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Historically, eSports has been the Wild West of sports; it has lacked the organization, structure, and revenue streams of established leagues. As competitive video games continue to integrate into popular culture, global investors, brands, and media outlets are all paying attention. Consumers are as well. The number of eSports viewers exceeded the number of viewers of the most watched traditional sports leagues (except for NFL) in 2020, amounting to 435.9 million, while the total viewers of CFB, NBA, MLB, Doc reached 352 million combined.
eSports is more global than traditional sports; the audience is more geographically dispersed relative to MLB or the NHL, for instance, which have more audience concentration in North America. Still, eSports teams today are more considered as tech startups than as sports teams, which is why they are not trying to be profitable in the short-term period but rather reinvest their revenue in the company to scale and grow, as the industry is booming, and the growth rates are quite promising.
Traditional sports vs online ones
There are three main income streams for sports leagues:
- broadcasting (sales of media rights)
- commercial (sponsorship and advertising partnerships)
- match day revenue (ticketing and hospitality).
Professional sports leagues are analogous to entertainment companies, where each team in a league is like a different channel. The teams have their own identities, employees, and fan bases, but the overall ‘programming schedule’ (the rules of the game and the fixture list) is set by the leagues.
The major sports are all reliant on broadcasting income (57% in revenues), as demonstrated by revenue data from the biggest leagues over the last five years. The global value of sports media rights is around $50bn – but 60% of that is accounted for by just 10 sports leagues. It should be noted that the largest share in eSports revenues has the sponsorship (59%), while the share of media rights is only 18% in contrast to that 57% in league revenues. The share of commercial and match day revenues in total is 18% and 25%, respectively.
While sponsorships make up the largest percentage of global revenue today, it is believed that media rights will eventually become the largest source of eSports revenue, as massive audiences and associated ad revenue for established online video platforms like Twitch, YouTube, Douyu, and Huya will be able to support a growing pool of media rights fees paid to top publishers for their content. Historically, sponsorships in eSports were mostly limited to endemic sponsors, like hardware manufacturers.
But in the last couple of years, we have seen more mainstream subscribers enter the fray, eager to reach the millennial & Gen Z audience of eSports. Sponsors for the League of Legends League included Geico, State Farm, Nissan, Axe, and Coca-Cola, while the Overwatch League was sponsored by Toyota, Sour Patch Kids, Intel, and T-Mobile. And it was only after Riot and Blizzard created established leagues that we started to see the landscape for sponsorship change.
Success in professional eSports demands rigorous teamwork and unflinching commitment to high performance; winning teams can earn millions in prize money, with popular teams and players drawing significant income from advertising, merchandise, and royalties.
The ecosystem
There are three main sections in the eSports ecosystem:
- The Players
- The Organizations & Teams
- The eSports Leagues, Casters & Game Publishers
Let’s take a closer look at them.
THE PLAYERS
Like any profession, rising through the ranks to become a top eSports player of a specific game takes dedication and practice, so much so that 12 to 14-hour days of gameplay is quite standard across the industry. Once at the top (or on the way to it), talented gamers have two eSports career paths: streaming or playing professionally on a team. Streamers are gamers who stream themselves live as they play video games, typically in a more casual playstyle. Streamers are incredibly profitable and often become influencers. Partnerships with streamers align closely with influencer marketing agreements with product placements done through the individual’s manager/organization which handles all the events, social posts, and sponsored content opportunities. The best professional eSports athletes are quickly picked up by teams and play in tournaments around the world against other teams. Even more impressive is that top players start their professional gaming careers around 16 to 17 years of age.
THE ORGANIZATIONS & TEAMS
eSports Organizations have several teams that each play their specific game but compete and operate under the same umbrella name similar to how NCAA universities compete in different types of sports but all under the same umbrella organization. By leveraging their massive fan base and influence, organizations seek advertising sponsorships as additional revenue streams for the organization and its players. The better the players, the better the organization which quickly leads to a large following and ample partnership opportunities.eSports Teams are composed of professional players and operate similarly to traditional sports teams like the Dallas Cowboys or New York Yankees with coaches, team managers, practice schedules, marketing support, and operations specialists. Each team specializes and competes in one specific game and like traditional sports, have massive followings and fan bases; millions of followers on Twitter, millions of fans watching online, and thousands of spectators following them to in-person live events.
ESPORTS LEAGUES, CASTERS & GAME PUBLISHERS
Like traditional sports, eSports Leagues offer teams the opportunity to compete against one another (for cash prizes) and have regular seasons, playoffs, and world championships. League tournaments are run by companies like Major League Gaming (MLG), Electronic Sports League (ESL), or game-specific leagues like League of Legends Championship Series or Call of Duty World League (organized by MLG). Total prize money for league events can be upwards of hundreds of thousands to millions of dollars. To commercialize and better establish the eSports industry as a legitimate spectator sport, Casters are also used during eSports tournaments and events. With a unique skillset of being able to speak to a player’s deep technical and strategic acumen in real-time, eSports casters play a pivotal role in keeping viewers educated and entertained during gameplay and the downtime of an event. Each game is the intellectual property of its creator, known in the industry as a publisher. Unlike traditional sports which can be played by anyone and anywhere, publishers build and develop their games and thus, own all the rights surrounding them [i.e., how and where the games can be played, who can host tournaments, etc.].
The pandemic effect
ESports’ advantage was that competitions could be sustained by moving the leagues and tournaments online, whereas traditional sports and entertainment segments paused.9 In addition, people spent significantly more time at home, limiting leisure activities to home-based entertainment. Consequently, eSports became a focus of consumers, attracting record audiences and boosting popularity beyond the sector’s previous borders.
Yet, as in-person events and competition became impossible, numerous eSports companies could not sustain operations and faced severe revenue losses and liquidity shortages, and had to put into effect forced strategic decisions or layoffs.11 Furthermore, sponsors and spectators had to keep their own financials intact.
The surge in spectators’ interest in eSports during the pandemic is underlined by a high proportion of newcomers in the total audience and increased consumption compared to pre-COVID levels. For instance, across European countries, 38% to 67% of eSports consumers stated that they watched eSports for the first time after COVID-19- related restrictions were imposed. Among those who had watched eSports before COVID-19, 42% stated that they had consumed more in 2020 than before.
As a consequence of trying new approaches and developing new products and services, the eSports world has opened up to new consumer groups. Since the implementation of COVID- 19 restrictions, the penetration rates across the survey groups have more than doubled in some. Women remain under-represented in the eSports audience, but the penetration rate is 2.36 times higher than before COVID-19 restrictions were introduced. Also, eSports provided a welcome escape from everyday life for consumers who suffered heavily under COVID-19, with a penetration rate of 2.40 times for this group.
But what about the future? It is difficult to predict the role of live events in the post-COVID world. After successfully establishing remote events and diversifying product portfolios, it is essential to reflect on the future role of live events in the ecosystem, taking into account consumer demand, event scale, and an appropriate balance of online and offline events.
Who watches esports?
In 2021, the global eSports audience was expected to grow +6.7% year-on-year to reach 465.1 million. The eSports enthusiast group accounts for 229.6 million, with occasional viewers making up the remaining 235.5 million. The global audience number continues to grow with a CAGR of +7.8% to 577.8 million in 2024, after having passed the half-a-billion mark in 2022.
This was due to the lockdown measures which led to many new viewers last year and continues to do so into 2021. Audience numbers were most affected by growth markets across the Middle East and Africa, Asia-Pacific, and Latin America, whose ongoing infrastructure developments are empowering residents. Another factor in the strong audience growth is mobile, which has entered the upper echelon of eSports and is driving demand in markets like India and Brazil.
For many businesses in media and entertainment, eSports offers a way to reach a demographic that has been increased beyond their grasp. In general, players and fans are younger, less likely to watch linear TV, and often less interested in professional sports than the population as a whole. Despite popular belief, women are already engaged with eSports. While women’s engagement is growing on an enthusiast level, there are also more women entering the market as competitors.
Viewer habits are also shifting. Cord-cutting viewers continue to move to stream and social platforms. The games live-streaming audience grows by +10% year-on-year to reach 728.8 million globally in 2021. The COVID-19 pandemic has accelerated gaming trends already in motion, leading to an expanded gaming audience and through-the-roof engagement. According to NewZoo, there are over 2.2 billion active gamers globally. Today, the eSports audience represents just 5% of the total online gaming population, which suggests that there should be plenty more runway for eSports audience growth.
Sports leagues become investors
Athletes and owners of professional sports teams have flooded into the eSports industry, plunking down $20 million to own teams in the officially sanctioned Overwatch League and placing similar-sized and smaller bets on companies developing services for the eSports ecosystem. As the first professional sports organization to form a franchise league, the NBA is testing the market, establishing leading practices, and highlighting the challenges, making it easier for others to get involved. eSports is now an official part of pro basketball’s future.
Businesses engaged with eSports will likely face tax and risk complications as the field grows geographically as well as demographically. From buying and sponsoring teams to securing broadcast rights, advertising channels, and M&A, savvy businesses can access lucrative investment opportunities while there’s still room for the market to grow.
One of the main reasons athletes invest in eSports is the opportunity for financial gain. ESports has experienced a decade of explosive growth, growing from a fringe interest by the wider gaming community to a fully established industry. Every year there are stories about how an eSports game has outperformed a traditional sporting match. Hence, it is no wonder that stars from the NFL, NBA, and the world’s biggest football clubs are following where people’s eyeballs are — and where many analysts predict they will stay.
It is important for businesses to understand the nuances before moving into the eSports arena, whether as sponsors, investors, service providers, security consultants, or in other roles. At the edge of advertising, data analytics may move into the gaming world. And while analytics allows for service and product innovations, businesses should be vigilant of the risk that such innovations can tread directly onto gamers’ turf. However, the challenge for many non-eSport-specific venues is providing the necessary infrastructure to make eSports work.
Trends
Based on various reports and articles28 on the eSports market, we identified 10 significant current and future market trends.
- Market Growth Bolsters with Engaging Gaming Competitions During COVID-19 Pandemic
The coronavirus outbreak has boosted user engagement with video games and eSports. Such trends are contributing to the growth of the global eSports market during the ongoing pandemic. Revenues of gaming companies in the eSports market have increased during the COVID-19 pandemic. Since malls and cinema halls are being starved for footfalls, an increasing number of individuals are turning toward eSports as a form of entertainment.
- Virtual eSports Programs Building Large & Reliable Gaming Ecosystems
FIFA and Electronic Arts (EA) have announced their new eSports program for EA Sports FIFA 22. Such programs are allowing players from different countries to compete in FIFA through virtual tournaments. These innovations are building a large, reliable, and competitive gaming ecosystem on a regional and global level.
- eSports Courses Help Teach Students Ways to Run Any eSports Company
Apart from gaining revenue from game publisher fees, sponsorships, and media, stakeholders are now developing eSports courses. Kirklees College is gaining recognition for partnering with Yorkshire-based company, Lucent eSports, to develop its eSports courses. Stakeholders are gaining knowledge about these courses that will cover all aspects of the eSports industry, including teams, games, and tournaments. The eSports market is undergoing a significant change with the introduction of eSports courses that will discuss streaming, events, establishing an eSports organization, and promoting the positive health & wellbeing of players. Companies in the eSports market are increasing their focus on offering courses that teach students on how to run an eSports company.
- Long-term Investment Opportunity
The eSports industry has seen a huge growth in increasing revenue by 37% in 2020, as COVID- 19 led to considerable demand for gaming. The eSports industry is not only a high-growth industry, but also a very lucrative business; it has attracted big technology companies such as Google, Apple, Microsoft, and Amazon. The growing acceptance of video games is anticipated to drive the growth of the eSports market. Increasing acceptance of progressive gaming technology, developing customer entertainment preferences, increasing income levels, and growing demand for mobile gaming are all projected to help drive the industry’s evolution in the future.
To invest in the eSports industry, companies such as eSports Entertainment Group, and Guild eSports directly bet on the sector, which may yield considerable returns. However, most existing eSports companies are small and lack the financial strength of larger, more differentiated players in the sector. This could hold back their growth opportunities in the long term.
- Competitive Landscape
The eSports market is at its initial stage, and thus, the market is a little competitive in nature. Although seeing the popularity of the eSports leagues, companies are entering the market to gain a competitive advantage and expand their geographical presence. Organizing new sports leagues, partnerships, mergers, and acquisitions are the strategies followed by these companies to increase their visibility across different geographic locations. Some of the significant players are Modern Times Group, Activision Blizzard, Inc, and Riot Games, Inc. (Tencent Holdings Ltd) amongst others.
- Esports Companies Are Looking for Cost-Effective Ways Through Partnerships
Key providers of eSports, such as SEG eSports, Inc., Rollic, Inc., Niantic, Inc., Microsoft, Resolve eSports, Inc., and OneTeam, Inc. are focusing on the development of cost-effective eSports to attract more customers. Additionally, players active in providing eSports are focusing on organic and inorganic growth strategies such as strategic collaborations and merger and acquisition, and new product launch with technology partners to improve their offerings and market reach. For example, in June 2021, SEG eSports, Inc. announced a technological partnership with Adamas eSports, Inc. to improve its services and provide a 360-degree approach for clients. The company is focusing on providing sports psychology, performance coaching, and emotional & physical development training.
- ESports Teams Will Continue to Diversify
ESports teams continue to broaden their horizons and diversify their operations. To that end, organizations will continue to diversify beyond the model set by traditional sports structures, putting a large focus on other initiatives, like positioning their company as a lifestyle brand or moving toward content-creator strategies. When an eSports company positions itself as a lifestyle brand, it transcends eSports alone and enters pop culture, diversifying an organization’s income streams in the process. Naturally, this lowers risk, as if one revenue stream performs worse than expected due to unforeseen circumstances (the pandemic, for example), a different stream could help offset the damage.
- Mobile ESports Enter the Upper Echelon
Mobile eSports are already subverting expectations in the once-PC-dominated eSports market. Even towards the end of last year, games like PUBG Mobile and Garena Free Fire began to generate higher peak eSports viewer counts than PC titles like CS:GO and Dota 2. We expect this to continue into next year, as consumer appetite for mobile eSports continues to grow in China, South and Southeast Asia, and Latin America. While the CS:GO and Dota scenes boast higher overall hours watched, PUBG Mobile and Free Fire are now top five eSports titles, and they’re setting their sights on the traditional PC giants.
- China Is 2022’s Esports Region to Look Out For
China alone was anticipated to be the largest eSports market worldwide in 2021 owing to the popularity of the eSports among the youth and government support for the growth of the market, generating an estimated $360.1 million within the industry. For instance, Hangzhou (a city in China) plans to build 14 eSports facilities before 2022 and is expected to invest up to RMB15.45 billion (USD 2.22 billion). This investment is expected to make it the eSports capital of the world.
Moreover, Hangzhou is going to host Asian Games in 2022, where eSports is expected to be an official medal event. With its investments, China is expected to become to hold a significant market share. Further, Tencent Holdings Limited, a significant player in the eSports industry is planning for expanding tournaments for hugely popular games like “League of Legends” and “Honor of Kings in China which is going to attract global players and viewers29.
- Non-Gaming Content Becomes Even Bigger on Streaming Platforms
While Twitch began with gaming, non-gaming content is growing on the platform. In fact, the ‘Just Chatting’ category is now one of the most popular, and lockdown measures led to concerts, political events, and live shows all being hosted on the platform. We expect non-gaming content to become even more popular this year, and companies have already started doubling down on it for 2021.
Revenue streams and costs
Revenue opportunities for eSports teams are still fairly limited. The revenues of top eSports organizations with multiple teams range from $4 million to $25 million. They are:
- Sponsorships. As we can see from the previous sections, many companies – both endemic and non-endemic – are increasingly willing to sponsor teams. According to Patrik Sättermon (Fnatic’s Chief Gaming Officer), it is estimated that around 95% of the money generated by eSports teams comes directly from sponsorship deals. However, the industry average was estimated at 70% – 80%31. The remaining revenue is split evenly between other revenue streams.
- Merchandise sales. This includes sales of both physical and digital goods. Digital goods are probably the larger opportunity for now. Also, for example, Overwatch merchandise and league-affiliated fan items are sold by each team individually, with half of those revenues streaming into the net shared revenue pool for all teams.
- Revenue share. First, there is revenue share from participation in leagues and championship events. This revenue consists of ticket sales, merchandise sales, and some sponsorship. The second, larger pool is a share of revenue from broadcast rights. This is likely going to emerge as the largest source of eSports revenue and is part of the ongoing discussion between the teams and the game publishers. For instance, the Overwatch League teams receive an equal share of all league-wide net revenues and further revenue streams are created through advertising, ticketing, and broadcasting rights. All teams have a license to operate and monetize up to five amateur events in their home territory each year.
Now, what about costs?
Total costs of an eSports team typically include the costs of participating in live events (franchise fees) and video production for streams, coaching and staff salaries, business overheads, marketing, a game house or other facilities, and most importantly player salaries. Player costs typically eat up half of a company’s operating budget. The vast majority of companies are cash-flow negative in the sense of earnings before interest, taxes, depreciation, and amortization, as they continue to spend money to build their rosters and brands.
Despite the obvious monetary advice of using the franchising model for eSports, there remain some lingering questions regarding compatibility. Another major question revolves around whether some games are at all a right fit for franchising, to begin with. Some major games like Dota 2, Fortnite, Counter-Strike: Global Offensive, and Rocket League remain un-franchised until now and both fans and investors alike have yet to make any move to move to a franchise model in the near future.
The numbers of the industry
In 2021, the global eSports market was expected to generate $1084.1 million in annual revenues, representing year-on-year growth of 14.5%. It is believed that China will generate more than a third of worldwide eSports revenues. Looking further forward to 2024, eSports revenues will reach $1617.7 million, showing a Compound Annual Growth Rate (CAGR) of 11.1% from 2019-2024. The growth of this market is attributed to the increasing popularity of video games and growing awareness about eSports.
While certain segments of eSports revenues took a hit due to the pandemic, such as the decline in ticket and merchandise revenues due to the cancelation of in-person events, other segments are expected to perform well. It is estimated that more than three-quarters of the total 2021 eSports market revenues or $833.6M will come from media rights and sponsorships.In 2021, the global eSports audience will grow +6.7% year-on-year to reach 465.1 million. The eSports enthusiast group will account for 229.6 million, with occasional viewers making up the remaining 235.5 million.
By 2024, Newzoo estimates the eSports audience will reach 577.8 million. There are several factors to support this audience growth including growth in the global gaming audience as well as the increasing prize pools of eSports, which is expected to continue to build interest among players and fans.
Our predictions
A traditional sports organization when acquiring an eSports team might use its current resources (Finance, Legal, Marketing, etc.) to run its eSports team and only hire a coach and a team manager. However, it might be more appropriate to create a new eSports division with its own staff. Marketing and Promotion costs include both digital and offline campaigns. We assume that the team will need to invest in marketing campaigns more at the beginning and decrease these expenses as the team gets more recognition and sponsorship deals.
The key areas where the startup will spend its capital are: operational cost for the first year (payments of bills, etc) – $1,200,000, the total cost for leasing facility for the eSport team training center – $80,000, the total cost for facility remodeling – $50,000, the cost for acquiring LED TVs, computers, Xbox stations, comfortable chairs, tables, Air Conditions, Shelve for stocking video games and video games accessories amongst others.
The eSports industry is booming and is expected to grow exponentially, and these revenue projections do not consider rapid industry changes, unexpected partnership deals, or other events which might have a positive impact on a company’s cash flow.
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