus!” (via Epic Games)

Critics can argue that if Epic had made decisions differently, the outcome for Fortnite Competitive could have been meaningfully rosier. While possibly true, a more broadly applicable learning is that even though esports deliver marketing value for video games, they don’t operate in a vacuum: there are compelling alternatives for publishers to invest in.

The general consensus in the games industry has been that by virtue of cultivating direct relationships with their audiences, content creators can generally jump between games with minimal friction and take their viewers with them. As a result, creators can offer great value to game publishers but are less reliable than esports ecosystems, which can’t simply pick up and move to a different game. That’s the trade-off.

While somewhat comforting for esports optimists, in business as in life being the sure thing isn’t always the most compelling branding nor does it typically grant much leverage. Esports are generally viewed by publishers as one part of a balanced marketing strategy, not outlier secret weapons that deliver more ROI than any other marketing channel.

Esports-specific bundles and in-game items are fairly common in the industry today, but few fans are aware they’re often viewed by publishers as a subsidy for esports rather than a serious money-maker for the underlying game.

Valve has long been the industry leader at selling compelling bundles of in-game items to fund esports prize pool (see: TI Battle Pass) but recently announced a shift away from an esports-centric strategy to put more focus on serving the broader player base. (via Valve)

Privately, many prominent game publishers have long found it challenging to calculate exactly how much value these in-game tie-ins generate due to the fact that they’re supporting popular players/organizations vs. how much is being generated from the fact that they’re high-quality cosmetics in one of the most popular video games in the world. In recent years, publishers have gotten increasingly candid publicly about these concerns.

Cannibalization of revenue is a serious consideration.

(via Respawn Entertainment)

For example, if the publisher of a top esports title releases a Halloween-themed skin for one of their most popular characters⁶¹ vs. an esports-themed skin for that same legend, which will sell better?

For a publisher, is that even the right question?

Clearly a skin for a popular hero in a game with millions of monthly active users will sell regardless (and conversely, esports cosmetics in unpopular games won’t), so the more relevant question is actually how many people would have bought a cosmetic for the champion regardless of whether it had an esports tie-in or not.

Some additional questions to consider: in a world where the publisher releases both a Halloween and esports cosmetic, how many sales of the Halloween skin (which doesn’t require a revshare with esports orgs and players, making it more lucrative) would be cannibalized by the fact that an esports skin (which does) is also available? As the ecosystem grows in size, how can a publisher avoid flooding a game with esports tie-in content, especially if there are dozens of teams scattered across multiple regions?

These questions aren’t abstract, nor are the answers universal.

Riot Games recently revealed the impressive stat that three of League of Legends’ top six best-selling skins of all-time are esports-themed (each year Riot creates 1 line of skins honoring World Champions), but that they are struggling to create cosmetics that can move the needle for the other ~100 teams in the LoL esports ecosystem on a consistent basis. ⁶²

Meanwhile, Electronic Arts recently made headlines⁶³ over a conflict regarding revenue sharing with esports organizations participating in competitive Apex Legends. After weak sales of team banners (in-game cosmetics less prominent than skins), EA and Respawn reportedly grew skeptical of the value that teams were bringing to the table and declined a proposal by teams for uncapped revshare on skins. In response, one unnamed team executive reportedly said the following:

“So [EA and Respawn are] like, OK, if we make $100 million from this bundle and we’re giving $20 million to the teams, we don’t feel like the teams are going to bring $20 million in sales… From a P&L standpoint, sure, maybe that’s the case. But that’s the problem with them … other developers would say, ‘Maybe the teams are not going to push the sales 20% more than what it would have been, but you know, these teams invest in our ecosystem, they do free marketing for us with them being in an esports programme’. …”

Every ecosystem is different and this unnamed executive doesn’t speak for every organization… but ouch. The cold reality is that most publishers care very much about the P&L.

While there can be temporary experimental phases and some indulgence by publishers trying to build generational IP or more absorbed with running a games storefront, there is no long-term sustainable future where publishers are handing out money to third parties without regard for ROI.

A brighter future for esports requires changing incentives to create a dynamic where third parties don’t feel like they’re desperately scrabbling for crumbs that fall from the table of iron-fisted publishers and game publishers don’t feel like they’re working with mercenaries whose main value add is managing the logistics of employing players and leveraging world-class IP they didn’t build.

The urgency around figuring out how to do this has sharpened in recent years as gaming content creators have exploded in popularity, with many capable of consistently drawing audiences that handily eclipse esports broadcasts.

The tug-of-war for resources between different departments responsible for different strategic approaches within game publishers (e.g. creators, paid marketing, esports) is virtually never discussed publicly, but is both common and a powerful signal that if esports has an ambitious future beyond grassroots, it will need to generate a value proposition that’s more defensible/unique than simple marketing for the underlying game, because that lane will always be crowded and competitive.

Sometimes you just have to let it go (via Disney)⁶⁴

Yes, in-game revshare is a glittering lure, and should absolutely be part of the business equation. Particularly in ecosystems which are defined by their grassroots or not run with the expectation of becoming a profit center for publishers, revshare on esports-specific cosmetics or bundles can be enough to sustain an entire ecosystem.

However, for ecosystems with ambitions to (1) scale beyond grassroots and (2) be materially more sustainable and independent than typical marketing programs, in-game revenue sharing can’t be the primary load-bearing pillar of revenue. Otherwise, esports will simply be locked into a brutal race-to-the bottom competition for marketing dollars with creators, paid marketing channels, and every other marketing lever at a game publisher’s disposal. ⁶⁵

In that paradigm, when other channels (e.g. working with content creators or paid marketing) can demonstrate higher return on investment than esports, why would a rational publisher not prioritize the higher-performing channels– particularly if they don’t require revshare? How stable can the esports industry expect to be if its primary financial lifeline can change dramatically based on factors totally out of its control?

The key to esports sustainability beyond the grassroots level must be growing esports-specific revenue, because that approach aligns the long-term incentives of all major stakeholders and generates value which is straightforward to attribute to the esports product specifically.

Innovation around fandom and the product experience of consuming competitive content generates value distinct from what creators and other marketing avenues can offer, and in my view is the more defensible path to a sustainable, scalable future.

/// CONCLUSION ///

Let’s quickly recap the major challenges of esports:

Companion Products

• Esports are companion (rather than standalone) products which are built on top of incredibly lucrative and rare-to-pull-off entertainment products: 10,000 hour games. An esport built on top of a game for which there is no organic competitive interest or isn’t popular/fun to play/fun to watch is historically doomed to failure.

Limited Upside and Leverage for Third Parties

• This companion product dynamic heavily limits leverage for third parties building on top of these games, and also makes esports a lower priority than the core game for publishers. That doesn’t mean publishers don’t value esports, but that esports are never at the top of the priority list.

• Whereas revenue is split 2 ways in most traditional sports (labor and ownership) it splits at least 3 ways in esports: publishers/teams/players, limiting upside for third parties.

Limited Value Over Replacement Marketing

• While esports generate marketing value for games, measuring that value is extremely fuzzy. Moreover, there are many other ways that publishers can market their products, several of which readily outperform esports on cost, scale, or even both. The fact that key data-driven publishers of 10,000 hour games like Epic and Valve have been shifting resources away from esports in recent years is a revealed preference that internal data probably does not obviously suggest esports is secretly a major money maker.

Ephemeral Popularity

• Video games rise and fall rapidly, which means that trying to blitzscale an esports ecosystem shortly after launch (rather than building gradually on top of sustained grassroots momentum) is extremely dangerous, as Overwatch League investors have learned. Building up a traditional sport is a long term game, building up an esport is the vast majority of the time a short-term one. There are outlier esports that have long-term longevity, but these are the outliers of the outliers.

What does it all mean?

Basically, any esports ecosystem looking to overcome these challenges will need to:

1. Build on top of a 10,000 hour game that is competitive, fun to play, and fun to watch.
2. Cultivate revenue streams specific to the competitive ecosystem to incentivize cultivating it as a self-sufficient product rather than loss-leading marketing program
3. Convince publishers to share enough of the upside of a successful esport with third parties to attract competent operators and partners.
4. Hope that the game’s popularity lasts long enough to recoup their investment

Many of the biggest investors in esports over the past decade did not account for these challenges or have a well-crafted strategy for how to work around them, and the results have been predictable.

Is it possible to overcome these issues?

Yes— that said, I cannot emphasize enough that very few esports ecosystems should be fueled to expand beyond straightforward marketing programs for underlying games!

As for the outliers that do have a shot at building something sustainable at scale… there’s meaningful opportunity for the right type of publisher with the right type of game, but that’s a very deep rabbit hole that’s a separate conversation altogether.

Incentives of Esports (Part II): Paths to Profitability

By Avi Bhuiyan

Author's Note⁶⁶

/// INTRO ///

“Predicting failure is easy. It's not worth 280 characters to make such a prediction and certainly not worth writing a whole opinion piece. If you want to do something difficult, then figure out what it takes for something to succeed. That's what the builders must do.” — Steven Sinofsky

Wow. Based on Part I it sounds like esports is doomed?

All esports are not doomed!

That said, it’s pretty clear that this recent era of esports modeling itself after traditional sports is hurtling towards an unhappy ending. The product similarities are obvious, but traditional sports were never the right mental model for the business side of esports.

Still, I believe there are plausible paths for a small number of esports to become $1B+ ecosystems, though it will require a ton of unglamorous iteration and experimentation to get there, particularly as esports have fallen out of fashion in the current hype cycle.

For all its macro challenges, the fundamentals of esports remain the same:

• In an era where audiences for live programming are increasingly fragmented and attention is at a premium, a small number of esports continue to reliably draw large numbers of fans to broadcasts and venues. Cutting through hype and abstraction, at a baseline level that’s valuable to brands, broadcast platforms, and venue operators among others.

• Esports offer a unique social surface area for publishers to build affinity for their game IP outside of the confines of games. Winning a ranked ladder match is a completely different type of engagement from spending a Sunday with friends on Discord cheering on your favorite player or team in a championship match.

• Video game IP is ascending culturally, and while it’s important to be honest that hardcore competitive content isn’t automatically correlated with the growth of the video games industry generally, the readily addressable market for esports is still growing.

Is that enough?

If you believe that esports products have already more or less reached their final form then it’s understandable to say no, that’s not enough, and write them off as a stack of loss-leading marketing programs in a trench coat trying to cosplay as a high-growth industry.

“It is I, the highly professional and swiftly growing esports industry!” (via Netflix)

It’s important to be realistic that the overwhelming majority of esports ecosystems will likely continue to top out as grassroots communities (e.g. Super Smash Bros Melee) or moderately-subsidized publisher marketing programs (e.g. Halo) that allow a handful of people to make a full-time living and delight a small but passionate fanbase while having no realistic shot at creating billion-dollar entertainment products or venture scale outcomes.

That’s perfectly fine, and actually akin to traditional sports: no amount of private investment is likely to make curling or ultimate frisbee consistently fill stadiums in the medium term, but that doesn’t tell us much about the prospects of basketball or football.

Esports has numerous examples of ecosystems that can persist at a grassroots level through pretty much anything, as well as glitzy, highly-subsidized ecosystems that can scale if publishers are willing to sustain eye-watering losses.

The real question is: can it cultivate ecosystems which can actually scale sustainably?

Personally, I believe yes.

Outlier esports– I’m talking about a handful of ecosystems per decade if that– have barely begun to scratch the surface of the innovation space at their disposal. More immediately, there’s clearly a lot of room to improve on the basics like monetizing broadcast rights effectively, which the industry has struggled mightily to figure out.

OK, so how does an esport scale sustainably?

First and foremost: there’s no forcing scale in an ecosystem that doesn’t have organic popularity. That’s how you get cash incineration machines, an esports industry specialty.

Second: scaling an esport only really makes sense if the underlying video game is wildly popular, profitable, and has demonstrated longevity to a point that the publisher is serious about expanding the IP beyond video games. Needless to say, this is an extremely rare mix: these are outliers of outliers.

For the overwhelming majority of competitive ecosystems, attempting to reach scale is an exorbitantly expensive wild goose chase. It’s far more realistic to grow organically or via mild publisher subsidies with the goal of building a successful marketing program that doesn’t need to be self-sufficient, particularly given the rarity of longevity for video games.

Scaling an outlier esport is both expensive and outside the core competency of game development, so it requires a publisher with strong conviction in cultivating IP beyond just the gaming context and building a flywheel to monetize that affinity in Disney-like fashion. Think Nintendo partnering with Comcast to build a Super Nintendo World amusement park, or Riot Games partnering with Fortiche to deliver a #1 Netflix hit in Arcane.

Walt Disney’s iconic sketch of how Disney’s empire of theme parks, movies, TV shows, etc. all work together to grow and monetize Disney IP in a self-reinforcing loop. For game publishers pursuing a similar strategy, esports are simply a modern addition to this classic model. (via Disney)

Nintendo is famous for its tight control over its IP, but its vision clearly extends beyond just video games and it’s willing to collaborate with third parties to get there(via Nintendo)

I’m generally skeptical of the incentives of publishers lacking strong conviction in building a flywheel to monetize their IP trying to take a hands-on role in scaling up their competitive ecosystems beyond marketing programs. When the going gets tough they have every reason to cut bait, and why wouldn’t they? Scaling esports revenue is an expensive, difficult, and improbable-to-complete sidequest.

Third: once there’s a critical mass of grassroots enthusiasm, the most important business priority is for publishers to collaborate with third parties to develop and grow esports-specific revenue streams to meaningful levels. The temptation to simply piggyback on in-game video game monetization is powerful, but past a certain point that approach is a dead end of warped incentives and inefficient subsidies that inevitably get scaled back or pulled altogether.

While I don’t claim to have a silver bullet solution on how esports can scale to multi-billion dollar ecosystems in the short term, I do have several predictions on where some key breakthroughs for the esports industry will come from in the years ahead:

1. Broadening the Base
2. Interactive Monetization

----------------------------------------------------------------------------

/// BROADENING THE BASE ///

A publisher with strong conviction in expanding the depth of their video game IP across many different mediums (e.g. film, television) is going to devote significant focus and resources to broadening the fanbase of an organically popular esport beyond core gamers and reap massive rewards. Ecosystems with less legible products will try to mimic their strategy and fail.

The single most important strategy to increase esports-specific revenue is to broaden the fanbase. Sponsorships, broadcast rights, merch: all tried-and-true forms of revenue generation that are the cornerstones of any sustainable ecosystem benefit from growing the size of the fanbase.

This may sound like an obvious north star (duh, just get more popular!), but many suggestions from industry stakeholders around how to monetize esports center around trading future growth for up-front cash (e.g. by paywalling broadcasts.)

Furthermore, given how hardcore the underlying games of most popular esports are, appealing to a more casual audience is viewed by many as a fool’s errand. The argument is that the best approach is increasing revenue per fan from a relatively static audience.

That’s actually probably correct for esports that stakeholders believe have matured and won’t meaningfully grow over time, which is most grassroots and moderately-subsidized ecosystems. It’s also understandable given how many esports fans (60% in some ecosystems)⁶⁷ watch esports primarily to get better at playing underlying video games.

However, for games with aspirations to have multi-generational longevity and sustainable growth, outlier outcomes demand ambitious vision and a willingness to challenge conventional wisdom. For example:

I’m skeptical that “esports fans have to be players” is an immutable law with no exceptions.

I predict a publisher with a breakout competitive title that has reasonably high legibility to casual observers is going to seriously commit to broadening the profile of fans of their competitive products from hardcore gamers to anyone that enjoys dramatic storylines, charismatic players, and the thrill of competition.

This is definitely not a short-term prediction, but I don’t think esports’ best days are in the near future.

The outcome will be an esport that is widely popular with fans who may not even play the underlying video game. While completely normal for traditional sports like football which virtually no one plays after their school days, this would be a groundbreaking outcome for a major esport.

Trading dollars today for fans tomorrow also only makes sense if stakeholders are confident in their long-term upside– not exactly descriptive of the status quo for third parties in esports, which is the main reason why I believe this investment must come top-down barring unusual situations like a publisher licensing an esports ecosystem to a third party like the Saudi Public Investment Fund to operate.

A compelling product isn’t enough by itself, though: there’s strong empirical evidence that the specific keys to widening the fanbase for an existing competitive entertainment product are broad distribution, accessible storytelling, and hero generation.

Formula 1 racing offers a recent compelling case study on how that’s done.

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As fellow competitive entertainment products, today’s outlier esports face many of the same struggles that F1 did prior to its ownership change in 2017 by Liberty Media.

• Passionate fandom but niche popularity

• Limited focus on expanding the fanbase

• Lack of accessible anchor content outside of competitive broadcasts

• Hyperfocus on competitive nuances and results with limited focus on human storytelling

• Lukewarm interest in broadcast rights in the United States

• Slow progress on appealing beyond a primarily male fanbase

Previous F1 boss Bernie Ecclestone once laughed off the idea of F1 going after a new generation of fans in an interview, saying “I'd rather get to the 70-year-old guy who's got plenty of cash. So, there's no point trying to reach these kids..."⁶⁸

Within 5 years of Liberty Media at the helm:⁶⁹

• The average age of an F1 fan dropped from 36 to 32

• Viewership doubled

• Female fans went from comprising 8% of F1’s fan base to a staggering 40%⁷⁰

• US broadcast rights went from being valued at $4 million⁷¹ to ~$80 million⁷² (per year)

It’s safe to assume that the population of racers (street or professional) around the globe did not jump 100% in those five years, nor were most new fans tuning in looking to improve their hairpin turns or overtakes.

So, how did Liberty do it? Where did they find all these new fans that weren’t racers?

The focal point of Liberty’s strategy for growing F1 was broadening the fan base rather than just doubling down on monetizing more efficiently from existing superfans. The crown jewel of that strategy turned out to be the now-famous Netflix series “Drive to Survive.”

As Ben Thompson of Stratechery put it in an excellent piece on F1’s rise, the show “made everyone a star, from the most obscure midfield driver to team principals and CEO.”⁷³ While seemingly a show about racing, its focus was actually mainly on human interest storylines and politics: backstabbing billionaires, teammates who cared as much about one-upping each other as the rest of the field, and colorful team principals ranging from easy-to-root-for underdogs to raging narcissists.

Importantly, the producers of Drive to Survive got unprecedented access and editorial discretion. The show was not a puff piece produced in-house; the producers were empowered to shine a bright light on drama where they saw fit in service of the greater story. They were also free to aggregate stories from across the grid rather than being forced to release 10 competing team-specific mini-series.

Everyone likes a champion, but Drive to Survive found resonant storylines and made stars of participants all over the grid, including the bottom of the standings. That’s a rare achievement.

The show had broad appeal far beyond racing fans– one didn’t need to be an expert on oil cooling or drag reduction to find Daniel Ricciardo’s roguish charm dazzling or Max Verstappen’s maniacal pursuit of greatness inspiring. While racing of course played a role in the narratives, the emphasis was as much on the human competitors as the race outcomes.

All that said, it’s important to note that Liberty’s strategy wasn’t simply:

Step 1: Make Netflix documentary

Step 2: ???

Step 3: Profit

Liberty leaned heavily into social media promotion, changed rules to dramatically increase fan engagement for drivers, aggressively wooed mainstream celebrities for crossover moments, built its own streaming service, and shifted the race calendar to make sure that key markets like the US got high-profile races (e.g. Miami, Las Vegas) among other steps to raise the profile of its product.

Drive to Survive wasn’t just a breakout hit, it was the culmination of a broader philosophical shift towards broadening the profile of an F1 fan from hardcore motorsport enthusiasts to anyone that enjoys dramatic storylines, charismatic athletes, and the thrill of competition.

The total addressable market for the latter is much larger, as it turns out.

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What’s the lesson here for outlier esports?

Translating F1’s strategy to an esports context, the playbook would look something like this:

• Embrace the north star of broadening the fanbase beyond just hardcore players

• Invest in accessible content which isn’t primarily geared towards hardcore fans and exists independent of broadcasts

  • Gameday shoulder content and “newbie streams” are not nearly enough

• Build brands for pro players that extend beyond their competitive results

• Leverage distribution channels (e.g. creator YT channels, Netflix) that increase the likelihood of reaching audiences who may not be familiar with the underlying game

• Work with high-profile public figures (in particular: content creators) who can create fun crossover moments or even deliver as ecosystem partners

One specific advantage top-flight esports have is that quite a few of the most popular content creators in the world are massive fans. Mr. Beast is a long-time admirer of League of Legends and has eyed buying a professional team for years.⁷⁴ Brazilian creator Gaules has publicly claimed to have spent millions of dollars for licensing rights to co-stream Counter-Strike tournaments.⁷⁵ Offline TV star Disguised Toast created his own esports team and generates entertaining and insightful meta-content about the trials and tribulations of running an esports team. The list goes on: just as F1 leveraged the brands and distribution of mainstream celebrities (e.g. pre-slap Will Smith) to get in front of new audiences, high-profile esports ecosystems have similar opportunities with content creators that are some of the world’s foremost experts on digital content and community cultivation. More than a few mainstream celebrities are enthusiastic gamers and esports fans also.

Still, motorsport and competitive gaming have many differences– far too many to list here! Notably, the former has been around for decades and isn’t in any realistic danger of a new type of motorsport coming out next year to take its crown (always a risk in gaming.) Formula 1 also only has 20 drivers as of 2023, which is a much more manageable cast of characters to humanize and elevate than say the 24 teams which competed in the most recent CS:GO Major or League of Legends World Championship.

It’s also quite a bit easier to follow a race than it is to make sense of the visual frenzy of teamfights in popular esports like Overwatch, DOTA 2, and League of Legends. Shooters like Valorant and Counter-Strike as well as fighting games like Street Fighter and Mortal Kombat do better in this regard, but it’s still a fundamental challenge that esports face when chasing a broader fanbase, and there’s just no sugar coating that.

That said, if anything, this further underscores the importance of emphasizing human storylines as the core value proposition for new fans.

I strongly believe that an ambitious publisher will decide that broadening their esport’s fanbase is a windmill worth tilting at, invest seriously behind that conviction, and reap massive rewards.

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/// INTERACTIVE MONETIZATION ///

Prediction #2: A publisher is going to revolutionize participatory fandom by leaning into the livestreaming equivalent of in-game microtransactions for esports broadcasts.

There’s an odd contradiction about esports: despite the industry’s reputation for being on the bleeding edge of tech and entertainment, its monetization and interactivity is generally old-school. Current monetization is mostly focused on sponsorships, live events (which commonly run at a loss), and in certain cases broadcast rights. Interactivity is mostly limited to chat.

This is strange because video games differ from traditional entertainment like TV and movies precisely because they’re highly interactive– players don’t just sit back and watch the action unfold; they have agency in navigating stories, customizing characters, and manipulating environments.

The ability for a player to have a say in what happens next is foundational to the appeal of the medium.

The immersion level is completely different when audiences can interact with the experience (via BioWare)

Streamers on platforms like Twitch and YT long ago figured out how to lean into the interactive nature of livestreaming by offering shout-outs personally or via text-to-speech (TTS) in real time in exchange for donations. A key subset of viewers who would scoff at the idea of disabling Adblock or paying a subscription to access content are willing to pay for the experience of having a creator interact with them in real time in front of their live audience, and that behavior funnels millions into the pockets of gaming content creators.

Donations to streamers started off humble: a simple shout-out or TTS acknowledgement (via Sneaky)

In recent years, an increasing number of creators and platforms like TikTok (via LIVE) have leaned further into interactivity, offering viewers the ability to alter the stream experience itself via one-time purchases, an approach similar to microtransactions in live service games.

This isn’t just dabbling– TikTok recently became the first-ever app to surpass $1 billion in consumer spending within a single quarter,⁷⁶ primarily powered by one-time purchases of gifts on LIVE which appear on-stream.

It’s notable that the top ten apps in the US for one-time purchase revenue in 2022 consisted of 9 games and TikTok. The user behavior of one-off impulse purchasing has been foundational for modern monetization of both live service video games and live streaming, yet despite that being the exact intersection esports sits at, one-time purchases haven’t been an area of focus for major esports broadcasts.

(via data.ai)

Gifting on TikTok Live can trigger a wide variety of animations on stream ranging from a tiny rose to a screen-splashing galaxy. Creators can tailor reactions or rewards to specific Gifts.(via TikTok: Souljaboy, TacticalGramma)

CodeMiko, a vtuber who has built monetization tooling⁷⁷ to allow viewers to interact with streams in novel ways, is an emblematic example of this trend. She offers a menu of options for fans to choose from such as changing the proportions of her avatar’s head, muting/unmuting her, having a variety of objects such as confetti and crash dummies fly all over the screen, and even “killing”/”resurrecting” her avatar– all in real time! She has stated in interviews that her monthly revenue more than tripled after she began offering what are effectively interactive microtransactions to her streaming audience.⁷⁸

The results for viewers range from good-natured fun to absolute screen-drowning chaos.

YouTuber PaymoneyWubby encouraged his community to spontaneously gift hundreds of subs to Vtuber CodeMiko, flooding the stream with gift box animations and delighting viewers with the chaos (via CodeMiko)

Bleeding edge content creators and younger platforms like TikTok are pushing the envelope on interactive monetization at a time that esports monetization appears stagnant and platforms like Twitch appear more focused on rent-seeking than product innovation.

You can probably tell where this is heading: esports has been taking its monetization cues from traditional sports for the past decade with results that speak for themselves. It’s past time for esports to take a harder look at video games and content creators.

This revenue stream is unlikely to be in the ballpark of exclusive streaming rights deals or robust sponsorships in the short-term– more of a garnish than a main dish at first– but that’s okay. The success of one-time purchases both in games and streaming platforms suggests that interactive monetization and one-time purchases have a high ceiling, are an increasingly normalized user behavior, and if done correctly can make products both stickier and more immersive for fans.

What will this look like in practice?

The playbook for esports can’t simply copy the homework of streamers or games: live thank-yous from pro players and screen-drowning animations would not naturally fit within a competitive broadcast with hundreds of thousands (or even millions) of viewers tuned in. Fandom in esports is also generally not rooted in a parasocial relationship with an abstract tournament or league (unlike the creator-fan relationship), which means exploration of motivations and product offerings will be an important and ongoing process.

My prediction is that the first ecosystem to crack esports-specific interactive monetization will lean into (1) the immersive pull of interactivity and user-influenced (if not generated) content (2) the appeal of flexing, and (3) the empowerment of fans (particularly those watching at home) to act as the 12th man.⁷⁹

It may look directionally like offering a crowdfund-oriented product which allows viewers to manipulate the venue and broadcast itself (not just chat) within specific constraints, e.g. changing the stage lights to the colors of the team with the most fans donating/subscribing. The goal would be to give superfans who aren’t in the arena– the vast majority of the audience– an avenue to coordinate flexing with fellow fans, visually support their favorite teams, and mimic the effect of a home crowd advantage.

A simpler possibility is that a publisher will simply create an alt stream where viewers can alter the broadcast in a fun and potentially chaotic fashion, similar to a TikTok LIVE stream. This would also create interesting collaboration and revshare possibilities with teams and players but also co-streamers who can exhort fans to make purchases live on stream.

Consider: “Arena Takeover,” An expensive crowdfunded emote meant for whales and flash crowdfunding which allows fans to (1) bathe the otherwise neutrally-lit arena in their favorite team’s colors (2) have its logo projected into the stands and flashed on broadcast(Image via Esports Observer, Valve)

From an incentives perspective, all revenue generated by these kinds of interactive offerings would clearly be attributable to the esports product and even specific teams or players. Importantly, all major stakeholders are incentivized to grow the revenue of these kinds of direct esports offerings because there’s no direct cannibalization from video game revenue.

The stakes are also lower for experimentation since these purchases aren’t directly interacting with the publisher’s crown jewel.

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Some may roll their eyes at the idea of esports broadcasts taking cues from content creators or question if the behavior for esports products is comparable to solo creator streams.

For the former I would respond with two points: first, for many games, co-streams of esports broadcasts run by content creators are not only major sources of viewership but in high-profile cases attracting more viewership than the main broadcast.⁸⁰ It’s fair to assume these audiences are receptive to streamer culture, and the horse has already left the barn with regard to publishers loosening control of the broadcast experience to third parties in exchange for more viewership.

Second, there is strong anecdotal evidence that stiff suit-and-tie professionalism is out of sync with the tastes of younger audiences generally. Even ESPN and the NFL have loosened up a bit in an effort to be more approachable to fans with the Manningcast.⁸¹ It’s absolutely possible for esports broadcasts to remain (reasonably) brand-safe and compelling while also leaning into playfulness and experimentation.

There’s just so much going on here (Image via ESPN)

As for the latter objection, it’s a fair one: an esports broadcast is offering a different value proposition than an individual creator in some key ways. There’s very little data available on how to calibrate correctly when rewarding fan donations and subscriptions with livestream offerings that aren’t backed by a parasocial relationship– but that’s in part because experimentation around these concepts has not been a priority for flagship esports products.

Given publishers’ embrace of co-streams and assuming interactivity and immersion are important goals for esports product owners, this seems like an area well worth exploring further.

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/// CONCLUSION ///

Esports have been at the right place at the right time so consistently over the years that as an industry it’s hard to count out, even if individual eras often end with spectacular wipeouts.

In 1999, when the first iPhone was almost a decade away and teenager Britney Spears had just released her debut album, Blizzard’s smash hit StarCraft developed a competitive ecosystem that quickly became the pinnacle of esports globally. In particular it became a cultural phenomenon in South Korea, where at one point there were three cable TV channels broadcasting StarCraft esports matches 24/7.

StarCraft as a video game was wildly popular (for the time) around the globe including in the West, but early mass adoption of consumer high-speed internet in Korea propelled it to a level of popularity and mainstream appeal no other esport had previously reached.

StarCraft pros playing in a televised match in 1998(Image via Kai Hendry)

Spurs icons David Robinson and Tim Duncan often played StarCraft on the team plane while traveling to and from NBA games in 1999 (via San Antonio Spurs)

The game had a decade-plus run of immense popularity, is near-universally respected as a masterpiece, and continues to be a staple for gamers of a certain age. However, its sequel StarCraft II couldn’t replicate the magic of the original. More broadly, the genre of real-time strategy fell by the wayside as modern FPS games, MMOs, Battle Royales, and MOBAs pushed forward and won over younger generations of gamers.

Nevertheless, esports marched on.

The development of in-game microtransactions and the live service game model– incentivizing keeping games alive rather than supporting with a skeleton crew after launch while sprinting towards development of a sequel– made long-term engagement with games lucrative in a way that hadn’t been true for traditional box games during StarCraft’s heyday. This incentives-driven strategic shift directly fueled an esports renaissance in the early 2010s led by DOTA 2, League of Legends, and later CS:GO.

LoL 2017 World Championship in Beijing National Stadium (The Bird’s Nest)(via ESPN)

Live streaming made esports broadly accessible to a massive digitally-native audience in a way that wasn’t possible during the 90s dial-up-and-cable-TV era, which dramatically expanded the viewer base and commercial viability of sponsorships and broadcast rights for all popular esports. Sponsorship deals for top esports today– despite some high profile hiccups– are orders of magnitude larger than what they were at the height of the StarCraft II era. The same goes for broadcast rights deals (particularly in Asia) though the industry is very much still trying to figure out its place in the digital media rights landscape.

The point is this: from modding to broadband internet penetration to digital microtransactions to live streaming platforms to the rise of the creator economy, esports have reliably capitalized and grown in the wake of major new tech and gaming trends even as specific titles and third parties have shuffled in and out.

The audience interested in prodigies playing video games at the highest level existed back when video games were niche products totally outside of the mainstream and have since grown two steps forward one step back ever since. Figuring out the specifics of how to build sustainably on top of that foundation has been a bumpy ride, but the size of the addressable audience and resonance of video game IP is only going one way.

Yes, there are catastrophic failures every era– the industry is clearly cyclical– but after each downturn the peak of the next cycle has been higher than before.

The work of building sports takes decades, and esports are no exception. It’s a delightfully chaotic, highly ephemeral industry that ultimately lives and dies by the whim of multi-billion dollar game publishers, with no clear winner-take-all outcomes for third parties.

Quite a pitch for founders and investors!

That said: the products delight millions, have a strong gravitational pull for community-building, and the industry itself has a strong track record of innovation alongside tech and gaming breakthroughs.

For many, that’s enough.

The crucial work for the next generation of esports builders and torchbearers is figuring out how to grow esports-specific revenue to align the incentives of publishers with third parties while having direct exposure to the upside.

I have strong conviction that a major catalyst for the next era of esports will be found in an extreme on the spectrum– either interactive monetization for superfans or broadening the addressable fanbase.

If there’s one thing I’m sure of though, it’s this: esports is an industry powered by fans and builders who simply can’t end on a loss, and that resilience is a powerful foundation regardless of how

If you enjoyed this piece, drop me a line!

Avi Bhuiyan (@avibhuiyan)

Esports Fandom

By Bryce Blum

Author's Note⁸²

Esports Fan Demographics

Let’s start with the obvious: every different esport is going to have different demographics. The fan base of Call of Duty looks very different from that of League of Legends or Pokémon. While it's not practical to get into every individual esports scene’s demographics, it’s important to recognize at the outset that these differences exist and that attempts to increase esports fan engagement must necessarily look different game by game.⁸³

With that said, let’s set the stage at the 50,000 foot level before diving into what drives esports fandom. Esports fans are a niche subset of the broader gaming community. There are roughly 2.7 billion gamers in the world,⁸⁴ 540 million of whom are esports fans in some capacity.⁸⁵

Market research on esports fan demographics vary by report, but ultimately reach similar conclusions. Esports fans are young (but getting older), lean male (though female audience share is on the rise), and relatively affluent.

Age

The median age of a US esports fan in 2020 was around 29; globally that number is a bit higher, at 32.⁸⁶ Roughly 60% of esports fans are between the ages of 16-35.⁸⁷ While the overall audience is still quite young, it’s starting to age and esports fan interest in the 35-44 year old demographic in particular is spiking.⁸⁸

It’s not hard to see why. Let’s take a look at major gaming console and game releases in the US as gaming rose in prominence:

• Super Nintendo: released on September 9, 1991 and sold 20 million units⁸⁹

• Playstation 1: released on December 3, 1994 and sold 102 million units⁹⁰

• N64: released on September 26, 1996 and sold 20 million units⁹¹

• Half-Life: released on November 19, 1998 and sold 9 million units⁹²

• Starcraft: released on December 18, 1998 and sold 10 million units⁹³

• XBOX: released on November 15, 2001 and sold 24 million units⁹⁴

While we can’t pinpoint an exact date, this suggests gaming started to penetrate mainstream consciousness in the US sometime in the mid nineties. Put differently, virtually everyone born before ~1980 didn’t get exposed to gaming in their childhood and likely has very different gaming habits as a result. That’s roughly half to the US population, depending on where the line is drawn.⁹⁵

For people below this line, gaming is a deep part of their culture. For people above the line, they have been exposed to gaming and may even become hardcore gamers, but it’s not part of their DNA. They weren’t born with it. It’s not cool for their generation. This isn’t just common sense; it’s born out by the data.

via Marketing Charts⁹⁶

via Marketing Charts⁹⁷

With that said, one shouldn’t assume the esports audience will simply age along with the industry itself. It’s possible that esports fan engagement will dwindle with time as personal and professional responsibilities increase. This hasn’t been the case with traditional sports where the audience continues to get older, but there simply isn’t pertinent data to definitively say how the esports audience evolves in the decades to come.

There is also interesting data on the other side of this coin, as recent studies show that Millennials actually spend more time playing video games than Gen Z and Teens.⁹⁸ Some industry insiders argue that esports may peak with the Millennial generation, and interest will taper off as mindshare in younger generations moves to other places. Only time will tell how this plays out, though it is worth noting that “the biggest growth in overall time spent gaming vs. last year was seen among tweens and teens, up 63% and 48%.”⁹⁹

Gender

Estimates show that 72% of US esports fans are male and 28% are female.¹⁰⁰ Recent global data on this topic is hard to find, but in 2019 multiple studies estimated that the breakdown was 78-22, with the percentage of female gamers growing annually.¹⁰¹

Notably, relatively nascent esports powerhouse Valorant boasts an even larger percentage of female players;¹⁰² Riot confirmed that 30% to 40% of Valorant players are female.¹⁰³ This is particularly impressive considering that a 2017 study found that 16% of Overwatch players were female, which was 2x the average for a first-person shooter game at the time.¹⁰⁴

It’s clear that game-specific elements can heavily impact the likelihood that women are inclined to play and/or watch, but there are also broader issues surrounding toxicity against women in gaming. According to the 2022 study published by Bryter, one in five female gamers quit online gaming due to negative, toxic and threatening experiences.¹⁰⁵ About 72% of female gamers experienced gaming toxicity in the last year, which represented an 8% increase from 2021.¹⁰⁶

Though esports-specific data on these issues doesn’t seem to be available, these problems are often at their worst in popular esports titles because of the prominence of voice communication between players and the high-stakes, competitive team environment commonplace in such games.

Income

According to the Interactive Advertising Bureau, 43% of esports enthusiasts have an annual household income of $75,000 and 31% have an income of $90,000 or higher.¹⁰⁷ A 2020 study found that 30% of esports fans have an annual income of greater than $100,000.¹⁰⁸ These numbers are relatively in line with some of the most commercially successful traditional sports; for example, 32% of NBA fans earn a yearly income of $100,000 - $199,999.¹⁰⁹ With that said, esports fan spend has proven relatively difficult to capture, in part because fans spend a meaningful amount within the game as opposed to directly on esports.¹¹⁰

Sources of Fandom

Understanding who is an esports fan is important, but it’s not novel information. Most of this is common sense, and it’s been featured in every esports pitch deck for over a decade. The far more interesting inquiry is the why behind that fandom.

Esports fandom diverges from traditional sports fandom in several important ways, most notably with where fandom originates. The overwhelming majority of sports fans get their fandom from one of two places, neither of which is currently applicable in esports: their geography and their family.

Geographically-Connected Fandom

Local connectivity is deeply embedded in the origin story of traditional sports. These sports came to fruition before the advent of television or the Internet. Fans couldn’t watch a team play unless they physically went to the game.

Esports, in contrast, originated in a globally connected world. From practically the very beginning, a fan could watch any team compete no matter where they lived. In some senses, this is a core advantage; esports are global in nature, which means the addressable market for any given team, league, or player can be far bigger.

As a result, the only meaningful experiments with geographic ties in esports–the Call of Duty League and the Overwatch League–are relatively nascent. They were also significantly hindered by COVID-19. Though the results haven’t been particularly promising to date, the esports industry needs to experiment more with geographic connectivity as time goes on.

Contrary to popular belief, there is plenty of evidence to suggest that geography will play a meaningful role in the long term future of esports fandom.

While not city-based, country- and region-based affinity is quite strong across many esports. North America vs. Europe is a very common and passionate rivalry dynamic in virtually every esports title that is popular on both continents, including League of Legends, Counter-Strike, Rocket League, and more. China vs. South Korea is a huge rivalry in League of Legends, and China vs. North America is a huge rivalry in Dota 2. These rivalries often supersede team-based affinities–even if a fan is a diehard for a particular team, such loyalties can be left on the backburner in the face of inter-regional competition. Just ask any North American League of Legends fan; a TSM fan may hate Cloud9 during the LCS Regular Season, but cheer vehemently for them by the time Worlds comes around.

Country-based fandom is also deeply rooted in many esports, especially Counter-Strike. Whether it was the Danes of Astralis, the Poles of Virtus Pro, the Brazilians of Luminosity/SK Gaming/MiBR, or the Swedes of Ninjas in Pyjamas, these rosters became national catalysts that generated enormous fan unity and affinity within the applicable country.

With that said, the current scale of the industry also makes it difficult to build more narrow local ties because the number of fans of a particular esport in any given city is quite small relative to, for example, an NBA team. This is certainly true for the current experiments with city-based teams, but this will change as the industry grows. We don’t know what the most popular esport will be in 2050, but it’s reasonable to expect that it will have a much larger fanbase than anything in existence today.

Will it be enough to support a city-based team hosting regular home games at a local venue? I believe it will in time, but we won’t be able to definitively answer that question for at least a decade. We also don’t have to adopt the more common city-based framework used in many traditional sports; country-based teams may well prove more effective, particularly in esports where such rivalries and affinities develop naturally.

It also must be noted that geographic connectivity can come with other benefits. Beginning with the Baltimore Orioles in 1984, American sports teams have established a strong precedent for receiving enormous local taxpayer support for their ventures.¹¹¹ Whether in the form of relocation fees or stadium financing, cities with fan bases invested in the notion of having/keeping a team also have a strong track record of supporting those businesses at the governmental level.

Reasonable minds can disagree about the prospective likelihood that more local ties become a major part of esports fandom moving forward. Such ties may play a major role for certain esports, but not others. Only time will tell on this one, though it’s important that industry leaders continue to consider this possibility and not abandon any hope of building local fandom when creating new and evolving existing esports ecosystems moving forward.

Family-Driven Fandom

In contrast, family-driven fandom in esports feels far more certain, though the second generation of esports fans is only just starting to be born. As this second generation of esports fans grows up, many of them will be exposed to the simple, yet immensely powerful dynamic of watching sports with a parent and adopting that parent’s rooting interests.

Some of my earliest memories involve Mariners baseball, University of Washington football, and Seattle Supersonics basketball (may they rest in peace). At first, I watched these teams because my Dad did. I loved them because my Dad did. I was heartbroken when they lost because my Dad was heartbroken when they lost.

In my case, my Dad’s investment in purely local teams meant that all of these connections were reinforced by friends and classmates who shared these experiences with their own families, and eventually it became a part of our independent interactions. The combination of geographic and familial connection is potent, but family ties often lead to burgeoning fandom behind enemy lines. People move, after all, and a diehard Boston Celtics fan isn’t likely to start rooting for the Los Angeles Lakers purely because they relocate to LA. When that fan has kids, they inevitably attempt to brainwash their kids into maintaining the family’s rooting interests over the local ones.¹¹²

This same dynamic will come to the fore in esports, though it will take us a couple of decades to feel the impact. We also will have to overcome an additional hurdle since a parent and their kids will likely grow up playing the same sports, but different video games. While some familial fandom will occur naturally, teams and leagues should build programs designed to foster generational fandom in the coming decades. This is an enormous opportunity that need only be recognized and then seized.

The Implications

If geographic and familial sources of fandom begin to take root in esports, they have the potential to profoundly impact the landscape, as this is an area where esports struggles relative to our traditional sports counterparts. If a franchise like the Buffalo Sabres, New York Jets, or Seattle Mariners can maintain meaningful fan bases through excruciatingly long playoff droughts, it’s clear that something in traditional sports is much more sticky than what we currently have in esports. Esports fans don’t tend to stick around like that, at least not currently. We lack the social and emotional connections that bind sports fans to their teams.

Beyond the lack of geographic and familial ties, many teams fail to articulate a clear proposition as to why someone should be their fan instead of a fan of a different team. For years, teams used winning as their primary fan acquisition tool, but it’s impossible to win forever. Some teams approach branding more intentionally and articulate a clear proposition for why someone would choose them above all other options, then base every business decision within this framework in order to ensure their brand story is consistent and effective. Such efforts can make fan affinity for such teams more sticky, though it’s difficult to quantify without doing a comprehensive, industry-wide survey on the topic and I’m not aware of any such survey existing.

Perhaps more importantly, such efforts will always lack some of the intrinsic strength and stickiness of geographically- or familially-inherited fandom. Geography and family run deep; they’re a part of a person’s origin story, and generally don’t change as a person grows up.

As a result, a large percentage of esports fans gravitate more toward players than teams. There are certainly notable exceptions in esports history–TSM in League of Legends and OpTic Gaming in Call of Duty come to mind–but both of these examples involve teams that were steeply rooted in the origin story of the esport and game itself. Early market domination coupled with competitive success and content generation proved to be a potent mix, but it’s incredibly hard to replicate across an entire esports organization. As such, even teams like TSM and OpTic that have built enormous fan loyalty within a particular title struggle to make that translate to other esports.

It also doesn’t help that esports fans tend to shift their focus far more frequently than traditional sports fans. A sports fan will often go their entire life as a diehard fan of a particular sport. That’s not generally the case for esports fans. Popular games seldom dominate the games market for decades, though there are some exceptions; Counter-Strike, for example, has a 20+ year history and is still thriving. And while it’s true that traditional sports fandom does fluctuate by generation¹¹³ and new sports can sometimes emerge (e.g. pickleball), the sports marketplace is much more stable than esports because the lifecycle of a sport is typically measured in decades or centuries, not months or years.

On the plus side, a major point of differentiation between an esports team and its traditional sport counterparts is that esports teams operate across many esports titles, not just a single sport. This means an esports team can regularly adapt its business to ensure it competes in the titles that are most relevant to the evolving esports marketplace. If done well, brand loyalty built in one esport can theoretically translate to other esports as the industry continues to create new genres of games and new hit esports titles within those genres.

While it’s difficult to reach any definitive conclusions based on the relatively short history of well-funded esports team operations, it’s certainly something to track in the coming decades. Right now, this is a major area of weakness for esports team businesses but that may change as the marketplace matures.

Some amount of familially-inherited fandom seems inevitable, but the rest is up to us. If teams and leagues choose not to invest more heavily in geographically connected fandom, they will need to ensure that they have clear, alternate answers for why someone becomes and stays a fan.

We would also benefit by experimenting more with the fan-supporting infrastructure that exists in traditional sports, such as fan clubs and liaison officers (a person within an esports team functioning as a bridge between the team and its fans). There are some early efforts on this front, such as Liquid+, Cloud9 Stratus, and OpTic Nation. This is an area poised for innovation moving forward.

The first step to solving a problem is recognizing that it exists. The current nature of esports fandom is far too fleeting, which in turn hinders monetization efforts, particularly at the team level. If the industry can successfully mirror the social and emotional investment levels commonly found throughout traditional sports, this paradigm will flip.

I wish I had all of the answers surrounding how to fix it, but the reality is that this is an area that will require more intentionality and experimentation moving forward to ultimately get right. The solutions will also vary by esport. I’m excited to see how industry leaders will handle this challenge in the coming decades.

Evolution of the Team Model

By Bryce Blum

Esports teams are some of the most interesting businesses in the industry. While they share key similarities with traditional sports teams, esports teams are ultimately very different. This essay will explore those comparisons, analyze the development of the team business model, and evaluate opportunities for teams in the evolving esports marketplace.

The esports team business has evolved dramatically over the past decade. In order for teams to thrive, they will have to evolve even more and find the right balance between modeling themselves after traditional sports teams and forging their own path.

Sports Team Business Model

North American sports teams generate their revenue from four core buckets: media rights, gate (ticket sales, food/beverage service at games, and hospitality), sponsorships, and merchandise. PricewaterhouseCoopers has tracked these revenue streams for decades, and their breakdown shows that each bucket is relatively equal at present.

(via Awful Announcing)¹¹⁴

Depending on the sport, these percentages vary. All of the buckets have increased steadily over time, though the percentages have shifted with media rights playing an increasingly pivotal role for teams and merchandise becoming less significant.

Most sports teams around the world are also heavily geographically connected, usually to a state or city. These geographic restrictions are enforced at the league level, though the most successful teams often buck these limitations in order to establish a broader fanbase (e.g. Dallas Cowboys, Los Angeles Lakers, or New York Yankees). On the flip side, localization unlocks a wide array of revenue-generating opportunities within the buckets listed above, including local media rights in some sports, gate (you can’t sell tickets or food/beverage without having a local venue), and sponsorships attached to a venue.

Put simply, professional sports is a purely eyeballs-based business. Fans are monetized in a variety of ways–whether from home or at a live event– but they all come back to viewership of competitions.

While the monetization of professional sports teams/leagues has exploded in recent years, they weren’t particularly good businesses historically–at least, not when viewed from the lens of year over year profitability. In 2017, leaked NBA financial records revealed that 14/30 NBA teams lost money that year.¹¹⁵ When Jerry Jones bought the Dallas Cowboys in 1989, they were losing a reported $1 Million per month.¹¹⁶ As Victor Matheson, economics professor at College of the Holy Cross, put it in a recent Ringer article on this subject: “The idea that [pro sports] is a money-losing proposition was still right there in people’s minds as late as the 1990s. How do you become a millionaire? Start out a multimillionaire and buy a sports team.”¹¹⁷

This dynamic has done a complete 180 in recent years. Part of this can be attributed to revenue growth and improved performance of the average team’s year over year finances, but the largest driver is that sports team enterprise value has risen dramatically over the past 30 years. From 1996 to 2004, the average NFL team appreciated 321 percent (the S&P 500, by comparison, appreciated by 97 percent.)¹¹⁸ This growth has only further accelerated in recent years; for example, Michael Jordan recently 10xed his investment in an NBA franchise in only 13 years.¹¹⁹

(via Huddle Up)¹²⁰

This growth is also incredibly resilient. Sports franchise value has maintained its heavy upward trajectory in the face of recessions, foreclosure crises, a global pandemic, and other economic turmoil that has impacted performance in virtually every other industry.

The rising franchise value has almost become a self-fulfilling prophecy. For decades, sports teams were largely considered vanity assets; most teams lost money year over year, but were among the coolest things a billionaire could own and there are more billionaires in the world than there are tier one sports franchises. Now there are more billionaires than ever,¹²¹ sports revenue generation has skyrocketed (particularly media rights),¹²² and franchise value has followed suit. In many ways, sports teams are more akin to artwork than conventional businesses: their potential to produce a massive return on investment is often decoupled from revenue generation. Sports teams are a rare asset: they’re sexy and they’re good investments.

Esports Team Access to Traditional Sports Revenue Streams

Esports teams certainly have similarities with their traditional sports counterparts, but they are not the same business or particularly close to it. First and foremost, esports teams only access some of the revenue streams on which traditional sports teams rely.

Sponsorships are the primary source of esports team revenue, typically accounting for over 50% and sometimes as much as 90% of a team’s total revenue.¹²³ Brand integrations are a natural fit for official team apparel, content, and facilities. Some teams have even sold naming rights to their facilities (e.g. Team Liquid’s Alienware Training Facility), the entire organization (Shopify Rebellion), or a specific team within an organization (e.g. The General NRG Rocket League team).

Essentially every esports team sells merchandise, and larger organizations can generate seven-figures annually from such sales. However, merchandise is a relatively low-margin revenue stream that scales linearly with the size of a team’s fanbase. It will always be part of a team’s business, but doesn’t present much opportunity for exponential growth or cost innovation.

Media rights aren’t typically a significant revenue-driver for esports teams. Team-specific deals were common in the early days of Twitch and some maintain such deals to this day, but Twitch has shifted away from this strategy and teams will struggle to generate meaningful revenue directly via the sale of team-specific media rights unless the landscape shifts dramatically or they start generating significantly more first-party content.¹²⁴

Teams can capture media rights value via a revenue sharing relationship with a league, which do exist in many esports. However, league-wide media rights are often sold on a non-exclusive basis in order to maximize reach, which in turn drastically diminishes the value of those rights. Whether they’re sold exclusively or not, esports media rights aren’t worth nearly as much as in traditional sports for three reasons: (1) there isn’t much competition to acquire the rights, with just Twitch and YouTube as prospective buyers in the West, (2) esports content is distributed for free whereas sports content is typically behind a paywall (cable TV or similar service), and (3) many attempts to switch platforms haven’t proved to be successful. As a result, media rights don’t generally account for a meaningful percentage of an esports team’s revenue.

Teams also don’t host home games, so they have no current potential to generate ticket sales or food/beverage sales directly. Similar to media rights, these revenues get captured at the league level and are sometimes shared with the teams, but live events are such a small part of the current esports landscape that the resulting revenues are negligible, especially relative to the costs of those events.

When you put this together, it means that 50+% of an average North American sports team’s revenues are not a material opportunity for an esports team. This is a huge problem for any esports team that modeled its monetization plan 1:1 off its traditional sports counterparts. With that said, esports teams have significant advantages over traditional sports teams as well.

Esports Team Advantages & Opportunities

Esports teams are diversified assets. In almost every esport¹²⁵ teams are permitted to use their same branding, which creates numerous advantages: (1) allowing teams to build a broader base of fan support, (2) providing flexibility to enter new, popular esports or exit an esport that isn’t working, (3) leveraging existing resources and capabilities for low-cost expansion, and (4) de-risking the team’s business because its interests can be spread across every possible esport.

Now contrast that with a typical North American traditional sports team. For example, the New York Yankees are a globally-recognized brand with enormous fan affinity. However, that brand cannot be used outside the context of professional baseball. This is doubly problematic. The Yankees aren’t able to capitalize on their valuable brand in other contexts, for example by using it in another sport or producing any kind of consumer good using the team’s IP.¹²⁶ Perhaps more importantly, the Yankees are indefinitely tied to baseball, which is declining in various metrics ranging from World Series viewership¹²⁷ to youth participation.¹²⁸ To be clear, baseball is a great business (at least for now) and the Yankees are thriving, but their market position would be infinitely improved if they were permitted the flexibility of an esports team.

This opportunity for esports teams cannot be overstated. While an esports team may not have access to certain major revenue streams for a traditional sports team, the nature of their business is far less narrowly constrained. Within an esports organization, the team itself is not the beginning and end of the business–it is the anchor asset around which other business units may be built. These other business units can target the same valuable audience as esports (young, highly engaged, and relatively affluent), while taking advantage of the organization's existing marketplace expertise, leveraging the team’s brand for reach and credibility, and getting free promotion from the talent under its banner. These are massive legs up over any direct competitor, no matter what line of business a team chooses to enter.

As the team business has evolved over the past decade, we’ve seen more and more teams embrace this opportunity. 100 Thieves began by building an apparel business well beyond typical team merchandising, essentially creating Supreme for gaming. They have since expanded those efforts to include an energy drink (Juvee) and peripherals (Higround). TSM has an enormously successful web properties business, spearheaded by Blitz. Team Liquid has done groundbreaking collaborations with brands such as Naruto and Marvel. They also offer white label production services via Liquid Media and merchandising via irl/URL.

These are just some of the examples in the current market. Not all of these businesses will succeed, but that’s ok. Sometimes the problem will be that the team’s in-built advantages were outweighed by other market factors, such as too much existing competition. Sometimes the new line of business will be poorly executed. Sometimes the team will just get unlucky.

Not every attempted expansion needs to win so long as teams recognize the opportunity in front of them and make smart bets on business lines in which they are fundamentally advantaged via their ownership of their anchor asset (the team itself). We’re in the very early stages of the evolution of the team business model, and there is plenty of room left for innovation. My hope is that by recognizing the current strengths and weaknesses of the esports team business model, teams will be better equipped to experiment, grow, and thrive moving forward.

The Rise of Influencer-Led Esports Teams

Another recent evolution of the team business stems from the ownership of the team. Major influencers ranging from MoistCr1TiKaL (who then partnered with Ludwig) to Disguised Toast have recently launched their own esports teams. In some senses, the notion of an influencer-driven esports team isn’t original. Many esports teams were built at least partially around a popular gaming influencer, most notably 100 Thieves and Nadeshot.¹²⁹ With that said, the recent trend is different because the new teams are being built exclusively by the influencers without raising outside capital.

Influencer-driven esports teams are interesting because they invert the anchor-asset dynamic I described above; instead of the team being the anchor asset around which other businesses are built, the influencer becomes that anchor and the team is an ancillary business unit. This shift is further buoyed by the rise of co-streaming as a major piece of the esports broadcast landscape.

Co-streaming is when an influencer streams an esports event on their personal channel, sometimes while being joined by other influencers. This was expressly prohibited by most esports competitions in the past, but is becoming increasingly common as competition organizers recognize that a large percentage of fans prefer a more laidback broadcast experience and such co-streams can significantly increase the total audience for an event. Recently, Tarik’s Valorant co-streams have outstripped the main broadcast’s viewership. This type of content has become so successful that we’ve started to see traditional sports launch their own versions of this type of product.¹³⁰

When you fit these two pieces of the puzzle together, it becomes clear that an influencer-driven esports team has a major edge over its competitors: media rights monetization. In contrast to other esports teams that don’t generate meaningful media rights revenues, an influencer-driven esports team captures that value by co-streaming the team’s matches on the influencer’s channel. This content is often highly engaging, and can even outperform the influencer’s standard suite of content from a viewership standpoint. Influencers monetize those co-streams directly through all of the standard forms of streaming monetization (ads, subscriptions, donations, and personal sponsorships) and also generate indirect revenues via their platform deals; large influencers shop the exclusive rights to their content on a regular basis, and pricing is heavily based on their content metrics.

This new model comes with downsides as well, particularly the key-man risk associated with building an entire team brand around an individual (or multiple individuals). If a major issue arises for the underlying influencer, the team has a high chance of imploding because the business operates as an extension of the influencer’s brand; it’s hard to imagine how Moist Esports could live on without MoistCr1TiKaL or Disguised (DSG) without Disguised Toast.

Significance of Franchising

The creation of “franchised” esports leagues has also had a large impact on the team ecosystem. I say “franchised” because they’re not actual franchises in a legal sense. They’re also not structured in the same way as franchised leagues in traditional sports. A traditional sports league is typically a two-party system, with teams owning and operating the league and players getting contracted to compete on behalf of the teams in that league. Most franchised esports leagues are three-party systems, with the publisher owning/operating the league, teams maintaining some kind of right to participate, and players competing on behalf of teams (e.g. the LCS or the Call of Duty League). In Counter-Strike, there is even a four-party system where ESL and the teams co-operate the league, players compete, and the game’s publisher (Valve) exists as a relatively hands-off, but critical fourth stakeholder.¹³¹

For our purposes, I’ll use the term franchised to refer to esports leagues in which the parties involved have made a long term commitment (at least three years) to maintain operations, agreed upon a governance structure, and where league-level revenues are shared with the teams participating. Notably, this definition does not require teams to be owners of the league itself or be the primary decision maker at the league level, as is typically the case in traditional sports. Publishers generally haven’t been eager to cede control over their ecosystems to date.

Even more importantly, this complicates the revenue sharing dynamics. When the NBA calculates its revenues, basketball sales aren’t a part of the equation. In esports, player retention, engagement, and spend are very much a part of why publishers invest,¹³² but in-game spend is seldom incorporated into revenue sharing.¹³³

While existing franchised leagues are not currently optimized for teams because of the role publishers play within these ecosystems, they have provided many benefits to teams.¹³⁴ Chief among them is stability. Competitive structures that include promotion/relegation lead to extremely high-stakes, fun to watch matches; they also create crippling uncertainty for the teams competing in them. A team in such a system can only invest so much in players, their training, and related endeavors because they can’t be sure they’ll have the opportunity to recoup that investment. It’s hard to build for the future if you can’t guarantee that future will exist.

The stability and access to additional revenue streams generated through the transition to franchising was a primary driver behind the influx of team investments from 2016-2018 as well as the massive growth in esports team enterprise valuations.

(via forbes)

While it’s reasonable to expect this growth is going to slow and some team values to decline in the short term, it underscores the significance of the transition to franchising for the financial health of teams.

As mentioned above, rising franchise values has been a primary driver behind the acquisition of sports teams. Tier one sports teams are cool; they’re also quite rare.

In contrast, most esports investments today have zero vanity component. Investors expect a return on their investment. That will shift in time, at least partially. Esports will only become more and more mainstream in the coming decades, thereby increasing the cultural relevance of esports team ownership. As the gaming generation grows up and some of them become billionaires, esports teams will undoubtedly become hotter commodities for reasons unrelated to pure business performance.

The scarcity component of professional sports team ownership will be more difficult to replicate. Since the most popular esports change far more frequently than traditional sports, it’s hard for an esports team to overly rely upon a single game franchise for its valuation.

With that said, the ability of the biggest esports teams to fluidly transition between titles will help them maintain broader market dominance even if an individual game franchise wanes. An esports team may not be built around a single franchise slot that will last indefinitely, but it has the potential to make up for that by establishing itself as one of the marquee teams across the entire industry, thereby getting priority access to each new franchising opportunity that arises. This will help bolster the value of esports teams, even while the industry works to establish stronger operational business models.

Conclusion

Teams play a vital role in the broader esports ecosystem. They provide stability, training, and logistical support to enable players to reach their peak potential. They help build storylines that make competitions more compelling and they bridge fandom as new esports emerge, which is particularly important given the frequent turnover of popular games.

With that said, the esports team business model–much like the industry itself–is in the very early stages of its evolution. Teams have learned a lot about what works, what doesn’t, and where there is still room for experimentation. Publishers invested in making their ecosystems work also have similar learnings on how best to support their participating teams.

While comparisons to traditional sports teams are useful in some contexts, it's clear that the business of a sports team is quite different from that of an esports team. We need to learn from our traditional sports counterparts because they have a much longer operational history and have perfected certain aspects of eyeball-related revenue generation. But if esports teams are going to thrive and ultimately become the billion dollar assets that traditional sports teams have already become, it will require them to walk a much different, and largely uncharted path.

The Role of Players

By Jake Lyon

While the esports industry is being tossed on the rough seas of economic forces that are many orders of magnitude larger than the industry itself, it’s an important time to consider not only the corporate ships on that sea but also the brave group who dedicate some of the most important years of their lives to swimming in its uncertain waters.

Gamers are not only the lifeblood of esports fandom and the reason for its viability as a burgeoning entertainment industry; they are also the group from which its superstars emerge.

For many young and talented gamers, becoming a professional esports player is the dream. It was for me. As in traditional sports, the dream of being the very best is straightforwardly appealing to those who love to play and compete. It is especially so to young, passionate gamers seeking clarity of purpose in their lives and an alternative to the miasma of simultaneous insecurity and monotony of traditional career paths. The practical reality for a player embarking on this journey is, however, fraught with obstacles and uncertainty.

The Climb

As much as I would love to present a hopeful message to aspiring young players, I think it’s important to be realistic about the odds of achieving the level of competitive success necessary to earn a living wage in esports. This is the most important threshold aspiring players need to be thinking about. Reaching the elite competitive level in an esport typically demands an enormous and continuous time investment–often impossible for those who need to earn an income to support themselves. This depends almost entirely on family circumstances. A player who can expect to be supported through college has much more time to reach the living-wage threshold in their game of choice than one who will need to earn an income much earlier. Although it is not impossible to continue to compete while working to support oneself, it is drastically more difficult.

Some manage to buy themselves more time or find independent success via careers in content creation that allow them to make a living without compromising their practice schedule, but these folks are the exception rather than the rule. Many elite competitive players are simply not suited to be successful entertainers and achieving financial stability as a content creator can be just as difficult as doing so in esports.

To contextualize the difficulty of what an aspiring esports player is trying to accomplish, let us take men’s football (soccer) as a comparative example. A 2019 FIFA report on men’s professional football found that there were 128,983 professional players out of an estimated 275 million players active in the sport globally. League of Legends has around a thousand professional players globally out of an estimated 153 million players active in the last 30 days. While the conclusions one can draw from this mode of analysis are limited, back-of-the-napkin math tells us that becoming a professional League of Legends player is 71 times less likely than the already herculean task of becoming a professional footballer.

Given the incredible odds stacked against a given player’s success, young people who dream of becoming esports superstars would be wise to consider the sacrifices necessary to attempt to become a professional player. Only a player whose natural passion for the activity has already placed their skill on the right tail of the bell curve should even consider it possible. Luckily, modern esports titles contain a feature perfectly suited to this evaluation.

The ultimate metric for evaluating one’s chances at a career as an esports player is nearly as old as videogames themselves: the leaderboard. One of the great departures that modern esport games make from most other competitive activities is in the ubiquity of online ranked ladders. Imagine a system where 1 million basketball courts exist side-by-side and players are continuously matched against one another in constantly changing teams. A new player starts at the bottom court; a player on the winning team moves to the next court and a player on the losing team moves back a court. The best living player can wind up losing in a small sample of games, but over time their skill will prevail and they will reach the rank 1 court. Such a system cannot exist for traditional stick and ball sports, but they’re the norm for esports.

No matter who you are and what background you might have, public online ranking systems are a great equalizer. Any esports player’s resume is glaringly incomplete without a mention of their achievements in this space. It is the first and most crucial competition in which a player must succeed in order to have a real shot at a competitive career.

What makes these ranked ladders unique in a competitive context is that they erase any formal divisions between different groups of players. The only thing separating a casual player from a full-time, salaried professional in this particular arena is winning games on the ranked ladder. Win much more often than you lose and it is a mathematical certainty that you will face the best of the best in time. These public leaderboards allow talented young up-and-comers to square off against legends, albeit virtually. Typically this functions as a prerequisite to the possibility of joining the pros on teams or challenging them on a competition stage. While a player who reaches the top of a game’s ranked leaderboard isn’t guaranteed to find the same success in elite competition, they will certainly have the attention of professional teams and a good chance at starting a career.

Game Selection

There is a larger, implicit decision continuously at play during this phase of a player’s career (whether the player is aware of it or not): in which game should they invest their time, energy, and talent?

Depending on the competitive format of the game (rules typically set by the game’s publisher) there may be age restrictions on professional competition. For example, the Overwatch League currently sets the minimum age requirement at 17. A player with a few years to wait before the possibility of joining an Overwatch League team could and should take seriously the possibility of trying to play professionally in a title that will allow them to profit from their skills without delay; a player must also consider the life cycle of a game and whether the game’s prime will overlap with their own. In traditional sports, a young and talented athlete possesses skills that are often highly transferable to similar competitive endeavors. The same can be true in esports. This transferability, though, is highly dependent on the specifics of a player’s experience, gaming strengths, and willingness to endure a relative reset on their competitive progression.

Players must evaluate for themselves which game presents the best odds for competitive success based on their experience, time horizons, and perhaps most crucially: which game seems most likely to endure as a professionalized esport. This is ultimately an exercise in calculated risk taking. Up and coming esports titles promise a level playing field and a chance at a relatively fresh start, yet their success and the future scale of professional competition is unknowable. Enduring and well known esports offer a measure of relative security, but a new player in an old game finds themselves with years of catching up to do as they work their way up the ranks.

Publishers seeking to fit their games into the landscape of esports do well to cultivate a reputation of nurturing their nascent competitive scenes if they want to attract elite talent. Riot is clearly a leader here, as any new title they release has the implicit backing of a publisher that has integrated esports into its DNA.

In my personal journey, I knew even before the release of Overwatch that it would be my best bet at having an esports career. Blizzard’s support of Heroes of the Storm esports despite its relatively minor market share in the MOBA category was for me reliable evidence that Overwatch–by all appearances set to be much more successful in its niche–would be a worthy game in which to take my best shot at a professional career.

These decisions about which game to focus on are for players as crucial as they are rare. Aspiring players will only have the time for at most a few attempts at professional success, and reaching the top in a popular title can take years of total dedication to its mastery. It is perhaps the most tragic outcome for a player to succeed in reaching the top echelon of competition only to find that their skills can no longer command a living wage.

Going Pro

Even players who are able to realize the dream of earning a salary to compete professionally have only taken the first step on the path to true security. A rookie player without competition for their contract will likely only be earning the minimum salary allowable under the rules set by the competition in which they compete. For competitions not governed by any contractual standardization, some players choose to sign highly exploitative contracts for fear that it is their only chance to ‘make it’ as a professional gamer. Many of these players are completely uneducated on the nature of contract law or simply fail to consider how much they risk in signing something that they have not read or understood. The dream of esports stardom can be a powerful intoxicant for many people in this position. As an aside to any player who happens to read this, please at least read any contract you intend to sign and try to be sure that you understand what the contract truly commits you to. I’d also highly recommend having a lawyer look it over before you sign.

From a financial perspective, a career as a player is no golden goose. An unfortunate reality of careers in esports specifically is that they are often very short. Retiring in your mid 20s is the norm for players. While the best of the best in a tier 1 esport have for a few years commanded impressive salaries, the median esports player in most titles is not making the kind of money that can set a person up for life. Furthermore, due to the incredible focus on individual skill that is necessary to reach this level, players often lack the financial literacy to use their early earnings wisely. Even NFL players earning an order of magnitude more money than the top esports stars routinely find themselves in financial trouble after retirement.

While esports players might have transferability of skills between different titles during their competitive prime, there is a dearth of well established paths that a retiring player can follow. Experience as a professional player does lend itself to coaching, content creation, and broadcast talent work, but many players might find that they are suited to none of these roles. This will change as the industry matures and ex-players acquire the diversity of skills necessary to work in roles slightly more distant from the games themselves (production and development to name a few), but current players on their way out would be wise to prepare an exit strategy. Collegiate esports in the west offer a hopeful path for the future in this regard, yet professional opportunities in this scene vary widely.

In theory, the best way to make esports careers more sustainable would be to increase their average duration. While in my view the competitive impact of biological decline is relatively minimal, I see much more significant structural obstacles to long and sustainable esports playing careers. Since modern esports titles are primarily monetized via microtransactions, the economic incentives lead publishers to maximize not only the size of their player base but also the sustained duration of their games’ popularity. In the business of esports, the synergies of this model are significant: a large player base is a fertile soil in which to grow the fandom of the competition while perceived durability of a game’s popularity is a necessity to attract outside investment.

Competitively speaking, there is a crucial side effect of this economic reality: frequent changes to the game. Publishers know that keeping the fickle attention of gamers focused on a given title demands a constant flow of new content and patches that impact the game’s meta. Consequently, esports games remain in a constant state of change. One’s experience as a player is always sliding towards obsolescence–maintaining the massive demands on esports players’ time throughout their careers. Unlike traditional sports players who can reasonably expect relatively minor rule tweaks on a generational timescale, esports players are forced to adapt to dramatic changes that can take place often without any advance notice or competitive consideration. Elite players must constantly study the latest innovations of their competitors and try to continuously innovate as the playing field shifts under their feet.

This neverending study of shifting nuance is a crucial and unique element of esports that players and coaches are constantly seeking to perfect. New ideas and strategies are always in tension with one another; huge rewards accrue to those whose theory of the game is the most incisive at the moment of competition. Even before one considers the impossible-to-predict changes handed down by developers, competitive games are so rich with detail that some facts about the game can lie dormant and undiscovered for years before an enterprising team or player finds a way to exploit them for massive competitive advantage. A further wrinkle of complexity is that every player or team of players (depending on the esport) is ultimately a sample size of one in that a given strategy can suit the strengths of individual players differently.

Conclusion

In short, the reality of being a professional esports player is not easy.

And yet, despite the near impossibility of the dream, it persists. Every player who has tried to make their mark on the history of esports has their own story and their own reason why. In my view, though, it all comes from the same source. Giving all of yourself in pursuit of mastery is a very natural human endeavor. It is the ubiquity of this human experience and the vigor with which we pursue it that has given rise to esports in the first place.

As gaming has come to dominate the global entertainment marketplace, esports allows those most passionate about the medium to gather together to be amazed and delighted by what the very best of us show to be possible. These possibilities inspire us, and invite us to wonder what it is that we are capable of. This is the role of players in esports.

— Jake Lyon

"Wish We'd Had Time To Cover That"

Bryce Blum & Avi Bhuiyan

Authors Note¹³⁵

Role of the Publisher Moving Forward

BRYCE:

When the history of esports is written 100 years from now, I think we’ll refer to the period we’re currently in as the publisher era of esports. We live in a world where Riot operates more than ten leagues across the globe and outlays more than $100 million on esports annually, and where Blizzard-Activision stood up two separate, large-scale franchised leagues for Overwatch and Call of Duty. We’ve also seen publishers from Ubisoft to Epic Games invest heavily in their esports ecosystems. In many ways, Valve remains a massive outlier in the current marketplace due to its largely hands-off approach to esports.

This wasn’t always the case, and it doesn’t have to be moving forward either. No matter how focused a publisher is on its esports ecosystem, a game’s revenue-generating potential will always far outstrip that of the game’s esports. It’s also a completely different line of business. Making and monetizing a great game is completely divorced from the exercise of making and monetizing a great sport. This is why Riot ultimately decided to separate esports from publishing in its organizational structure.

AVI:

Haha I think it’s more likely we’ll refer to this as the end of the “logo and dozen expiring contracts is worth $100M” era, or perhaps more charitably the “traditional sports era.”

There are so few 10,000+ hour games that we’re really talking about a tiny subset of publishers to begin with– owned-and-operated leagues are uncommon now and will be in the future IMO. That said, I have a hard time imagining an era that isn’t defined by publishers’ interests generally. The IP flywheel is too important.

Companies like Riot and Nintendo have game development in their core DNA, but they also view themselves as cultivators of IP. Arcane was the #1 show on Netflix across dozens of countries, while The Super Mario Bros. movie has grossed more than Frozen at the box office. K/DA has a #1 Billboard hit and Universal Studios’ latest flagship amusement park offering is Super Mario World.

These aren’t the side projects of game devs moonlighting between balance patches; these companies are working very methodically to build themselves into peers of Disney.

For stewards of iconic IP, any surface area where fans can interact with the IP has to be up to the quality bar, but that’s especially true for high-profile products. Whether it’s esports, music, theme parks, animation– bad headlines and poor product experiences gum up the entire flywheel, which is a much higher stakes issue than esports revenue.

Your point that esports aren’t a publisher’s core area of expertise is a fair one; Disney tried and failed to make video games in-house quite a few times before they finally gave up and started licensing IP out to third parties like EA and Second Dinner, which definitely seems like the correct decision long-term.

That said, I think that esports are closer to the flagship product (video games) for publishers than video games are to the flagship product for Disney (movies/parks.) I also think that if esports does figure out monetization at scale, publishers on the sidelines will come storming back into the picture (see: Disney opting to build and run their streaming service in-house rather than licensing content out to Netflix.)

BRYCE:

To be clear, it’s hard for me to envision Riot ever turning back. Esports are in the company’s DNA at this point. They’ve invested hundreds of millions to develop the expertise, acquire the equipment, and build an esports department within a game studio that maintains roles and responsibilities far more similar to that of the NBA than any game publisher. Riot’s example has inspired dozens of game publishers to follow in their footsteps, but as time goes on I think Riot’s approach to esports will become the exception, not the rule.

Esports represent a marketing and independent revenue generation opportunity for a game publisher. That opportunity shouldn’t be left on the table, but that doesn’t mean a publisher needs to operate the business. When Riot started on this path in 2012, the marketplace looked very different. They looked around and saw a wide array of third party esports competition organizers, none of which played at the level they envisioned. Riot wanted to create spectacle akin to the biggest and best traditional sports products. They wanted something worthy of garnering mainstream attention. Maybe some of those operators were capable of pulling it off, but there was no established track record to prove it and so Riot bet on themselves instead.

If a new game publisher emerges tomorrow with an esport that takes the gaming world by storm and ascends beyond any other, would they make the same decision? If we could wave a magic wand and create a world where Riot itself releases League of Legends today instead of in 2009, would they?

I’m not sure they would.

The financial upside of esports can be captured without operating a soup to nuts sporting business inside of a publisher that is built to do something very different. Game IP can be licensed, exclusively or non-exclusively, to competition organizers that pay a fee and offer a revenue share. A publisher can stay involved to ensure the resulting competitions support their goals and protect their brand.

While the experience levels and products created by third party esports competition organizers didn’t impress Riot in 2012, they have evolved along with the industry. All of the biggest competition organizers (ESL, Esports Engine, FaceIt, NGE, and Dreamhack) have been rolled up into a single entity that has operated marquee events across the globe. Perhaps more importantly, mainstream sports/media companies ranging from the WWE to the NBA have expressed meaningful interest in esports, and could easily partner with a game publisher to become their turnkey esports solution.

The NBA has 30 experienced ownership groups with physical infrastructure in virtually every major city across the US and a track record of building a best in class sporting business. It’s also already operating its own esports venture (the NBA 2K League), a venture that feels as much a proof of concept for the type of partnership I’m describing as it does an attempt to serve any other purpose for the NBA.

AVI: I think Riot’s approach already is the exception and not the rule– are there really dozens of game publishers with in-house esports departments that are larger than a handful of employees meant to coordinate with third parties (e.g. Supercell)? In the West I can think of Riot, Activision-Blizzard (and let’s put an asterisk on that one given that headcount has been in free-fall), EA, Ubisoft, Hi-Rez, and Epic. I believe Garena does some events in Latin America as well. Am I missing others

Regardless, I think it’s definitely true that publishers generally want to hire third parties to manage a lot of the tactical realities of running live events and competitions generally (every publisher including Riot works with contractors and third parties at some level.)

It’s also worth noting that Riot pulled the plug on Wild Rift esports outside of Asia after a trial period– even in this most recent era it hasn’t just been about the publisher, it’s also been a game-by-game consideration.

BRYCE:

No, you’re not, but that’s a pretty big list. Ten years ago, there were literally zero publishers that staffed out esports departments to actually operate a competitive ecosystem. Riot was the first, and their success moved the market dramatically.

I agree with your take that it’s hard to imagine an era that isn’t defined by publishers’ interests generally. My point is that the role publishers play in the industry is likely to evolve over time, and I’m not sure they’ll ever be this many marquee esports ecosystems operated directly by publishers ever again.

Yes, publishers will always care about protecting their IP. I’m just not convinced the best way to do that is by being an esports operator. Outsourcing may optimize for everything: brand protection, fan engagement, and revenue generation.

AVI:

Got it, OK yeah we mostly agree. It’s maybe just a question of how many outliers we think there will be. I don’t think Riot is going to be the last publisher to take the approach of running a meaningful portion of their ecosystem in-house in the interest of creating a standalone entertainment property with mass appeal, but I also think there are at most a handful of games each decade that even warrant raising the question. It’ll be a rarity.

Valve

BRYCE: While we’re on the subject of publisher’s taking a different path, we should discuss Valve’s stance on esports. They published two of the three largest esports of the past decade (Dota 2 and CSGO), and yet remained largely disinterested in esports as a business venture. They support the Majors in CSGO via prize pool funding and in-game content revenue sharing. They support Dota 2 through in-game content revenue sharing in conjunction with their operation of the International. That’s not nothing, but in comparison to other publishers Valve has a pronounced laissez-faire attitude surrounding the esports industry.

This approach has some pretty clear pros and cons. Valve gets enormous marketing value for their games without having to spend much money. On the other hand, they lack the level of control other publishers have surrounding their esports ecosystems. This means their IP is at the mercy of third parties. If an event runs behind schedule, broadcast quality is poor, or fan experience is otherwise suboptimal, that is outside of Valve’s control. To say nothing of more extreme examples, such as match-fixing.

AVI:

Yeah, Valve is such an interesting outlier. Unlike almost every other company that publishes 10,000 hour games their golden goose isn’t a game: it’s a digital commerce platform.

Gabe Newell said in an interview some time back that Valve is more profitable per employee than Apple or Google– and that tracks, because Steam’s colossal success affords them the ability to do pretty much whatever they feel like. Their priorities and constraints are very different from any other game publisher I’m familiar with, and that’s reflected in their unusually lean company size and quirks like not having formal managers or reporting structures.

I give Valve a ton of credit: I get why you describe them as disinterested, but considering the company’s size (they’ve clearly spent scarce time and energy cultivating recognizable properties like The International and well-thought-out integrations like CS:GO stickers and DOTA 2’s Battle Pass [editor’s note: now defunct!] . They may not be overly engaged, but they do meaningfully subsidize. That said, esports feel like a surprising side quest for them given how miniscule the upside is compared to Steam and how IP cultivation is often crowdsourced to the community rather than a major area of focus for them. That’s especially true given how generally disengaged Valve is from public-facing communication with players or customers compared to industry norms. A laissez-faire approach to esports seems pretty consistent with their company culture across the board.

I think Valve’s esports approach isn’t optimized for cultivating IP or scaling revenue so it’s unlikely to be modeled by publishers looking to scale. Even today, they’re sort of in a category of their own when it comes to major esports publishers. Consider that Valve doesn’t bother asking for royalties in its standard Game Tournament License Agreement, while Steam has long had a 30% platform tax. I think that speaks volumes on how important esports is to their core business.

If they were reliant on growing the revenue and resonance of their first-party IP to survive they would operate quite differently. That said: they aren’t, so they don’t.

BRYCE:

It’s easy to understand why Valve takes this approach. The tougher question is whether it’s a model other publishers should replicate in the decades to come. As recently as three years ago, the CS:GO esports ecosystem looked very different than it does today. Third party tournament organizers were diversified, highly competitive, and pushing to innovate on the core broadcast product. There were two major leagues–entrenched powerhouse ESL Pro League and upstart competitor Flashpoint, owned by the teams and operated in conjunction with FaceIt. There were also regular, high-stakes tournament circuits that included BLAST and Intel Extreme Masters, and major one-off events organized by parties including PGL, Dreamhack, and Beyond the Summit.

Today, the free market of competition has pushed the CS:GO esports ecosystem toward consolidation. ESL, Dreamhack, FaceIt, and others have been rolled up into a single entity, the Savvy Gaming Group, which is owned by Saudi Arabia's sovereign wealth fund. Flashpoint shut down in 2021, Beyond the Summit operated its last CS:GO Summit that same year, and many other third parties have shied away from operating CS:GO events. Valve is clearly unhappy with the status quo, and recently announced that it expects stakeholders to be more transparent surrounding conflicts of interest and extend competition invites based solely upon Valve’s ranking system.

With that said, viewership of the esport is still going strong. The recent BLAST.tv Paris Major recorded a peak viewership of 1.52M during its finals, making it the third most popular event in the title’s history.

Since Valve doesn’t financially support any CS:GO events outside of the “Majors”, the stakeholders building the competitive infrastructure around the game must focus on their bottom line far more than their publisher-backed counterparts in other esports. It’s hard to overstate how much this changes the nature of business operations throughout CS:GO.

AVI:

Hmm I may have some unpopular opinions about this.

First, I’m not sure that consolidation is a unique consequence of the Valve approach: publishers that spin up first-party competitive products generally almost immediately shut down all competing tournaments/leagues/etc.

Second, I feel like being focused on the bottom line is generally the correct approach for 99.99% of esports ecosystems and by extension the companies operating in them. Trying to blitzscale your way to winning a market only makes sense if that market is large enough to more than offset your losses once you’ve won– and that’s just not the case for most esports ecosystems, which are pretty niche. If anyone should be taking those kinds of risks it should really be the publisher IMO– though that affects the upside for third parties.

Let’s dig into this more though: Is there something specific you have in mind when you’re referring to how business operations are different in CS:GO because stakeholders “must focus on their bottom line?” One thing that immediately comes to mind for me is how some creators like Gaules have had to pay tournament organizers millions to co-stream events while most publishers can take a longer-term view and just welcome creators to co-stream for free. Anything else come to mind?

What I meant by focusing more on the bottom line is that it largely removes the game marketing component from the equation. As such, competition organizers must operate their events to break even or better. This doesn’t just impact how co-streaming works, it impacts every decision made in connection with the event: where it’s held, ticket pricing, which teams are invited, how much is invested in production, broadcast, etc. Everything is different.

BRYCE: What I meant by focusing more on the bottom line is that it largely removes the game marketing component from the equation. As such, competition organizers must operate their events to break even or better. This doesn’t just impact how co-streaming works, it impacts every decision made in connection with the event: where it’s held, ticket pricing, which teams are invited, how much is invested in production, broadcast, etc. Everything is different.

AVI:

Got it, fair enough! We’re on the same apge then.

In a sense it seems like there’s a core trade-off:

Valve will meaningfully subsidize their ecosystem with revshare on in-game items and not require third parties to pay a licensing fee to leverage the iconic IP of a 10,000 hour game. That’s huge! However, they’re pretty hands off from there except when every so often they come down from on high to issue about an issue with no prior warning— coaches, banning players, ecosystem consolidation— then go back to the ivory tower.

Riot owns and operates the flagship esports properties in their top titles and has a reputation for keeping a Nintendo-like grip on everything their IP touches. The flip side is that they have a strong and reasonably predictable POV on the game and future of the esport. They’re willing to deploy humans and capital far beyond Valve’s appetite, but at the end of the day they’re in the driver’s seat and third parties can either come along for the ride or not.

At the end of the day, I’d actually prefer the Riot approach: I think there’s a lot more predictability and sustainability with a partner that’s all-in on the product you’re building your business on rather than a detached but unpredictable entity whose IP you build on top of with no guarantees.

Acknowledgments

This project was a multi-month behemoth, and we are grateful for the many people that were down to read early drafts, offer feedback, and push us when we weren’t sharp enough.

Please note that the folks below don’t necessarily agree or disagree with any of the views in these essays, but all of them have been generous with their time and energy.

In no particular order, many thanks to:

Krista Hiner, Ryan Garfat, Steve Arhancet, Yoni Ginsburg, David Philip Graham, Josh Swartz, Chris Hopper, Ryan Fairchild, Seb Park, Don Boyce, and of course the legend Jake Lyon

We appreciate you all!

• 1.

  This essay and the entire series focuses primarily on North American and European esports. Though the history of esports is deeply rooted in Asia, the business side of the industry remains largely separated. An entirely separate series of essays could be written on these same topics focusing on esports within Asia and in other parts of the world.

• 2.

  Reasonable minds can also disagree on the exact year when this transition occurred. I’m confident it’s within the three year period I identified, but if someone thinks it’s slightly earlier or later I wouldn’t put up much of a fight.

• 3.

  https://web.archive.org/web/20150924091644/http://www.riotgames.com/sites/default/files/uploads/120806_NEWS_lol_champseriesannounce.pdf

• 4.

  https://www.forbes.com/sites/insertcoin/2013/08/24/league-of-legends-finals-sells-out-las-staples-center-in-an-hour/?sh=42e1849b32b8

• 5.

  https://www.dotesports.com/general/news/coca-cola-riot-games-sponsorship-league-of-legends-esports-39

• 6.

  https://www.vg247.com/twitch-viewers-more-than-double-to-45-million-in-2013#:~:text=In 2013%2C Twitch reached 45,million unique broadcasters this month.

• 7.

  https://en.wikipedia.org/wiki/Justin.tv

• 8.

  Id.

• 9.

  https://www.businessinsider.com/amazon-buys-twitch-2014-8

• 10.

  https://archive.esportsobserver.com/esports-essentials-counter-strike-majors/

• 11.

  https://liquipedia.net/dota2/The_International

• 12.

  Id.

• 13.

  There are so many stories from this era; some hilarious, some scary, some downright tragic. I’m intentionally leaving out much of this color because it’s too far afield from what I’m trying to accomplish via these essays.

• 14.

  https://en.wikipedia.org/wiki/Championship_Gaming_Series

• 15.

  Gaming houses had plenty of pros and cons. Unfortunately, this is not something worth getting into for my purposes lest this series of essays turn into a novel.

• 16.

• 17.

  Id.

• 18.

  https://www.svg.com/164026/how-much-money-do-pro-league-of-legends-players-make/

• 19.

  https://digiday.com/marketing/the-esports-salary-market-is-headed-toward-a-correction/#:~:text=Hal Biagas%2C then the executive,one league source told Digiday.

• 20.

  Avi would like me to recognize that there are people in their 40s, 50s, and 60s who adopted esports fandom later in life and will feel left out because I don’t explicitly mention them. To the twelve of you, I’m sorry that I only gave you a footnote. Better than nothing, though.

• 21.

  See esports fandom essay for a more detailed breakdown on the underlying demographic trends impacting the size of the addressable esports market at any given time.

• 22.

  https://newzoo.com/resources/trend-reports/newzoo-global-esports-live-streaming-market-report-2022-free-version

• 23.

  https://www.espn.com/espn/story/_/page/instantawesome-leagueoflegends-141201/league-legends-championships-watched-more-people-nba-finals-world-series-clinchers

• 24.

  https://www.cnbc.com/2019/04/14/league-of-legends-gets-more-viewers-than-super-bowlwhats-coming-next.html

• 25.

  This topic is extensively covered in later essays in this series.

• 26.

  https://techcrunch.com/2023/04/19/tech-industry-layoffs/

• 27.

  https://twitter.com/scienceisstrat1/status/1643623908573102081?s=46&t=FY6onOQnbE99Brb_ellh0Q

• 28.

  https://www.riotgames.com/en/news/building-the-future-of-sport-at-riot-games

• 29.

  Hello there!

  This essay is about a topic close to my heart: the business incentives driving professional esports and the core issues that need to be solved to move the industry forward to a post-traditional sports era.

  In a previous life I ran day-to-day league operations for Riot Games’ flagship North American League of Legends esports product, the LCS. I have since consulted with dozens of clients ranging from NBA teams and family offices to game publishers and blue chip brands about video game marketing, particularly competitive gaming and content creators.

  I’ve condensed years of working experience, hard-won learnings, and candid conversations with industry decision-makers and line workers all into one piece. It’s one of the longest essays I’ve ever written, but I couldn’t do the topic justice any other way.

  This piece is divided into two parts: Part I frames the incentives and challenges for the industry at large, Part II is about solution spaces for outlier esports.

  The TL;DR of this piece is that the the keys to esports sustainability at scale are:

  ❌ NOT betting it all on mimicking traditional sports business models (they share similarities product-wise, but the business dynamics are fundamentally differently-shaped)

  ❌ NOT betting it all on raising revenue share from video games (there’s incentive misalignment and major attribution problems)

  ✅ Creating and monetizing a more interactive experience for viewers to influence broadcasts (Incentives are aligned and there is strong precedent)

  ✅ Broadening the profile of fans from hardcore gaming enthusiasts to anyone that enjoys dramatic storylines, charismatic athletes, and the thrill of competition.

  I hope you enjoy!

  – Avi Bhuiyan

• 30.

  Note: only a handful of esports can sell out arenas, much like traditional sports. Most attract small but dedicated grassroots communities that play and watch for love of the game– and for most, that’s enough!

• 31.

  Can a sustainable esport be more popular than its underlying game? It’s certainly possible (see: traditional sports where virtually no one plays contact football after high school yet it’s the most popular sport in America) but there are good reasons to be skeptical (and no current examples in gaming.)

• 32.

  https://nikopartners.com/esports-in-asia-and-mena/

• 33.

  https://superjoost.substack.com/p/eyes-wide-shut

• 34.

  https://investor.activision.com/news-releases/news-release-details/call-duty-surpasses-3-billion-net-bookings-over-last-12-months

• 35.

  https://www.reuters.com/article/esports-lol-revenue-idUSFLM2vzDZL

• 36.

  https://www.talkesport.com/news/valve-earning-54-million-from-csgo-case/

• 37.

  https://mobilegamer.biz/2022s-biggest-mobile-games-subway-surfers-free-fire-stumble-guys-roblox-and-more/

• 39.

  Matthew Ball has an excellent piece on the macro dynamics of esports that delves into this analogy and the nature of esports from an investment perspective more broadly. https://www.matthewball.vc/all/esportsrisks

• 39.

  Matthew Ball has an excellent piece on the macro dynamics of esports that delves into this analogy and the nature of esports from an investment perspective more broadly. https://www.matthewball.vc/all/esportsrisks

• 40.

  https://news.gallup.com/poll/4735/sports.aspx

• 41.

  https://www.washingtonpost.com/outlook/2019/10/29/why-boxing-disappeared-after-rumble-jungle-why-football-could-too/

• 42.

  https://esportsinsider.com/2021/08/coca-cola-and-state-farm-reassessing-overwatch-league-sponsorships

• 43.

  In fairness, while OWL is arguably the poster child of esports excess for the 2017-2023 era, global COVID-19 lockdowns did not create favorable conditions for a strategy built around live events.

• 44.

  https://www.forbes.com/sites/mikestubbs/2023/05/06/csgo-breaks-all-time-player-record-again-with-18-million-players/#:~:text=For what feels like the,into the game earlier today.

• 45.

  https://kotaku.com/overwatch-league-esports-layoffs-blizzard-owl-1850657003

• 46.

  https://www.washingtonpost.com/sports/nintendos-newest-smash-bros-game-showcases-its-odd-relationship-with-esports/2018/07/05/ad8632fe-7568-11e8-b4b7-308400242c2e_story.html

• 47.

  https://www.digitaltrends.com/gaming/overwatch-2-team-size-change/

• 48.

  https://www.dota2.com/newsentry/6252732681186068104

• 49.

  https://www.gamesindustry.biz/video-game-market-revenue-forecasted-to-hit-usd200bn-for-2022

• 50.

  In a sign of the times, the industry’s leading source of revenue projections, Newzoo, announced they were throwing in the towel on esports-specific coverage in 2023 https://esportsinsider.com/2023/03/newzoo-ends-esports-report

• 51.

  Speedrunners, please forgive me

• 52.

  For the purposes of this piece let’s define “top-tier” as ecosystems which can consistently attract ~100,000 viewers for flagship esports broadcasts.

• 53.

  This is a composite of perspectives I’ve heard from prominent insiders working on the publisher side of the industry. Naturally not all publishers are the same, and Valve in particular is an outlier that doesn’t share this POV given their laissez-faire approach to esports.

• 54.

  There are many examples, though Heroes of the Storm is one that readily comes to mind: https://www.polygon.com/2018/12/14/18141331/heroes-of-the-storm-canceled-hgc-blizzard-community

• 55.

  https://www.pcgamer.com/how-among-us-became-so-popular/

• 56.

  https://newzoo.com/resources/blog/apex-legends-is-one-of-the-best-orchestrated-game-launches-we-have-ever-seen

• 57.

  Note that certain high-profile esports events are broadcast on multiple platforms (e.g. YT, Douyu, Huya, etc.) and/or allow for co-streaming, which can split viewership numbers.

• 58.

  Between 2018-2019 Epic committed $200M to the Fortnite Competitive prize pool, as well as an undisclosed amount into live events, online broadcasts, and general infrastructure

• 59.

  Fortnite Competitive missed revenue targets by a staggering $154M in 2019

• 60.

  To be clear: Fortnite Competitive still has a respectable prize pool and gets material support from Epic, but the era of a World Cup at Arthur Ashe Stadium and 9 figure prize pools seems to be in the rearview.

• 61.

  Have you ever noticed how many different terms there are for “character” in competitive titles?

• 62.

  https://www.riotgames.com/en/news/building-the-future-of-sport-at-riot-games

• 63.

  Billy Studholme has an excellent piece on this showdown well worth reading: https://digiday.com/media/inside-the-breakdown-of-eas-revenue-share-deal-for-apex-legends-esports/

• 64.

  https://youtu.be/nGTEXqudVJM?t=42

• 65.

  Epic Games recently created an innovative revshare program putting 40% of net revenue from the Fortnite Item Shop up for grabs to anyone (including Epic itself…) depending on how much engagement they drive to the game. While esports organizations are free to vie for a share, they have no guarantees or advantages when competing with creators or other third parties for a piece of the pie. https://create.fortnite.com/news/introducing-the-creator-economy-2-0?team=personal. This paradigm smartly sidesteps a lot of the core issues with esports monetization but also illustrates how competition for non-esports-specific marketing dollars is for all intents and purposes a battle royale.

• 66.

  This is Part II of “The Incentives of Esports.” Part I outlined the incentives of major stakeholders in the industry and laid out why the esports industry differs in fundamental ways from both gaming and traditional sports, framing up the myriad of structural challenges that have led the industry to recent struggles.

  Candidly, Part II is 5,000+ word insider baseball-y take on the future of the esports industry with a pretty lengthy detour into Tiktok monetization and Formula 1.

  If that still sounds like fun, though, you’re absolutely my type of person.

• 67.

  https://www.riotgames.com/en/news/building-the-future-of-sport-at-riot-games

• 68.

  https://www.autosport.com/f1/news/bernie-ecclestone-formula-1-doesnt-need-young-fans-5045828/5045828/

• 69.

  https://www.warc.com/content/feed/f1s-drive-to-survive-shows-why-sport-should-build-long-term-demand/en-GB/7904

• 70.

  https://www.reuters.com/breakingviews/female-fans-will-fuel-formula-one-2023-2022-12-23/

• 71.

  https://www.autoweek.com/racing/formula-1/a1709016/revealed-f1s-40-million-gamble-streaming-races-scared-nbc/

• 72.

  https://frontofficesports.com/espn-scores-u-s-formula-1-media-rights/#:~:text=F1 and ESPN have agreed,on its ESPN%2B streaming service.

• 73.

  Bonus: Thompson does a great job of outlining some of the long-term risks of leaning into pay-per-view as a monetization strategy, i.e. trading off acquisition of fans tomorrow for dollars today. https://stratechery.com/2023/what-the-nba-can-learn-from-formula-1/

• 74.

  https://www.dexerto.com/league-of-legends/mrbeast-reportedly-interested-in-entering-lol-esports-with-nacl-team-2191343/

• 75.

  https://www.dexerto.com/csgo/csgo-streamer-gaules-reveals-hes-paid-millions-for-rights-to-tournaments-2147886/

• 76.

  https://www.businessofapps.com/news/tiktok-surpasses-1-billion-in-consumer-spending-in-a-single-quarter/

• 77.

  https://www.mikoverse.com/

• 78.

  https://kotaku.com/codemiko-is-the-future-of-streaming-unless-twitch-bans-1846349881

• 79.

  https://en.wikipedia.org/wiki/12th_man_(football)

• 80.

  https://dotesports.com/valorant/news/tariks-vct-lock-in-co-stream-viewership-conquered-main-valorant-twitch-channel

• 81.

  ESPN essentially runs a co-stream with Peyton and Eli Manning for Monday Night Football, offering an informal buddies-on-the-couch vibe as an alternative to the primary suit-and-tie broadcast. The reception has been so positive they’ve extended the concept to other sports including FIFA, NCAAF, etc.

• 82.

  While another essay in this collection looks at the monetization of fans, it’s important that we also explore esports fandom more broadly. I frequently hear esports “experts” make conclusive statements about the nature of esports fandom, such as “esports fans will always care more about players than teams”, “localization doesn’t work in esports because esports fans don’t think that way”, or “esports fandom can’t be generational because popular games change too quickly”. Some of these takes may wind up being true, but the reality is that esports fandom is still far too nascent to draw sweeping conclusions surrounding how it will look in 50, or even 10 years.

  This essay explores the current dynamics of esports fandom to better understand our strengths and weaknesses in this area. While reasonable minds can disagree about how to better engage esports fans and approaches will necessarily vary by game and stakeholder, it’s clear that the esports industry needs to invest more time, money, and attention into generating strong, lasting social and emotional ties that connect esports fans to stakeholders other than their favorite players. Such ties are an indispensable component of the sports ecosystem and a major factor in revenue generation; esports can and must do better on this front.

• 83.

  Former CEO of Counter Logic Gaming, Devin Nash, did a detailed video on esports-related demographics broken down by game and team that is worth watching if you have further interest in this topic. https://www.youtube.com/watch?v=F-J0_I_aCcE&t=1390s

• 84.

  https://www.statista.com/statistics/748044/number-video-gamers-world/

• 85.

  https://www.demandsage.com/esports-statistics/#:~:text=Esports Audience Statistics,reach 640.8 million in 2025.

• 86.

  https://financesonline.com/esports-statistics/

• 87.

  https://www.demandsage.com/esports-statistics/#:~:text=More than 60%25 of e,concurrent viewers in complete 2022.

• 88.

  https://www.statista.com/statistics/1108276/esports-interest-age/

• 89.

  https://en.wikipedia.org/wiki/Super_Nintendo_Entertainment_System

• 90.

  https://en.wikipedia.org/wiki/PlayStation_(console)

• 91.

  https://en.wikipedia.org/wiki/Nintendo_64

• 92.

  https://en.wikipedia.org/wiki/Half-Life_(video_game)

• 93.

  https://en.wikipedia.org/wiki/StarCraft

• 94.

  https://en.wikipedia.org/wiki/Xbox

• 95.

  https://usafacts.org/data/topics/people-society/population-and-demographics/our-changing-population?utm_source=google&utm_medium=cpc&utm_campaign=ND-DemPop&gclid=CjwKCAjw__ihBhADEiwAXEazJvTpc5kW9GY3RUeeE0LAgoawZwgZ3-7PXClbzQbJCJT_ZVu4x3SamRoC_3QQAvD_BwE

• 96.

  https://www.marketingcharts.com/cross-media-and-traditional/videogames-traditional-and-cross-channel-229050

• 97.

  https://www.marketingcharts.com/cross-media-and-traditional/videogames-traditional-and-cross-channel-114168

• 98.

  https://variety.com/2023/gaming/news/millennials-video-games-gen-z-study-gaming-1235579573/

• 99.

  Id.

• 100.

  https://www.colormatics.com/article/esports-audience-demographics/

• 101.

  https://www.sciencedirect.com/science/article/abs/pii/S0747563221003782

• 102.

  No Valorant-specific fan data is available.

• 103.

  https://venturebeat.com/games/how-riot-games-wants-to-ensure-that-valorants-esports-stars-include-women/

• 104.

  https://quanticfoundry.com/2017/01/19/female-gamers-by-genre/

• 105.

  https://www.prnewswire.com/news-releases/the-gaming-industry-will-be-hoping-for-strong-holiday-sales-but-the-latest-female-gamers-study-shows-the-industry-loses-1-in-5-female-online-gamers-due-to-negative-toxic-and-threatening-experiences-301708790.html

• 106.

  https://www.prnewswire.com/news-releases/the-gaming-industry-will-be-hoping-for-strong-holiday-sales-but-the-latest-female-gamers-study-shows-the-industry-loses-1-in-5-female-online-gamers-due-to-negative-toxic-and-threatening-experiences-301708790.html

• 107.

  https://www.iab.com/wp-content/uploads/2018/05/IAB_Esports_Marketers_Guide_2018-05_Final.pdf

• 108.

  https://interpret.la/fans-of-esports-are-young-relatively-affluent-and-likely-to-spend/#:~:text=In fact%2C 30%25 of esports,incomes of more than %24100%2C000

• 109.

  https://www.sponsorpulse.com/insights/the-sponsorpulse-guide-to-nba-fan-demographics

• 110.

  These dynamics are more extensively explored in other essays in this series.

• 111.

  https://www.theringer.com/sports/2022/11/28/23472636/sports-team-franchise-valuation-sale-prices

• 112.

  If you’re up for a fun read on this very topic from notorious sports writer Bill Simmons, enjoy: http://www.espn.com/espn/page2/story?sportCat=nba&page=simmons/101201.

• 113.

  https://news.gallup.com/poll/4735/sports.aspx

• 114.

  https://awfulannouncing.com/streaming/media-rights-largest-source-of-revenue-continue-rise.html

• 115.

  https://www.sbnation.com/2017/9/19/16334596/nba-teams-losing-money-revenue-profits-why-matters

• 116.

  https://www.businessinsider.in/sports/nfl/when-jerry-jones-bought-the-dallas-cowboys-they-were-losing-1-million-per-month-and-now-it-is-the-most-valuable-team-in-the-world/articleshow/59908342.cms

• 117.

  https://www.theringer.com/sports/2022/11/28/23472636/sports-team-franchise-valuation-sale-prices

• 118.

  https://www.theringer.com/sports/2022/11/28/23472636/sports-team-franchise-valuation-sale-prices

• 119.

  https://www.axios.com/2023/06/20/nba-michael-jordan-charlotte-hornets-sale?utm_campaign=editorial&utm_source=twitter&utm_medium=social

• 120.

  https://huddleup.substack.com/p/professional-sports-teams-continue

• 121.

  https://www.forbesafrica.com/billionaires/2021/04/06/forbes-35th-annual-worlds-billionaires-list-facts-and-figures-2021/

• 122.

  https://www.theringer.com/sports/2022/11/28/23472636/sports-team-franchise-valuation-sale-prices

• 123.

  https://www.latimes.com/business/story/2022-12-08/esports-hype-fading-investors-sponsors-dry-up#:~:text=Sponsors and advertisers%2C like BMW,' revenue%2C according to NewZoo.

• 124.

  This topic is covered in far more detail in another essay in this series.

• 125.

  Activision-Blizzard Overwatch League and Call of Duty League are the notable exceptions.

• 126.

  Some sports teams have started to expand their business models via interconnected real estate ventures, but opportunities are limited because of the exclusive nature of team

• 127.

  https://whsgoldenarrow.com/1628/sports/the-world-series-baseball-in-decline/

• 128.

  https://sportsplexoperators.com/sports-facilities/decline-of-youth-participating-in-baseball/

• 129.

  It’s also worth noting that some of the oldest North American esports teams were built around a front-facing team owner / influencer hybrid, such as TSM’s Andy “Reginald” Dinh and CLG’s George "HotshotGG" Georgallidis.

• 130.

  For example, the NFL launched the ManningCast - a separate broadcast of games where Peyton and Eli Manning hang out and analyze the games together, completely separate from the main broadcast of that game.

• 131.

  https://pro.eslgaming.com/csgo/proleague/wp-content/uploads/2020/02/Louvre-Agreement.pdf

• 132.

  https://www.riotgames.com/en/news/building-the-future-of-sport-at-riot-games

• 133.

  This is further explored in other essays in this series.

• 134.

  This essay evaluates franchising from the teams’ financial perspective. There are various arguments against franchising related to the competitive balance and health of an esport more broadly. While this topic is worth exploring and I’m not trying to imply franchising is an unambiguous good for all esports stakeholders in all instances, this broader discussion is too far afield from the core topic of the essay.

• 135.

  Consider this our equivalent of old school DVD Extra Content/Special Features! While we were able to go deep on many topics that are important to us, there were a several we didn’t quite get to in the detail they deserve. Rather than leaving them on the cutting room floor, we decided to experiment with a conversational-style piece the generally mirrors our brainstorming sessions when were putting this project together.