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Esports events can fill a big stadium of fans who watch video game pros play for $20 million in prizes. But compared to traditional sports, esports still have a long way to go.
One telling statistic: Traditional sports leagues such as basketball monetize fans at about $15 per person. Esports right now is monetizing at $2.83 per person, according to market researcher Newzoo. Everyone is out to change that.
I recently attended the “Intel Buzz Workshop: The Future of esports” in Los Angeles and moderated a couple of panels. One of them was about the evolution of esports, and we discussed the parallels and differences between esports and traditional sports.
Our panelists included Kurt Pakendorf, chief strategy officer at Faceit; Craig Barry, executive vice president and chief content officer at Turner Sports; and Alex Birns, an investor at Santa Monica, California-based venture firm Anthos Capital. We took a deep dive into the subject, digging out interesting opinions such as the desire by everyone to have player-supported unions and more regulations.
Three top investment pros open up about what it takes to get your video game funded.
Here’s an edited transcript of our panel.
Craig Barry: I’m executive vice president and chief content officer for Turner Sports. I’m a relative newbie in the space. I’ve been broadcasting, traditional broadcast business for the last 27 years. Thanks to Tobias, I’ve been in this space about the last year and a half. I can give you the newbie’s perspective.
Alex Birns: I’m here representing the venture community in esports. I’m actually a big investor in Faceit through Anthos. We look at a lot of stuff in gaming, esports, areas like VR and other technologies, in addition to traditional media and a variety of other sectors. We’re investors in Machine Zone, who make Game of War and Mobile Strike.
I grew up in playing games. I’ve logged thousands of hours on MMO, DOTA, Counter-Strike, Hearthstone, everything. It’s been interesting to see that evolve over the past handful of years since Twitch launched.
Kurt Pakendorf: I’m the chief strategy officer at Faceit. I came to gaming through a legal background. I worked in middleware for video games and other technology. I moved to Faceit as part of the team that put together their CS league, negotiating with teams and Twitch and other partners.
GamesBeat: If we’re talking about the comparison to real-world sports, Newzoo says that traditional sports leagues such as basketball monetize fans at about $15 per person. Esports right now is monetizing at $2.83 cents per person. Everyone is out to change that. We’ll see how that can happen. Viewed more optimistically, esports revenues are on pace to generate more than $493 million in 2016. That’s up 51 percent on just a year ago. I’ll start with the basic question. What do esports need to do to progress?
Barry: I’m passionate about gaming. I’ve been a gamer my whole life, although I’m relatively new to esports. When you ask about the comparison to traditional sports leagues, it’s a pretty big disconnect now. At Turner, obviously, we do the NBA, we do MLB, we do March Madness, and so on. It doesn’t matter if you’re ELeague, MLG, ESL, or whatever. We are not leagues. We’re tournament operators that go out and put on high-end tournaments. We don’t own the IP or the franchises or the teams. There are no by-laws for the players or teams. When you get to real professional sports leagues, the IP is controlled by the league. Everything falls under that umbrella. That’s why it can be extremely profitable and build an ever-growing fan base. It’s easy to connect yourself to a team and a player.
The hierarchy of professional sports fundamentally goes player, team, consequence. That’s why people love sports. They emotionally connect themselves to a player, who ultimately plays for a team. Different sports have different emphasis. College sports are more about the team than the player. But then you look for the consequence. Esports, because of the fractured nature of where it lives right now, it lacks that emotional connection to players and teams and ultimately the consequence.
Overwatch and Blizzard just took a big step. That franchise model — building a league, owning the teams, owning the IP, having a draft and a combine, and building out a real league everybody can get around — is the right model for the growth of esports at the professional level. There’s nothing wrong with what we do from a tournament activation perspective. We do it very well. But if we’re talking about the stake in the ground, growing the business, and creating something that people can attach themselves to for years to come, then we’re talking about a more established league environment.
That’s why it’s important that we see professional teams coming in, whether it’s NBA teams or NFL teams. They’re going to provide structure to what really has no structure right now. They understand the structure of leagues and teams. It’s an important step in the evolution and growth esports.
Birns: Ultimately, the reason why the NFL and NBA and many of these other leagues monetize so well is because they’re more or less monopolies. The problem, from our perspective — the reality in esports — is that things are pretty decentralized and fragmented in the overall landscape. Publishers own the IP. The IP isn’t static. Games become more or less popular as a result of what publishers do. How they think about esports varies a lot. Valve and Riot couldn’t be more different in how they approach this stuff.
The addition of structure, and perhaps some mild centralization — it’s also going to be good for a lot of players when it comes to being able to make what they’re worth, as opposed to just being spread all over the place. But there are other reasons, structurally, why it’s going to be tough to monetize esports to the same extent as traditional sports, at least in the near term. Digital CPMs, the amount of money you can make on advertising compared to TV, is much lower. The audience is much more global. People are still trying to figure out the best way to monetize users in Russia or eastern Europe or Asia, whereas something like the NBA is dealing almost entirely with American viewers.
We’re also just early in the process. It took a long time for a lot of that stuff to come together in traditional sports. Football and basketball had their early days with multiple leagues. Baseball was very different in the ‘20s and ‘30s compared to today. Watching games on streaming video has been around for less than 10 years, and in a big way for less than five or six. It takes time for the right business models to appear and evolve, to understand what’s different about users and what they want, what the right content is for the space. Getting all that right takes cycles. It’s hard to rush it. Publishers and developers are still trying to figure that out.
Going forward we have people making games with esports in mind, as opposed to creating esports hits by accident with games that aren’t necessarily designed as spectator sports, or for monetizing on the esports side. There’s going to be a lot of work going into that. There’s a ton of room to improve relative to where things will be in a few years. Whether we’ll hit the numbers traditional sports hit is a good question. Maybe not. But this can still be a big business without getting anywhere near that.
Pakendorf: Alex was referring to structure. What will be key is providing some certainty. For the industry itself, we need to create an ecosystem in which participants — people organizing events, people running leagues, people creating and distributing content, teams committing to establishing themselves in that ecosystem — have a greater sense of certainty around how they operate and how long they’ll be around. That will go some way to helping the industry grow and draw more fans in.
From the non-endemic side, you look at big traditional family brands that are looking at esports and asking, “How and where do I get involved?” “Well, there’s an event in three weeks’ time. You can sponsor that.” “Who’s going to be there? These guys or those guys?” That’s a big ask for brands. Whereas if there’s some certainty — you know who’s going to be where at what time, you can say more about the outcome — there’s going to be growth. It enables the ecosystem to benefit everybody.
We can take lessons from more traditional sports as far as how we grow what we do. But I think structure, at this stage, and certainty will help drive growth first and foremost.
GamesBeat: We have $20 million prize pools. We can fill stadiums. This feels like a financial success right now. What else is missing?
Barry: I hope it doesn’t sound like I was downplaying leagues, because you just have to know what’s important in the space. For ELeague, what’s important is that we’re serving a community. It’s important that we’re authentic and we serve that community with whatever IP or game we’ve chosen to do.
When it comes to the economics of esports, that code has not been cracked. The IP holders, the publishers, are by far leveraging the most opportunity in esports. When you see these massive events — BlizzCon or the International — these are multi-million dollar events that are built out of marketing budgets to raise awareness around the publisher. They’re not looking to make a profit on the event itself, and quite frankly I don’t think they do. The Call of Duty event at the Forum where Snoop Dogg played was extremely expensive, and it was a marketing play.
In our business models — ELeague or MLG or ESL — nobody’s cracked that code. We’re all still at the vestment stage of esports. We have a passion and belief in the potential behind esports. For us at Turner, it’s important that — the two simple reasons we got into esports, when we were looking at all the numbers, were that we felt we could make a difference through quality of content and quality of storytelling. We’re content creators at our core.
That was the differentiator for us. It wasn’t like we see an opportunity to leverage the economics of this business and make it the most successful business we’ve ever gotten into. We felt like we had the opportunity to serve a community and build something from the ground up and differentiate ourselves from everyone else in the community through content creation and execution. That said, that’s a slow burn. There’s no lightning striking there. We don’t stand this thing up and suddenly we’re making three times the money invested. This is a marathon for us.
GamesBeat: What’s going to align the publishers’ interest with everyone else? They want to sell more games, but —
Barry: The publishers, for all intents and purposes — I’m trying to be PC about this. They’re rich. They are more interested — if I went to Valve tomorrow and said, “I want to broker a 10-year exclusive deal to do all the majors and give you $100 million for that,” they’d probably turn it down. They’d say, “What would you do for the community? How would you build the community? How is the audience served by an end to diversity in our space, just being with a single tournament group or league?”
In Valve’s eyes, the community is going to suffer from that. They believe in this diverse approach, in giving the ball to all these different divisions or companies with different resources and assets who can create different experiences and evolve the brand and the IP over time. In the model that ELeague is in, the better we can learn to serve the community, the more we can grow that community, the more successful we’re going to be with the publishers and with that community, and the easier it’s going to be to monetize.
I know there are these big numbers. Once you get into the space, as all of you out here probably know, you realize how small the space is, how fragmented it is. Everyone’s looking over their shoulder. We’re all ducks. We look calm on top, and we’re paddling like shit underneath to try to crack this code. The truth of the matter is that the grip is the publishers. Until we figure out the best way to work with the publishers, I don’t see it becoming this thriving business.
Birns: Each publisher has their own viewpoint on this, their own opinions and perspective. That’s informed by their culture and business model and all that. It’s not like there’s some unified interest there, where they’re all aligned in what they want and if you figure out one of them the rest fall in line. Although they follow each other, so it’s not crazy to think that if you solve this in a major way for one of them, others will be interested.
As Craig alluded to earlier, traditionally publishers don’t think of esports as a business. They think of it as marketing. It comes out of marketing budgets. They originally never intended to make money from it directly. They intended to use it to increase their conversion and LTVs and retention model in the game itself. That’s shifting a bit now, as you look at how Blizzard and Riot are beginning to think that maybe this can be its own independent business. But that ship is still underway. Until they get to a point where they decide that they can do this as a business, it’s tough to get them to buy into enabling and empowering third parties, external parties to run with it and succeed.
Even if they do decide they want to make this a business, some will decide that they want to own it themselves, as opposed to enabling other people to do that. It’ll take some time, some reps, and some failures to understand that making games is very different from running a large media company, which in turn is very different from running a major sports league and regulating that and so on. Until they understand that their core competency does not necessarily overlap with what it takes to make esports a success story on the business side, it’ll be tough. It won’t be a super fast process.
Pakendorf: There are two questions. One is about the live events and how we grow that. The second issue is around drawing in the publishers. In a way, perhaps the answer would be engagement.
If you think of the competitive side of esports, what you see on TBS or Twitch or whatever, as the pinnacle of what’s happening in the industry, it’s underpinned by different bands of competition. People, millions of them, have different skill sets, and they’re inspired to be like the heroes they watch playing in professional competition. They seek to compete at video games and be better. That’s human nature.
So the answer to both of these may be engagement. The more we can draw these people in and engage them, whether it’s a live event or something they watch on television or Twitch, the more likely they are to respond to social media, the more likely they are to follow teams, the more likely they are to create heroes or role models in the professional community that people look up to. That serves to engage when you produce content, because people start becoming fans, following players or teams. That feeds back into the ecosystem, whether it’s at the very top level — the professional teams, or a competitive community like Faceit — or whether it’s just watching on Twitch and TBS because you’re a converted fan.
The same thing goes for publishers. Alex is right. They may see it as a form of marketing, and it is that, but it’s also a way of engaging. How do you engage with your community, from the pro level at the top to folks at the bottom? Being able to do that, executing on engagement, you’ll grow your title if you’re a publisher, your brand if you’re a league, or your team’s success if you’re a pro team.
Barry: In the world of traditional media, full of ratings and CPMs and GRPs, I’d say the most important metric going forward is engagement. Are they watching? Are they sharing? Are they commenting? Whether that’s from a content standpoint, a platform standpoint, a live activation standpoint, an event marketing standpoint, that’s quickly becoming the measure of success.
In this business, which is clearly a native digital business, it’s even more important. A lot of people ask me about TBS. Why is esports on TBS? It’s on TBS not because we think that’s the evolution of the platform. It’s because we’re creating a portal for the casual fan or the curious fan to come in and convert to the digital platform and create a higher degree of engagement. We’re creating another doorway for people to walk through and get exposed to esports.
That’s on top of the fact that when we talk about esports, in parallel with traditional stick-and-ball sports, there’s a certain amount of validity to it being on broadcast. We have the support from the hardcore esports community and they understand that, but we also have this portal and this opportunity to create an entry for the casual fan. That’s an extremely important part of the linear aspect of broadcasting in our case.
GamesBeat: It’s interesting to hear business people say that they want things like regulation and player unions. Do you feel like those kinds of checks and balances are going to help the sport grow?
Pakendorf: Player unions, teams getting together, is not a bad thing. It’s a good thing for the industry. It helps drive conversation. We talk a lot about fragmentation in esports. There’s a fragmentation in how you go about dealing with participants in esports, which makes it difficult. Anything that enables you to go out and talk to people in a constructive manner is a good thing. Will some of these survive? No. Will we get new ones? Yes. Will some flourish and be great? Yes.
For us, I don’t think it’s an issue of being exclusive. It’s an issue of being inclusive. We try to be inclusive with people. We get asked a lot about the formation of this or that union and what we think about that, but it doesn’t affect us. Our league’s success is up to us. We’re not going to lose out because of some other organization. We’re going to lose out because of our own failure to execute. How we go about communicating with those people is key.
So I don’t think it’s necessarily a bad thing. From the players’ side, certainly, it’s useful. Through ECS, which Faceit’s involved in, we have minimum terms and conditions for players. We accept the fact that as the industry grows, that’s something we should have. In fact, we encourage it.
GamesBeat: The 76ers made an investment in a team, and the Immortals have drawn venture capital investment. Can you talk about why these things are happening and why they make sense now? Can you talk about how you’d assess the value of a team?
Birns: Increasingly, it’s becoming obvious to a lot of people in the traditional media space, traditional sports, VCs, whoever, that esports is a real thing. It’s not a fad. It’s growing. That’s step one, as an investor. You want to be behind a macro trend that’s moving in the right direction.
From there you ask what’s the best way to play this trend. How do I invest behind this in a way that makes sense and is going to produce the best outcomes for those businesses and for our fund? For people who are looking at sports, you see teams being sold for billions of dollars. The Clippers were sold for $2 billion. The Yankees or the Lakers or the Giants are valued at far more than that. Even less successful teams outside key markets are worth hundreds of millions. You draw the obvious analogy. People got rich buying and selling teams in traditional sports, so let’s check that out in esports.
There are going to be some crucial differences, at least in the short and medium term, that make it unlikely for us to see esports teams changing hands for more than a billion dollars any time soon. But that doesn’t necessarily mean it’s not a good investment. People are investing in these things at very early stages. There doesn’t have to be the same scale you see in traditional sports for there to be a good outcome, depending on when you get involved.
It does seem likely that, for the top teams that are able to build strong brands and build powerful affinities with the community and generate massive fan bases who are passionate about the team, they’ll be able to either turn that into a business by themselves through sponsorships and streaming revenue and various traditional channels, and also use those brands to create other consumer products that they can distribute using their team brand and community. People will get creative and find other ways to monetize over time.
The top teams will definitely be worth a decent amount of money. The question then becomes, are we talking tens of millions? Hundreds of millions? And how long will it take to get there? I have no idea. The bet people are taking is that it’s likely to have some material upside and some probability that it will hit numbers like that. It’s unlikely that, if you’re investing behind a strong brand, one of the top brands, that it’ll go to zero. It’s possible, but not likely at this point.
Question: This is a global thing, but regional conversations are important in esports as well. From what I understand, the idea with the Overwatch league is that communities in a physical location can get behind these teams. With stick-and-ball, being in a city with your team brings a community together and builds the brand locally in obvious ways. Do you think that will happen with this league or the leagues you’re talking to?
Barry: The markets are different. In North America you have four primary sports, each with a single league. If you go to the international side of things, you have cricket and rugby and soccer with multiple leagues all across the international landscape. At Turner, from a media standpoint, even though Time Warner is international and we have focus on international, growing the esports business in North America is paramount to our success, especially when you’re talking about broadcast and creating something viable for domestic sponsors. It comes down to being able to create a structure that can sustain longevity.
Again, we go back to the publisher having an umbrella where they own the teams and own the infrastructure and play teams in separate cities and have expansion opportunities. If we can serve that, that’s awesome, if we can create a model that works in that environment. When you get into the more global, 360-degree look of esports, the model changes pretty significantly. That’s the rub with esports. You have to be viable in both of those markets. Obviously the international market is much stronger than the domestic market right now, and it can be treated differently.
You were talking about teams unionizing. I think it’s more important to create infrastructure around leagues. The unionization of teams is a little bit counterproductive, because every IP — basketball is basketball. In the U.S. it’s the NBA, and every other country has its own basketball league, but everybody falls in under that governing body. That structure is important. The unionization of teams is more like a federation. It can fragment the opportunity to create strength behind these leagues. I don’t know if it’s wrong or right. I don’t necessarily have an opinion about it. I just have what I think is best — to create a league that’s sustainable and that people can emotionally connect to, finding a reason to care about the players and teams and consequences.
Pakendorf: It’s an interesting concept, regionalization. Depending on the title you’re playing with, it could play very well. From our view, based on our experience, esports is a global phenomenon and it comes down to a competitive community that’s at the bottom. The fans that actually follow what’s happening are a global audience. Just because you’re watching from Russia doesn’t necessarily mean you support a team from Russia. They tend to support the players they admire the most. That’s what draws them.
If you were to create a regionalized tournament and you didn’t have the best possible players in that tournament, you’d struggle to find people who would watch that and be drawn into that. Again, it comes back to engagement. If you can engage people who care about what you’re doing, you’re heading in the right direction.
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