Peter Warman, a game industry analyst and CEO of Dutch market researcher Newzoo, started following esports closely in 2013. He started looking into the numbers and comparisons to real world traditional sports, and began making projections about where it was going.

Now esports has begun to explode, and Newzoo estimates it will generate $1.7 billion in revenues by 2021. And big “non-endemic brands,” or those that are not directly related to games or esports, are coming in as sponsors. Riot Games recently announced that Mastercard has signed on as a global sponsor for the League of Legends World Championships. Overall, esports could represent an $80 billion opportunity, based on comparisons to traditional sports.

Warman spoke at the Esports BAR Miami event, and I interviewed him there. He said that the arrival of the big brands is at hand after prolonged periods of investigation of the esports audience, which is expected to grow from 395 million in 2018 to 580 million by 2021. Already, about 11 percent of the total viewing hours on Twitch and YouTube Gaming are based on esports. That’s a big audience, but most esports teams aren’t necessarily profitable yet. So Warman warns that setbacks can still happen.

But over time, Warman is excited about the notion that many more people could someday get paid to play games. (something that we call the Leisure Economy).

Here’s an edited transcript of our interview.

Above: Peter Warman is CEO of Newzoo.

Image Credit: Dean Takahashi

GamesBeat: You dove into esports quite early, right?

Peter Warman: Yeah, 2013. It was right at the launch of PS4 and Xbox One. That’s when I published the first report.

GamesBeat: What made you want to get into it back then?

Warman: At that moment, on the PC side, there was so much happening. League of Legends was on the rise. The first stadium event had happened. Personally, I’m always thinking about what’s next. I was triggered by meeting Ralf Reichert of ESL for the first time, that discussion. Gamescom, for the first time, had an esports part. If you put everything together — the events, the streaming — that’s big. And there was so much innovation happening on the PC front.

Of course, I was taking all these press calls at the time, and all anyone wanted to talk about was Xbox One and PS4. I found that so boring compared to what was happening on the PC. So we boldly called this report “PC Gaming: Power to the People,” and we launched it in the same month as the two consoles. It had quotes from Valve, from Twitch.

We thought this was really consumer-driven, because streaming was at the heart of it. It wasn’t a tech-driven innovation. This was something that the fans were doing themselves. That’s how you recognize a trend that’s going to stick around. Compare it to VR around the same time, which was a little bit too tech-driven. We’ve never published anything on VR, not yet.

We spent nine months trying to model the space. You might wonder what there was to model, but at that point there was a lot to model. What to do with streaming? What do you call these people? Are they all fans? Viewers? Esports enthusiasts? How does the money flow? We started to sketch it out. You can’t forecast a market if you don’t build a structure where you can get data to fill it in and form an opinion. It was quite a process.

GamesBeat: There’s a lot of esports believers who track back to a moment in time, where they “got it,” where they felt compelled to learn more about esports. They went to a tournament and saw how exciting it was, something like that. It’s associated with things you need to believe in first, I guess.

Warman: In the very early days, we had a lot of hardware companies, like Plantronics, as clients. They were talking about this esports thing. I did a session for Plantronics with Ralf Reichert, who I didn’t know at the time, in 2013. We’re both smokers, so we got to know each other a bit over the day, and we had a drink together. Ralf has this enormous legacy in esports. I spent about 48 hours with him, and then I really got it. I could understand what streaming was, why stadium events are important, why mass press is important, why the PC was the driving platform. Everything pulled together. It was spending time with Ralf, for me.

Above: Big brands are coming to esports.

Image Credit: Newzoo

GamesBeat: The time we’re in now–you had that comment about how brands are ready to jump in. Mastercard just signed on with Riot. And yet everyone believes there’s a lot more to come. We’re hitting a tipping point between preparing to get involved, and then the brands deciding what they’ll sponsor.

Warman: Exactly. Within Newzoo we group those brands in three tiers. The top-tier brands are the key sponsors of the NBA, the Champions League, things like that — Nike, Adidas, Mastercard, Visa, Heineken. Then the second tier is what we call the challenger brands, just below that. And then the third tier is innovative brands. They all take a different approach to esports.

The third tier, some of them we’ve seen really embrace esports as a means of growing their brand. From the endemic side, HyperX has completely built on esports, going from Kingston to HyperX. The second-tier brands, they have more to gain toward the top-tier brands. They’re early and experimenting and investing in esports. But the top-tier brands, they have more to lose than to gain. They’re afraid that their brand will be negatively influenced by a move that’s not respected. They’re very careful, and not always rightfully so. They’re also a bit arrogant, of course.

The third-tier brands might take half a year to decide what they’re going to do. The second tier, maybe nine months. And then the top tier, at least a year. We know, from the moment they start inquiring with us, when they buy their first report–we can guess, approximately, when the big announcement is coming. That’s a theory we’re testing internally, anyway. But the different tiers each have a different dynamic and time span.

GamesBeat: Once we go through that process, is that the point where you think that esports organizations in general become profitable? Or is there still a lot more to go to make that assumption?

Warman: That’s an interesting point. We continue to publish figures and forecasts, and then half of the audience says we’re overinflating the potential in the market, and the other half says we’re underestimating what’s going on. We’re very aware of the effect that those numbers can have. The end potential is billions of dollars. I think everyone agrees on that. It’s just a question of the pace of getting there, and whether we’ll stumble on the way.

There’s still a chance that the first investments, the financial investments and brand investments–the ecosystem may not be professional enough to handle that and give back a good return in the way they want to see. It could be that there will be a devaluation. “Maybe esports isn’t all it’s cracked up to be. Let’s give it a couple of years to mature.” There might be a slowdown. That’s a risk.

That will cause real trouble for the people who’ve built the ecosystem, because the teams aren’t profitable yet. The money going around is all investments and media rights deals. Not that much is trickling down to the teams, while the teams increasingly have to pay more salary. They’re having a hard time being profitable. The coming year or two will be critical for the health of the teams. That’s the most important thing.

Above: 11 percent of all viewing hours on YouTube and Twitch are generated by esports leagues and events.

Image Credit: Newzoo

GamesBeat: Team owners have to make a lot of leaps of faith. Things are so much in flux. You have to take into account things like–little differences in the games can be a big deal. Call of Duty will have the Blackout mode this year. If that’s successful, maybe Fortnite has something to worry about. Maybe Overwatch has something to worry about with Fortnite. These competitive shifts can cause disruption for teams.

Warman: There are so many games to choose from. Fortnite and PUBG have shaken up the whole world. It’s still possible that big hits can suddenly come in. We thought that was almost impossible. It’s exciting, but it’s made some people worry. When we get questions about where people should put their money–they ask, “Isn’t there a way I can invest that’s agnostic relative to hits?” That’s hard.

GamesBeat: Do you have some general ideas of what has been or will be successful, though? As opposed to certain games that just aren’t cutting it as esports.

Warman: You have the sports simulation group, and I think those esports activities will have no trouble earning good money. They have all the sponsor connections. It’s not as frightening for sponsors to step in. Their challenge is to provide something that’s engaging and exciting. The games need to be adjusted. There’s a lot that needs to change for the games to fill a stadium with screaming people. Many of these games are single-player. You have to change that. Part of the thrill is the strategy of team play. Their challenge is more audience engagement.

GamesBeat: If you want to fill a stadium, you could do it with the traditional athletes.

Warman: I have a personal opinion around that, but–it will be more directly compared with something that exists in real life. That’s always difficult.

Then you have the existing core franchises that have been around. Can Battlefield or Call of Duty come in and make a difference? I think they can, if they don’t underestimate the key mechanics of a successful esports experience. It’s not only about competition. The aspect of League of Legends where you choose the champions just before the game, and you change your strategy depending on what the other team chooses, that component, people know that’s all behind the game. Those are components people don’t talk about a lot, but if it’s not in the mix of an offering, then the chances of it being big as an esports title are slim.

The esports opportunity

Above: The esports opportunity

Image Credit: Newzoo

GamesBeat: You might think that if a game sold its TV broadcast rights, got sponsored and well under way, then it would be a success. But if you look at a market like China that doesn’t necessarily apply, because China has a state-owned media. It’s a lot harder to pull off that kind of big medial deal in a place like that.

Warman: That’s why I find it interesting that Huya spent money on Korean rights. If Huya and Douyu, the two big platforms, go head to head bidding for content, that’s a very similar situation to Twitter and Facebook bidding up rights.

GamesBeat: In this case you have different media companies coming in, Twitch-like companies.

Warman: Exactly. These are not traditional media companies over there. But it hits on an interesting point. The linear media companies all want to have more digital. When they talk to Activision Blizzard, they want digital rights to boost their digital strategy. That’s what they lack. You would expect the traditional guys to be after traditional rights, but they all want the digital stuff as well, to expand their offerings. The digital rights for esports now sell at a multiple of the linear rights. A lot of games are left with the linear rights. Digital is what even the traditional companies go for.

GamesBeat: When you gave your talk, you had some more futuristic ideas. Do you think we’re heading in the direction of a sort of leisure economy, as increasing numbers of people get paid to do things like play games? YouTubers are a good example, streams. Not all of them are giant celebrities, but they’re making a living.

Warman: Getting credit back for something you put your personal time into–it could be playing a game, but it could also be, I don’t know, answering questions in your neighborhood that people have. It could be all kinds of services. It doesn’t particularly have to be hard cash. It could be something that can give you enough to survive on. I’d even say you could have a credit system that automatically works, like an allowance. Even if you don’t do anything, or just do some basic things, you at least have some income. But I’m sure that we need to–I think it will happen. We have to be proactive in that, so we’re not so late that the divide between haves and have-nots is accelerated by technology. It should be more seamless.

Oh, dag

Above: Newzoo’s vision for the esports business of 2021.

Image Credit: Newzoo

GamesBeat: It seems like digital systems could be set up to find people who are putting time into something and getting them paid for that.

Warman: It also applies to product development. With all this video streaming–I’ve been saying that sports can be monetized in different ways. They can learn from games. Every time you look at something involving currency or gifting, things like that, you need a second layer for marketing.

There’s never been such a massive possibility for A/B testing as with mobile games. We have paid games and free games. The consumers have decided that the model of free stuff fits best. They’ve decided that a system of two currencies works best. If you’re developing a new monetization method, you should think about a marketing currency and a money currency. But this is only going so far in my head. Looking at things like loyalty systems at companies, I’d love to apply the smart mechanics of gaming to those systems. That would be my startup.

GamesBeat: You guys are doing interesting work in finding where the real opportunity is in esports.

Warman: How separate can you see esports from the larger world of game streaming? I wanted to ask Nate Nanzer about how much involvement or responsibility he sees for the 80 percent of all the hours on Twitch and YouTube that aren’t the Overwatch League, but just people streaming the game. Isn’t that part of their entertainment experience? Can you pay those streamers, do something for them?

I have a feeling that for Epic Games, with all that money they have, their idea isn’t around putting it into esports, but having that money spread all across the long tail. That’s what I hope for. I’m curious about what they’re going to do with that promise.

GamesBeat: Each league is making seemingly small decisions about how to set themselves up, and they turn out to be very important in the long run. Are you sharing money with your teams or not?

Warman: Right, or do they build their own business and make their own sponsor deals? Can they get the traditional sports owners to allow streamers to talk over their content and mash up summaries of their content? There may not be enough streams of good enough quality from live events quite yet, but–every time I watch a sports match now, I just think, “Why am I forced to listen to this one old guy talking over my game? I’d like to hear my favorite streamer, who I find way funnier.” I want to pick an audio track over the sports I watch. The only guy I’ve heard talking about that was from NASCAR.

They need to dare to put a little bit more power into the hands of consumers. If the development chain of the content is completely closed — “It’s finished, now you can watch it” — the young consumers, that’s not what they expect. They expect to be part of it, or to have someone else they trust make something in the style that they’re used to.

Disclosure: The organizers of Esports BAR paid my way to Miami. Our coverage remains objective.