Business of Esports: Where is The Money in The Gaming Industry?

By Gene Lin

In 2019, over one million people tuned in to watch the League of Legends World Championship, an event where 13 teams of video game players from around the world gather to compete in a celebration of digital athleticism.

The event was a milestone for the competitive video game industry, also known as esports, cementing it as one of the most-watched sports categories in modern time.

While some continue to debate whether esports qualify as a sport, what is undeniable is esports’ incredible popularity, which continues to draw in ever more eyeballs and revenues. For instance, the 2019 Dota 2 world championship alone boasted a total prize pool that exceeded US$34 million.

“Spectating games has been a big part of computer gaming history for a long time,” said Dr Paul Martin, professor of digital media and communications at the University of Nottingham Ningbo China.

“If you look at pictures of arcades in the 1970s, there would be one person playing as 10 people gather around [the player]. Even in the early stages of computer game history, that was already competitive sports, it had all the hallmarks of what we call esports now,” added Dr Martin.

As investors become increasingly eager to jump into the esports space, the question becomes where opportunities and risks lie in this burgeoning industry.

The esports industry originally started in South Korea, where the government’s initiative to rapidly expand broadband coverage made competitive gaming possible in the first place. (Photo: Wikicommons)

Stakeholders of the Game

In recent years, the lucrative revenues in esports had attracted different industry players into the market. These stakeholders can be generally categorised into four types:

  • Game Publisher: Companies that publish video games which serve as mediums for competitions. Examples include industry titans such as Riot Games and Activision Blizzard.
  • Event Organiser: Companies that handle the logistics of organising an esports event, often in a physical space with audiences who purchase tickets for entry. Event organisers tend to specialise in local markets.
  • Broadcaster: Companies that supply live streaming services which allow people to view esports events remotely. Broadcasters can vary in sizes and regions.
  • Teams: Companies that recruit esports players and supply teams to compete in various events. Prominent esports teams can rack in lucrative revenues from sponsors and advertisers once they reach a certain degree of fame.

While any competitive video game can be used in esports, only a few game titles are used for international, stadium-sized competitions that make headlines. Game titles such as League of Legends and Overwatch are among the few games that draw in a massive audience, and these games also happen to be developed by a few game publishers. This makes it almost impossible for any new game publishers to break into this market.

“When there is a winner in [the game publisher space], they usually take all the profit, ” said Eric Yeung, president of Esports Association Hong Kong. “It is impossible for new players to develop a game like League of Legends. You have to think out of the box for a totally new game title, such as PUBG or Fortnite“.

As a result, most people who enter the esports market tend to be event organisers or broadcasters because these markets remain competitive enough for small players to thrive. The event organisers acquire licenses from game publishers to host events, whereas broadcasters acquire streaming rights from event organisers to draw in viewers.

DouYu, one of China’s largest esports broadcasters, reported an earning of roughly US$321 million in the first quarter of 2020.

Meanwhile, esports companies that recruit and train players to compete in tournaments are considered by many to be in a high-risk, high-reward market. The fierce competition demands a large amount of time and resources to sharpen the players’ competitive edge, much like athletes in baseball and football.

“It’s like any kind of traditional sport, you have various aspects of tactical teamwork and communication strategies,” said Sean Zhang, CEO and founder of Talon Esports, a Hong Kong-based professional esports organisation with multiple teams under its name. “We have very strict training regimes, [the players] do anywhere from 12 to 16 hours a day.”

Danger of Monopoly

In 2017, Veli-Matti Karhulahti, a professor at the University of Turku, Finland, published a paper which argued that what makes esports fundamentally different from traditional sports is not its electronic nature but executive ownership.

“Instead of perceiving esports as sportified electronic gaming, it might be more practical to perceive it as sportified commercial gaming,” said Karhulahti. “Esports are cultural practices of exercise and contest on commercial play products that are governed by executive owners”.

This concept is not novel to industry experts, as many acknowledge the monopolising nature of the esports industry in which game publishers hold immense power through copyright laws.

“The game publishers effectively in many ways do hold all the cards, because they own the IP,” said Ann Hand, CEO of Super League Gaming, during an interview in 2018. “It’s like if you have to go to the NBA to get a license just to have a pick-up basketball game”.

This industry dynamic might create a degree of uncertainty for investors, as the esports game publishers can modify their games’ fundamental codes at any moment. Moreover, the companies’ ownership over the game itself allows them to issue or withdraw licenses to and from event organisers, which has wide implications for all industry stakeholders.

In 2019, Activision Blizzard drew significant criticism around the world for barring an esports player from competing in a tournament after the player expressed support for Hong Kong’s pro-democracy protests during an interview.

“If the esports industry and the whole ecosystem is dominated by the power of a few companies, it is very likely that [profit] and commercialisation will override any other consideration,” said Peichi Chung, professor of new development in media and cultural studies at the Chinese University of Hong Kong.

Chung added that under the rapid and unregulated commercialisation of the esports industry, the health and wellbeing of esports players are often sacrificed, which might warrant a certain degree of government intervention. This would be an area the industry has to face as it gains more legitimacy.

Contrary to popular media coverage, esports don’t always have to be hyper-commercialised events. Many happen in small pockets of communities and are treated as a cultural experience. (Photo: Wikicommons)

Future of Esports

While most experts agree that esports will continue to grow in popularity, it is unclear what its structure and power dynamic will be like for each stakeholder.

In the aftermath of COVID-19, esports events have no choice but to transition fully into online environments for the time being. Whereas the logistics might be relatively simpler compared to traditional sport, this disruption increases complexities for event organisers, broadcasters and esports teams in terms of how revenues are distributed.

The online nature of the esports culture also hinders the industry from developing local leagues for smaller teams to compete in, which is a common feature for traditional sports. In an environment where only the top-tier players can enjoy a sustainable business model, it stands to question the long-term stability of the industry.

Experts have raised concerns over the mental and emotional development of esports athletes, as they sit at the intersection of extreme wealth, fame and pressure. While this is not new to professional players in the sports industry, it is worth noting that esports players tend to be very young, many of whom are minors, which might invite further labour restrictions in the future.

“The industry is definitely not going away, it is still a very important part of youth culture,” said Yong Ming Kow, professor of community culture and media design at the City University of Hong Kong.

“The games will change, but the youth’s interest in video games and in rooting for their star [players] appears to be here to stay,” added Kow.

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