AVI BHUIYAN AUGUST 2023
<aside> <img src="/icons/chevrons-vertical_gray.svg" alt="/icons/chevrons-vertical_gray.svg" width="40px" /> AUTHOR’S NOTE
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
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”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 arenas [1] possibly struggle to generate scalable, sustainable value for everyone involved?
The image that launched a thousand pitch decks (via Riot Games)
The 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 [2] even 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 [3]. 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 [4]: $5.8 billion (2021)
Call of Duty [5]: $3 billion (2020)
League of Legends [6]: $1.75 billion (2020)
Counter-Strike [7]: ~$600+ million (2022)
Free Fire [8]: $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 [9].
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.
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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?