BRYCE BLUM AUGUST 2023
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.
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)
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. [2] When Jerry Jones bought the Dallas Cowboys in 1989, they were losing a reported $1 Million per month. [3] 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.” [4]
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.) [5] 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. [6]
(via Huddle Up)
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 [8], sports revenue generation has skyrocketed (particularly media rights) [9], 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 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. [10] 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. [11]
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.