The meaning of leisure changed completely in 2020. Amidst the various local lockdowns, where any forms of outdoor gatherings were restricted, people embraced indoor, digital entertainment - specifically video gaming. Four out of five consumers played video games in the last six months in the US, and Twitch, a livestream platform specialising in video gaming, saw the 5 billion hours of content watched in Q2 2020, an increase of 56 per cent vs. Q1. The World Health Organisation (WHO) and major global game companies launched #PlayApartTogether campaign to promote social distancing at the outbreak of the pandemic. It is perhaps unsurprising that gaming became the biggest earning media sector in 2020, with global video game revenue up 20 percent at c.$180 billion. This is greater than the revenue generated by movies and sports combined ($100 billion and $75 billion respectively) pre-coronavirus in 2019.
In the remainder of this article, we focus specifically on esports. Firstly, we cover how the ecosystem works, with a specific deep dive into football clubs and some of the other commercial deals already in place. Secondly, we provide our views on how to enter the market effectively. Thirdly, we then discuss emerging regulation in the ecosystem, followed by the links between esports and gambling.
A paradigm shift from “playing” to “watching” games
Traditionally, video gaming has been a player-centric B2C market, meaning game publishers and other stakeholders target video game players, who buy hardware, software, and other related products. esports, on the other hand, is a viewer-centric B2C and B2B2C market, with its growth into the mainstream being accelerated by the pandemic. Content and service providers are targeting viewers of competitive gaming, through online streaming services, tournament events, and sponsorship of teams and tournaments. As a result, the esports business ecosystem closely resembles that of the traditional sports business in that the key stakeholders include event organisers, professional teams/players, sponsors, broadcasters, and fans/audiences. The one key difference, however: in contrast to traditional sports, game publishers, as the content provider, are included.
Given the ecosystem resemblance, key players in the traditional sports business, e.g. big-league European football clubs have benefitted from leveraging their resources and assets to enter the esports market. Many teams are already doing so.
The “digital” playing field – a focus on football clubs and eSports in a Covid-19 world
The COVID-19 pandemic has significantly impacted the relationship between football and esports. With sports and other entertainment events suspended during lockdowns, people have been spending significantly more time inside, plugged in to the online environment to satisfy their need for sports, entertainment and human connection. Capitalising upon such unprecedented times, more football clubs have begun to tap into esports due to its increasing popularity and a lack of substitutes for live matches. However, most of them are still only scratching the surface of this opportunity, while the real jackpot may lie in non-simulation games.
Over four years ago, international football clubs began to embrace the world of esports, headlined by the establishment of FC Schalke 04’s esports division. Now, in the midst of the COVID-19 pandemic, as it has affected many other facets of the game, this world health crisis is significantly impacting the relationship between football and esports.
Without live sports events taking place, clubs have been forced to increase their digital activities to maintain engagement levels and reach fans in some way. The industry has seen wide-ranging content generation ideas from club and player social activism, still, it remains obvious that none of these efforts can replicate a live match, or the feelings of competition and triumph felt by spectators. esports has been the next best thing available and has certainly grabbed the attention of global football fans, especially younger fans. Thus we've seen the emergence of various initiatives from clubs, such as the 128-team “Ultimate Quaran-Team” FIFA tournament—organised by fourth division club Leyton Orient FC—achieving success, and even raising money for charity.
As the attention turned to digital, football clubs have also changed their communications strategy, placing emphasis on new forms of engagement while trying to produce innovative online content, mainly through social media platforms. As an element of these efforts, football simulation games are a logical way of replicating some of the attributes of live football, including competition, fun and excitement. Not only clubs, but also players have realised that esports can present an opportunity to build their brands while not able to be on the pitch. Gaming and esports offer a natural way for them to showcase their talents from home and facilitate interaction with fans by streaming gameplay and tournaments with counterparts, professional esports players or even with fans.
However, esports presents a much bigger opportunity than just digital content in the form of football simulation games – it is a long-term growth opportunity. First of all, it provides a natural way to engage with a new, younger audience. Furthermore, the esports landscape boasts a global audience, which enables wide-ranging opportunities to boost club efforts to communicate their brands internationally. A good example of this are the Wolverhampton Wanderers, who are using their esports initiatives to grow their international fanbase and build the club's brand within new segments. Among other activities, Wolves have created an esports tournament portal, tapped into the market of non-simulation games by organising a Fortnite tournament and sponsored a team in the virtual “24 hours of Le Mans” event. The key to their strategy is a focus on specific markets and segments, with China at the top of the list.
“Even before the pandemic had struck, football was facing an increased level of competition for attention, competing with streaming services, video games, OTT providers and other stakeholders in the entertainment industry. This extremely competitive field has mandated that clubs' operations adapt to a more entertainment-focused business model, which is vastly different from how football clubs operate traditionally. For top tier football clubs, esports is a relatable and somewhat similar industry, making it a logical first step in such a transformation.” Andrea Sartori, KPMG’ Global Head of Sports commented.
Finally, esports is not simply a marketing and brand building tool which only impacts the cost side of financial statements; it can turn into a long-term revenue opportunity down the line. Based on the latest projections by research firm Newzoo, industry revenues could reach USD 1.6 billion by 2023. Additionally, esports teams could be the next in line for huge capital gains through market value increases, similar to those seen by football clubs in the last two decades. While current valuations are considered to be inflated, an investment in esports can act as a type of hedge fund or safety blanket against any potential future decline of football revenues compared to other forms of entertainment.
Nonetheless, short-term financial expectations shouldn’t be the driving force behind any decision to embrace esports, as financial returns are unlikely at the moment. Not even the best esports teams have been able to consistently generate profits and operate a self-sustaining model even before COVID-19 had hit. Since then, most revenue sources have only decreased due to the lack of live events (which has eliminated ticket or merchandising sales, and resulted in lower-value sponsorship deals without live and large-scale activation). As an example of financial struggles, we can take a look at Astralis, one of the most successful and well-known teams in esports. Their 2019 financial statement reports a loss of almost EUR 5 million, even with total revenues nearing EUR 6.5 million. This can mostly be attributed to an extremely high wage bill, as the organisation’s staff costs-to-revenue ratio exceeded 100%. This ratio is between 50% and 70% at most football clubs.
On the other hand, financial performance is one of the areas where potential synergies can be reached between sports and esports, as revenue and cost structures are similar in the two industries: the main income sources are commercial/sponsorship revenues, broadcasting income and fees received from attendees at live events (in the form of ticketing revenue, merchandising, F&B). What's more, esports can rely on further revenue sources, such as digital & streaming income and publisher fees. Currently, sponsorship revenues are the dominant income source for esports teams, but the evolution of sports gives an indication about potential growth areas, topped by broadcasting revenues. In terms of absolute value difference, the gap is huge, as is apparent in the chart below – the combined revenue of English Premier League clubs is significantly higher than total revenues in the entirety of the global esports industry.