The Evolution of Gaming and esports Business The Evolution of Gaming and esports Business

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.

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 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.

The level of material gains and non-financial benefits achievable are mostly dependent on how an organisation endeavours to enter esports. Such a decision is based on a combination of factors, but mainly comes down to the levels of investment and risk-taking. The majority of football clubs have so far been cautious in their approach, focusing on minimising potential risks and touching only upon football simulation games. This is where most of the Big Six clubs of the Premier League stand – they have recognised the need for taking the initial steps, but have not committed major resources into esports thus far. Liverpool and Arsenal have signed players to represent them at specific tournaments, such as the ePremier League. Player selection methods in this case vary, from organising a local tournament for new talents to contracting an agency or specialised company to look for more experienced veteran players. Manchester United have gone a step further and signed an entire team of players to represent them at selected tournaments, while Ajax has set up a dedicated division focusing only on football simulation games.

More gain can only be expected if a club is either willing to discover non-simulation games, or start cooperating with a dedicated, well-known esports team (such as AS Roma with Fnatic or Manchester City with Faze Clan). The types of risks include brand association with games that do not represent the values of a club, such as violence; fans' dissatisfaction with presence in certain segments; or a lack of control and understanding of players as brand ambassadors. These risks can indeed be damaging and can result in a loss of reputational value, but in some cases, these are only perceived risks that are part of society and pop culture, delaying the inevitable step of reaching out and embracing the interests of new generations. Risk mitigation techniques involve a careful selection of games (e.g.: FC Barcelona tapping into Rocket League, which has similar elements to football), or setting up a new brand in a riskier game (FC Copenhagen’s entry into Counter Strike:GO).

Finally, the majority of the esports audience can only be reached by focusing on the most popular game titles, such as League of Legends or Call of Duty. However, other than the various potential risks, reaching this level requires significant resources or ample time investment, as buying a franchise slot or an established team costs more than EUR 10 million in most cases and building up one's own esports division from scratch and seeing results can take years. Still, Schalke’s example shows that it is doable and can be a great investment: currently, they are the only football club who are represented in a major esports franchise league.

If we take a look at the broader world of sports, this approach might be the way to go, at least if the major professional sports leagues of the US provide any indication. Several sports franchise owners, such as Jerry Jones and Robert Kraft, have made significant investments in the past couple of years to set up their own team or buy a majority stake in an existing one, and are currently competing in the upper-echelon of leagues and tournaments. 

As Shawn Quill, National Sports Industry Leader at KPMG in the US observes: “The world of sports is changing and not only because of COVID-19. As sports clubs and other stakeholders are in the process of returning to live sports, they have to be aware of the challenges presented by the fast-moving entertainment and tech industries. esports is one way to prepare for the future and key figures of the sports world have already recognised this opportunity to stay ahead of the curve.”

It remains to be seen if some of the most familiar team names will headline prestigious esports tournaments in future, but football clubs will soon have to start intensifying their efforts in this realm if they want a piece of the pie for themselves. Industry standards are already taking shape, while the new generation of fans sport the logos of brands that didn’t even exist 10-15 years ago. In any case, esports are here to stay, competing for eyeballs among a new wave of entertainment options.

The above focus on football, however, is only a fraction of what has been happening in the ecosystem over the past few years. 

In terms of sponsorship, major global brands have shifted gears towards reaching the young, digital-native esports crowd. In 2018, McDonald’s stopped renewing its fifteen-year sponsorship deal with the Bundesliga and chose instead to initiate a deep partnership with ESL, a prominent esports league brand, signing a decade-long deal. In 2020, BMW signed global partnerships with five top esports teams that include providing vehicles showcasing the team logos on the paintwork that the teams use to travel to and from events.

External providers – companies traditionally sitting outside of video games, have also been seeing promise in esports and made their own moves. In 2020, NTT Corporation, the fourth largest telecoms company in the world, launched an esports subsidiary. “NTT e-Sports” is dedicated to esports businesses including gaming facilities and online platforms. Another subsidiary, NTT Docomo, announced a mobile game esports league with an unprecedented prize pool of 2.8 million USD. Tokio Marine Holdings, the largest private insurance company in Japan, announced a new insurance policy for esports event organisers on potential damages due to cyber attacks and event cancellations.  

The venues part of the ecosystem also continues to expand. Gaming-dedicated facilities have been at the heart of expanding growing the market in some early adopter countries such as South Korea and China. Now, similar facilities are being opened in other regions, including the HyperX esports Arena at the Luxor Las Vegas, iHotel (a gaming-dedicated hotel) in Taiwan, and Belong Gaming Arenas in the UK.

esports has reached the financial sector as well. In the US, there are several exchange-traded funds based on gaming and esports stocks. SPD Bank, one of the largest banks in China, has released an exclusive esports organisation-branded credit card.

Given the market growth and the interplay between esports and a range of different sectors, governments around the world are taking actions to promote further business activity. For example, in 2020 the Japanese Ministry of Economy, Trade and Industry (METI), together with the Japan esports Union (JeSU), has published a comprehensive industry report on the perspective of further market growth and social significance. (Full English report available in KPMG Japan’s website)

For non-endemic companies trying to enter the esports market, it is crucial to set goals and expectations that are aligned to how the ecosystem works. As Baro Hyun, esports Advisory Lead at KPMG Consulting Co. Ltd., Japan comments: “It boils down to three clear goals: 1. Marketing and branding, 2. Monetisation, and 3. Investment. One important thing to note, however, is that as the esports market has grown from a small, exclusive community, that community can sometimes be hostile to outsiders that do not take the time to understand the market properly before entering. It is therefore critical for businesses to understand the community first before trying to reach their goals. Authenticity is the key”.

Regulating against risk

Like many other fast-growing digital markets, esports needs to be cognisant of existing regulation that applies to it, and emerging regulation that is beginning to form. Adam Rivers, a Director at KPMG Economics in the UK, noted that “there are numerous lessons esports can take from other markets that have evolved quickly. Being on the front foot when it comes to emerging regulation will help the industry contribute to the discussion to form an effective regulatory path where needed, as opposed to walking the one laid for it”.

Regulation is already being seen across several areas:

Consumer protection regulation is beginning to consider esports. Streamers and streaming platforms, for example, should be aware of advertising regulations and precedent set in tangential markets (such as the UK Competition and Market Authority's investigation into online influencers).

Competition regulators in the US and Europe, for example, have been considering the relationships between publishers and distribution platforms (for example, Apple). More broadly, relationships between esports teams, publishers, events organisers, streaming platforms and individual players are increasingly complex and may give rise to potential vertical issues that may also draw the attention of competition authorities.

Finally, governments continue to grapple with the notion of "online harms", the outcomes of which will undoubtedly be further regulation for the sector. This is likely to be relevant across publishers, platforms, and online communities, including message boards.

The link between esports and Gambling

The UK Gambling Commission has stated that video games can be construed as gambling where prizes are available, that these prizes are the equivalent of money or money’s worth, and the game mechanics are such that winning a prize involves a greater degree of chance than skill. However, on the basis that esports, rather than video games, involve sufficient skill to avoid this, the main link between esports and gambling is the ability of individuals to bet on the result of match-ups and competitions as they would on any other sport.

As one of the only sports that can be conducted remotely, esports and gambling on esports saw substantial growth at the start of the COVID-19 pandemic. This is reflected by UK gross gambling yield (GGY) rising from just £0.05million in March 2019 to £3.39million in April 2020. Although customers now can return to betting on their usual preferred sports, the introduction of many bettors to esports is likely to have increased awareness and knowledge that will accelerate growth more quickly than without the pandemic.

Two main issues are being discussed when it comes to gambling on esports – gambling integrity, and gambling advertising.

• On integrity, there is an unfortunate track record of players “throwing” a match or using “cheat” software to gain an advantage over an opponent, otherwise known as “edoping”. There have been several instances of match-fixing, particularly in Asia, and there remains no overarching esports regulator to monitor and enforce as you would find in other sports. The industry has started to self-regulate, including the formation of the esports Integrity Commission (ESIC) in 2016.
• Gambling operators spend substantial resources advertising through traditional sports. In esports, where children constitute a significant proportion of the target market, this therefore poses a dilemma. Regulation is limited to that already in force, for example, the UK Advertising Standards Authority prohibition of gambling advertising where there is a reasonable expectation that the majority of a user base are underage. However, outside of those circumstances, operators are free to advertise, provided players in the ecosystem permit it.

For more information on the opportunity in the eSports arena read our latest report ‘Going for gold’ today.