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Executive Summary
In November of last year, an esports viewership record was set
when over 4 million people watched the 2021
World Championship for League of Legends. The high mark, which came
despite the exclusion of Chinese platforms, surpassed the
previous peak set two years earlier and allayed fears that pandemic
fallout would negatively affect audience size. Indeed, esports viewership is up, even with the return
of some in-person events, and revenues are projected to reach $1.8 billion this
year.
These high-flying numbers – as well as occasional
viewership climbing to 220.5 million and dedicated viewership up
to 215.3 million globally – are likely
behind the bullish sentiment in the 4th Annual Esports Survey.
Conducted by Foley & Lardner LLP, Sports Business Journal, and
The Esports Observer, the survey finds that nearly 9 out of 10
esports professionals expect esports investment and deal activity
to increase in the first six months of 2022.
But that optimism should be tempered by the fact that
esports’ ability to grow its audience hasn’t translated
to an equal boon in monetization. At least, not yet.
“The perception continues to be there must be more ways to
make money out of a continually growing esports audience of this
magnitude, globality, and appealing demographics,” said Bobby
Sharma, special adviser to the Sports & Entertainment Group at
Foley. “But it’s more than just hope – it’s
a very logical progression. We just haven’t seen it fully
bear out yet.”
A Logical Progression for Monetization – and What’s
Driving It
Eighty-eight percent of the more than 400 executives surveyed
expect investment and deal activity to increase in the first six
months of the year, up from 73% who answered that way in 2020. Not
only that – this year’s gains in positive sentiment
came from the percentage of respondents who anticipate significant
or moderate increases, possibly a sign that industry officials see
an inflection point on the horizon.
Much of respondents’ bullish sentiment stems from
relatively new, but still uncommon, esports-dedicated investment
funds. That group saw a 21-percentage-point increase in our latest
survey and was selected by respondents as most likely to increase
its investment in esports this year. That spot in 2020 was held by
traditional sports teams and leagues, athletes, and celebrities
– a group that dropped 13 percentage points in this
year’s survey compared with the previous. Private equity and
venture capital firms also fell slightly compared with 2020, down 6
percentage points.
“What we’re seeing may be a recognition that
esports is complex – a different and, in some ways, more
complicated ecosystem than traditional sports. As such, it’s
taken some time, but the primary investment vehicles in the
space have begun to develop a very specific level of expertise and
portfolio, and it seems the marketplace may now be recognizing and
understanding that better,” said Sharma.
When it comes to the primary drivers of esports investment,
industry members are most focused on online streaming platforms,
while advertising and sponsorships – for a fourth consecutive
year are expected to be the greatest revenue drivers. Notably,
events and competitions moved up two spots to second on the list of
revenue drivers, a sign that industry officials expect esports to
significantly benefit from the continued return of in-person
events as the pandemic ebbs. The return to in-person events is
expected to provide greater visibility for advertising and sponsors
and, concordantly, renewed opportunities for revenue
growth.
Cybersecurity, IP Licensing Top Legal Concerns
Cybersecurity and intellectual property (IP) rights/ licensing
issues were respondents’ top legal concerns. Continuing
cybersecurity worries make sense given that web app attacks have skyrocketed since the
beginning of the pandemic, and after 2021’s series of high-profile DDoS and ransomware incidents, it
is clear even big-name publishers are vulnerable to
cyberattacks.
The IP concerns might stem from the growing popularity of
non-fungible tokens (NFTs) and smart contracts. Multimillion-dollar
prices for digital tokens are expected to increase concerns over
fraud and copyright issues, especially after NFT scandals, such
as Evolved Apes NFT creator Evil
Ape disappearing with $2.7 million, rocked the video game
industry.
Other matters – including cyberbullying, a lack of
adequate player protections in contracts, labor and employment
issues, and lack of diversity across the industry – were also
concerns.
Another top concern was match-fixing, but esports
executives’ worries there appear to be wrapped up in broader
concerns about a general lack of adequate detection systems and
monitoring tools for fraud and cheating. In January 2021, for
example, developer Valve suspended 37 Counter-Strike: Global Offensive
coaches for cheating activity related to bug exploits.
Meanwhile, natively digital media consumption platforms continue to
be seen as a significant opportunity for growth in the esports
betting market, as they more readily facilitate integration with
publishers’ core products.
A Desire for an Overarching Regulatory Body Amid Growth
At such a high-risk, high-reward moment, 72% of esports
executives strongly or somewhat agree that esports needs a single
overarching governing body for regulation and rule setting, up from
44% in 2020. This appears to be an acknowledgment that an
organization like the International Olympic Committee could provide
more overall structure to better provide commercial comfort for
additional mainstream brands and outside investors.
Simultaneously, it appears the pandemic will mostly be a net
positive when it comes to the growth of esports, as total
revenue has recovered after a slight drop in
2020. “COVID-19 has helped accelerate the wider public
consciousness of esports and placed it higher on the priority list
for many industry stakeholders,” said Michael Wall, a member
of Foley’s Transactions Practice Group and Sports &
Entertainment Group.
But whether that will translate into more monetization is still
the big question. The following report further analyzes this
year’s survey findings to assess what lies ahead for esports,
as those across the industry look for ways to align monetization
with viewership – and as the world fully emerges from the
worst health crisis in a century.
Growth and Investment
Esports Expected to See More Growth and Investment, Despite
Monetization Difficulties
Despite monetization concerns – a recent survey by Newzoo
showed the average revenue per fan would only reach $2.47 by 2023 – esports
executives remained optimistic about the future of their industry,
specifically investment and deal activity.
What’s behind their bullishness? Sixty-one percent of
respondents expect the continued growth of online streaming
platforms (e.g., Twitch, YouTube Gaming), including crossover
integration of video gaming with other forms of entertainment, to
increase investment in the first half of 2022. One survey
respondent said that the “pandemic led to the enhanced
development of online gaming platforms and had a positive impact on
the overall growth of the esports industry in 2021.” COVID-19
has clearly accelerated the adoption of online streaming platforms
like Twitch, which hit a peak of 6.3 billion hours watched
in the first quarter of 2021.
COVID-19 friction at live events and the declining appeal of
traditional sports with younger generations were also cited as
possible drivers of growth – both ranking second at 47%.
Measures taken at live events (e.g., social distancing, mask
policies, vaccination and/or negative testing requirements) have
driven adoption among those looking for a COVID-19-safe alternative
to the risks and inconveniences of in-person attendance.
| Which of the following do you think will drive increased investment in esports in the first half of 2022? [Check all that apply.] |
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61% |
47% |
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| 47% The declining appeal of traditional sports with younger generations continuing to drive increased gaming and esports consumption |
43% Increased attention on esports by national sports networks (e.g., ESPN, Fox Sports) |
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| 39% Expanded sponsorship and advertising opportunities afforded through live streaming and in-game ads |
32% Continued movement of big brands into esports sponsorship |
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| 4% Other |
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That said, merging esports with live events is seen as a growth
area, ranking second among areas respondents expect to drive
revenue growth in the next year (up from fourth in 2020). Of
course, it’s anyone’s guess how consumers will approach
live events when the pandemic eventually ends.
As they have since our first survey in 2018, respondents expect
advertising and sponsorships to be the top revenue driver. While
that has held, media rights have fallen steadily the last four
years, down from second in 2018 to fourth in 2022. This is likely a
reaction to unsuccessful attempts by tech and media
giants like Facebook, Microsoft, Turner, and Fox to gain
traction in the esports media space – and thereby foster a
more competitive esports media market – against the enduring
success of Amazon’s Twitch (live) and Google’s YouTube
(video on demand) platforms in the modern esports era.
When it comes to the parties that will increase their investment
most, half of respondents picked esports-dedicated funds, an
increase of 21 percentage points from 2020. In contrast,
traditional professional sports teams and leagues, athletes, and
celebrities dropped from last year’s top spot to second at
36%.
The year-over-year change could stem from a perception in the
traditional sports world that esports assets and their marketplace
are more complex, technical, and nuanced than previously assumed.
While pathways to monetization and a large, dedicated user
base exist for esports, perhaps traditional sports leagues expected
more commonalities with their business models leading to a quick
and lucrative turnaround on investments. And, in many cases,
such turnarounds have not happened.
Respondents may have also been drawn to dedicated funds’
singular focus on esports, a sharp contrast to traditional sports
leagues that have a core product – in-person sports and
entertainment – esports is meant to supplement, if not
supplant.
In addition, with dozens of major esports team assets already
owned or invested in by traditional sports teams and leagues,
respondents might think the rush for an initial stake in the
esports industry is over and that further investment from
traditional sports will be limited until revenue growth increases
substantially, more in line with its audience size.
Calls for Increased Regulation
As Esports Enters the Mainstream, Issues Like Gambling and
Match-Fixing Abound
There was no clear winner as far as perceived growth
opportunities for the esports betting market, which is probably a
sign respondents are bullish about 2022. Natively digital media
consumption topped the list at 54%, followed closely by increased
adoption of regulated gambling in the United States (52%),
inherently global fan and consumer bases (48%), and legacy
integration with cryptocurrencies (43%).
Natively digital media platforms offer a host of advantages to
traditional bookkeeping and betting, which may explain
respondents’ optimism. Unlike traditional sports gambling
avenues, which require an engaged audience to download an app or
physically go to a betting window, esports benefits from users who
already own devices that digitally integrate with betting
mechanisms. And, because esports runs on machines and produces
vast quantities of data, machine learning can be used to better
price pre-game odds and update in-play odds by the millisecond.
| Which of the following present significant opportunities for growth of the esports betting market? [Check all that apply.] |
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|
54% |
52% |
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| 48% Inherently global fan and consumer bases |
43% Legacy integration with cryptocurrencies |
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| 2% Other |
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This is buttressed by a rosy picture when it comes to
esports’ growing viewership. The audience size of both
esports enthusiasts and occasional viewers is projected to increase
from 234 million to 285.7 million and from 240 million to 291.6
million, respectively, by 2024. In addition, cryptocurrency –
with which users have already been purchasing digital assets, such
as skins, for years – is expected to play an outsize role in
betting. As the market capitalization of cryptocurrency continues
to reach record highs, it’s no wonder respondents see an
opening for increased growth.
Perhaps relatedly, given the increased stakes, concerns about
cheating remain top of mind. In 2021, the Esports Integrity
Commission issued a number of bans and penalties against teams and
players (Akuma, a Ukrainian team that handily defeated two of the best CS:GO teams in the
world, for example). Half of our survey respondents believed
that a lack of adequate detection systems and monitoring tools for
fraud and cheating posed the greatest threat to the growth of the
esports betting market – an increase of 5 percentage points
from our 3rd annual survey. And, although the percentage of
respondents who said fears of match-fixing were the greatest threat
to the esports betting market dropped by 13 percentage points from
2020, it’s possible those respondents believed it was part
and parcel with larger, systemic cheating in the esports
industry.
It follows then that the second-biggest perceived threat to the
betting market (at 40%) among respondents was the lack of oversight
of esports from an overarching body – a 9-percentage-point
increase over our previous survey results. This also lines up with
perceptions from the broader esports industry, with 72% of esports
executives agreeing esports needs a single overarching governing
body for regulation and rule setting. Just 16% said esports does
not need an overarching regulatory body, compared to 41% in
2020.
These changes might be in response to frustrations about the
current array of competing standards organizations,
which include the International Esports Federation, the Asian
Electronic Sports Federation, the Global Esports Federation, and
the World Esports Association. Such an overabundance of standards
setting creates confusion, and with two traditional sports that
were dominant in their eras as cautionary tales – boxing and
horse racing, which have both suffered from myriad cheating
scandals and commercial limitations over the last century –
respondents seem to be more willing than not to put a formal
singular structure in place.
Finally, the general public’s lack of esports knowledge
when it comes to betting, which nearly topped our 2020 survey
question at 45%, fell to fifth place, perhaps indicating an increase in awareness of
esports and its opportunities for gambling. Since global awareness
of esports continued its climb to two billion people in 2020, it is not
surprising those numbers have since risen.
NFTs — the Next Frontier?
Non-fungible tokens (NFTs) assign a unique identifier to digital
assets using blockchain technology. They also offer an entirely new
revenue stream for both teams and publishers, which could help
align viewership and monetization growth. In 2021 alone, European
team OG Esports generated almost $1 million by releasing
three collections of digital artwork as NFTs. Top-tier publishers,
such as Ubisoft, have a particular interest in NFTs
and their ability to boost “play-to-earn” models, where
in-game items gained through normal gameplay can be sold for a
profit.
Traditionally, esports players didn’t necessarily own
unique skins, avatars, or characters in the games they played
– via licensing, they merely borrowed them from the
publisher. That may be changing with NFTs and could result in the
decentralization of the gaming ecosystem. Existing game economies
– a select few of which involve loot boxes and real-world
trade of in-game goods – may be disrupted as gamers
shift to an NFT-based virtual marketplace.
Publishers may also be cautious about creating an ecosystem if
it means that players can remove assets and trade them somewhere
else. Even so, companies may be starting to soften their views on
this, especially as they begin to realize what an effective
marketing vehicle NFTs can be. Big-name publishers, such as EA
Sports and Ubisoft, have recently expressed interest in
offering player owned content, the latter calling it a
“revolution” in the industry.
Our survey reflects these changing attitudes –
particularly among publishers and developers, who were the
most represented demographic – with nearly 4 out of 5
respondents expecting the prevalence of NFTs to increase this year.
When asked to specify which of the following NFT uses they thought
would become increasingly prevalent in esports over the next 12
months, respondents’ top choice was digital player cards of
professional gamers, streamers, or content creators (64%), followed
by unique “skins,” animations, characters, or songs
(54%) and virtual merchandise related to specific esports
organizations and teams (51%), with unique highlights from esports
competitions (44%) trailing close behind.
Legal Risks
Cybersecurity Attacks, IP Remain Top Concerns, Publishers Worry
About Government Actions
As esports matures amid political and cultural upheaval, legal
concerns continue to evolve. Though respondents view cybersecurity
and malware attacks and IP rights/licensing issues as the greatest
legal risks to the esports industry – those categories were
selected by 42% and 40% of respondents, respectively – there
was no clear winner when we asked about top legal issues.
Cyberbullying within games, contracts that do not provide adequate
protections for players, and labor and employment issues all fell
within 7 percentage points of the respondents’ highest-ranked
selection.
| Which of the following legal issues do you think pose a substantial risk to the esports industry [Check all that apply.] |
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|
42% |
40% |
38% Cyberbullying within games |
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| 36% Contracts that do not provide adequate protections for players (e.g., long work hours and other restrictions on players) |
35% Labor and employment issues (e.g., unionization of players, classification of players as employees vs. independent contractors) |
33% Lack of diversity in esports and potential lawsuits from players involving discrimination based on gender, sexual orientation, etc. |
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| 32% Illegal gambling |
22% Antitrust actions with regard to mobile app stores, and their effect on esports publishers and developers |
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The increased concern among respondents over cybersecurity and
malware attacks came to a head last year when CD Projekt Red announced in February 2021
that a ransomware attack had been carried out on its internal
networks, and Riot Games experienced a DDoS attack on
its League of Legends team-based competitive tournament mode,
Clash. While perpetrators have been sentenced for involvement in
these cyberattacks, respondents are likely unsettled by the fact
the esports industry – including big-name publishers –
has not found a reliable way to prevent attacks from occurring in
the first place.
Labor and employment issues may also be top of mind due to a
perceived lack of equity in the workplace among publishers. Over
the last few years, several prominent development studios in the
video game industry have found themselves mired in litigation after
high-profile accusations of a gender-discriminatory workplace. In
addition, major issues have very publicly surfaced in recent months
at some of the biggest publishers in the world, including
complaints, protests, and even strikes regarding alleged
discriminatory practices and culture.
As with IP issues in traditional sports, enormous litigation
risks abound, particularly as NFTs grow in popularity. An
increasing number of NFTs are not properly copyrighted or do not address
revenue-share issues for sale and resale. To further complicate
matters: If a fan token – an NFT that allows for membership
perks in a club – is structured in a way that looks like an
investment, it may fall under the regulation of the U.S. Securities
and Exchange Commission.
Publishers face different obstacles. Survey respondents, when
asked which issues facing major game publishers were potentially
negatively impactful, rated cultural and/or political shifts away
from youth video gaming (e.g., links with violence, government
limitations on playing and consumption) and challenges with the
franchise league model and system as paramount, with the former
receiving 54% and the latter 53% of responses (respondents were
allowed to check all answers that applied). Challenges competing
with traditional sports (46%) and the ability to generate new and
successful esports-friendly titles at scale (36%) ranked well
behind the others.
Concerns about government actions understandably center on
China, one of the largest markets in the industry. More
than 250 million Chinese gamers play esports
or watch tournaments and games, but tightening restrictions, such
as real-name authentication, which prevents loopholes that allow
gamers to log on anonymously, and a ban on gamers under 18 from playing more
than three hours a week, are likely giving publishers pause. In
addition to immediate viewership hits, respondents might believe
these changes will hurt esports’ long-term popularity in
China.
In regard to potential challenges facing the franchise league
model, friction remains as to how the industry should be
structured. The ubiquity of the franchising model in the more
established and stable (in the sense of longevity and in that
no one company owns the intellectual property of the game itself)
traditional sporting world makes highly structured leagues and
teams a familiar and attractive option for prospective owners
and advertisers, as does the opportunity for more effective
monetization via sponsorship and media coverage. But some
respondents may expect pushback from competing frameworks and
models, including revenue-share. Moreover, many teams will not
want to geolocate within a specific city, especially
if their audience is primarily global.
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