JOSEPH NG – OCTOBER 24TH, 2018

“Fortnite tutors are a thing,” the headline from USA Today reads. “And yes, parents are paying them.”

Esports, already boasting millions of fans and almost a billion dollars in revenue, only promises to keep growing. The term refers to organized, competitive video game playing, featuring the likes of Dota 2, Counter-Strike: Global Offensive, Fortnite, League of Legends, and Overwatch. And it is no longer just a fringe hobby, as it might once have seemed. Esports is projected to reach an audience of over 380 million viewers by the end of this year, generating an industry-wide $1.4 billion by 2020.

Where does this money go? Esports, like traditional sports, has fans as well as other stakeholders: players, teams, and the game developers themselves. In this article, we take a look at how each of these parties makes money—and what the future might hold.

 

The Players.

First, the players. Their most high-profile sources of income are tournaments, in which they compete for a cash prize—and the numbers are enormous. Kuro Salehi Takhasomi, a German professional Dota 2 player, has raked in over $4 million in tournament prizes, with over $2 million from a single tournament in 2017. That year, $112 million of prize money was awarded, and for the 2018-19 season, video game maker Epic Games has promised $100 million in prize money for Fortnite tournaments alone.

But while winning tournaments might be the most glamorous way to earn money, it is not a particularly consistent revenue source. Instead, many players have turned to an online platform called Twitch to livestream their games. Viewers can subscribe to a stream for only $4.99 a month, and the streamer gets half of that. With only 4,000 subscribers, that is about $120,000 a year—and the top streamers make much more. Some are reported to earn over $100,000 a month.

It is an enormous sum of money, but it is not all. Streamers can upload their recorded streams to YouTube, generating more revenue through views on that platform. Many streamers also have loyal fans who are willing to simply donate money; for top streamers, that brings in up to $5,000 a day. On top of all this, streamers can also partner with various brands to promote their products on their channels—sharing links to certain products on Amazon, for example.

The best esports players are signed to teams, much like professional football or basketball players, and that represents yet another source of income. According to Forbes, “The average starting North America League of Legends Championship Series (NA LCS) player salary is now over $320,000” (comparable to Major League Soccer athletes!). Teams are even starting to offer other benefits like health insurance and 401Ks.

 

The Teams.

To understand how esports teams make money, it is easiest to contrast them with traditional sports teams—and the differences are easy to see. While traditional sports teams have massive stadiums and (generally) regional fanbases, esports are streamed online, so fanbases are not as localized. As a result, while traditional sports teams can generate revenue by selling tickets and concessions to fans coming to their home stadiums, esports teams generally cannot tap into that revenue stream.

Similarly, traditional sports teams frequently own broadcasting rights to their games, while esports teams largely do not enjoy that luxury. For instance, in 2011, the Los Angeles Lakers (a professional basketball team) signed a 20-year contract with Time Warner Cable for local television rights; the deal totaled $4 billion—an average of $200 million a year. Meanwhile, in esports, teams have far less leverage. In 2016, Riot Games (the developer for League of Legends) declined the petition of a number of esports teams for revenue sharing and broadcasting rights.

Instead, esports teams generate the vast majority of their money through sponsorship deals; estimates vary from 40% to around 95% of team revenue. Research firm Newzoo estimates that in 2018, $353.3 million was generated in the esports industry through sponsorship deals (with the caveat that not all of this necessarily went to teams). One problem with such one-sided revenue is that esports is such a rapidly changing industry. Games and teams can easily fade from popularity, causing their value to sponsoring companies to decrease—along with any associated sponsorship deals.

The future for esports teams, however, looks bright, as the rising trend of esports viewership has attracted millions in capital. Merchandise such as branded shirts and mouse pads already bring in revenue for teams, and new opportunities keep opening up. Team-customized digital skins (different visual appearances for on-screen characters), for instance, pose a potential source of revenue. So do esports-specific arenas, which could drive ticket sales, sponsorships, and ad revenue. Some of these arenas are already in the works.

All this potential for future growth, on top of the sheer amount of capital already being invested in the industry, has given esports teams sky-high valuations. Many have estimated valuations of $100–$200 million—and that number is likely to rise.

 

The Game Developers.

As noted earlier, some of the biggest game developers hold tournaments for their games, with a cash prize paid to the winner. Though expensive to host, these tournaments generate publicity for the games, and at least some of the costs can be offset via ticket sales, sponsorships, and advertisements.

Plus, the game developers own broadcasting rights; especially for lager tournaments, these rights can be worth a significant amount. In 2016, BAMTech (a streaming company owned by Major League Baseball and Disney) inked a deal with Riot Games for streaming rights through 2023, worth at least $300 million. Similarly, in 2018, Activision Blizzard (maker of Overwatch) sold broadcasting and streaming rights for its second season of the Overwatch League to three well-established companies (ESPN, ABC, and Disney), indicating esports’ growing mainstream appeal.

Perhaps the most interesting feature of game revenue for these developers is the rise of microtransactions (small in-game purchases), such as skins. Take Fortnite for example. As a free-to-play game, all its revenue is made through in-game transactions. In February 2018, the game brought in $126 million, mostly through in-app visual effect items. In April, it generated $296 million, and in May, monthly revenue hit $318 million. As of July, annual revenue was on track to hit $2 billion.

One interesting point to note is that, like pharmaceutical companies, game developers have enormous research and development costs. Much like the few drugs that pass regulatory approval and make it to market, very few games actually explode in popularity. Game developers must create a number of games and hope that at least one can hit it big, bringing in enough revenue to generate a profit after subtracting the costs for developing the others. Unfortunately for developers, the cost of making these games is growing. Electronic Arts, for example, noted in its 10-K filing for fiscal year 2018 that research and development costs had risen to $1.3 billion, up 10% from the previous year.

 

The Takeaway.

It is clear that esports has a promising future, both in the US and abroad.

Game developers are investing more and more money into trying to create the next big hit. Media broadcasters are willing to spend big to secure streaming and broadcasting rights. Gamers are generating billions through in-game purchases, and players and teams are earning millions.

Esports is a growing trend, and it should not be ignored. Who knows? It might even become the next Olympic sport.

Author’s Note: Newzoo, a market research firm, has interesting infographics with financial estimates of the size and trends of esports and the broader video game industry. They can be found here.

 

Featured Image Source: Medium 

Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of The Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty,  or the University of California at Berkeley in general.

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