The current eSports revenue model is completely dominated by partnership dollars. At $636.9 million, sponsorship revenue contributes more to the eSports ecosystem than media rights, ticket sales, publisher fees, streaming revenue, and other digital income sources combined. This puts a tremendous strain on eSports organizations to develop partnerships and activate them in ways that will keep brands in eSports in the long term. However, with a unique blend of loyal sponsors and digital assets, eSports is in a great position to offer partners an alternative to working with traditional sports organizations.
Endemic vs Non-Endemic Brands: The eSports Balance
The eSports partnership market can be split up into two main categories: endemic partnerships and non-endemic partnerships.
Endemic Brands
Endemic brands are those that offer products or services that complement or are used in the production or playing of eSports. This can range from large peripheral companies such as HyperX or Logitech to energy drink companies like Monster or Red Bull. eSports organizations have built up incredible loyalty with endemic partners as these brands look to use eSports, which had roughly 500 million viewers in 2020, to reach the larger gaming audience of around 2.69 billion people worldwide. However, a case can be made that eSports is over-reliant on endemic sponsors. Of the top 20 eSports teams in the world by prize money won and the 19 largest eSports events by viewership and sponsorship money, 88% of all team partnerships and 65% of event partnerships are with endemic brands. HyperX alone is partnered with over 20 organizations and is the principal sponsor of the Intel Extreme Masters (IEM) and Dreamhack tournaments. With the money spread so thinly across what is a heavily fragmented eSports market, there need to be other sources of sponsorship revenue coming in — there are only so many keyboards and mice that these companies can sell, after all. This is where non-endemic brands come into the picture.
Non-endemic Brands
Non-endemic brands are those that sell products and services that are not integral to eSports and gaming in general. A great example of a non-endemic partnership deal occurred in 2019 when Team Liquid collaborated with Marvel Entertainment. The partnership, which was primarily activated through apparel lines that mimicked Marvel superheroes like Iron Man and Captain America, was so successful that it was renewed until 2022. Both organizations have benefited from the natural crossover between gaming enthusiasts and comic book fans, but it took great creative vision to properly activate the partnership. eSports companies will need to continue to find and develop relationships with non-endemic partners like Marvel if the current revenue model of the industry stays in place going forward. If not, these organizations run the risk of seeing their growth stagnate as they wait for the media rights and fan monetization revenue streams to reach the level of current sponsorship revenue amounts.
The partnership landscapes of the sport and eSports industries share many similarities but have several key differences that separate the two markets. Common partnership categories that are shared by both industries include jersey patches, in-stadium ad spaces, and naming rights. There are also individual player sponsorships and affiliate marketing deals with streamers that are similar to what is seen in the sports industry. It is not uncommon for eSports brands and sports teams to share the same partners as well. For example, the cryptocurrency platform FTX recently inked a $210 million naming rights deal with Esports organization Team SoloMid (TSM) as part of a global expansion and talent development strategy. FTX then followed that up with another partnership — this time with the MLB to become a professional American sports league’s first cryptocurrency partner. Collaborating with brands that also operate within traditional sports markets is a fantastic tactic that eSports organizations can employ as they seek to grow their non-endemic partnership revenue streams. With many similar partnership categories, selling asset packages to these brands should run smoothly due to the familiarity they already have from their experience in traditional sports.
Digital First: Streaming, Asset Models & Activation in eSports
The most significant differences between sports and eSports partnerships can be found within digital and broadcast ad spaces. For almost the entire history of eSports, the primary method for viewing content was through streaming platforms like Twitch or YouTube. Television networks will occasionally pick up the odd eSports tournament or finals, but even then, the bulk of the audience will view from streaming platforms. Tournament organizers capitalize on this by selling against overlay and banner ad spaces to go along with traditional commercial breaks in between matches.
What Traditional Sports Brands Must Know About Partnering in eSports
Unlike traditional sports, there is a primary broadcaster that holds a virtual monopoly over content distribution: Twitch. With almost 92% of the eSports viewership market share, Twitch is able to set the price they are willing to pay tournament organizers which significantly drives the cost down. This contributes to the eSports industry’s reliance on partnership revenue. On the other side, traditional sports organizers are only just starting to broadcast their games on streaming platforms. Deals have been brokered between the likes of Amazon and the NFL as well as YouTube and the NBA, but it remains to be seen whether streaming can become as dominant in traditional sports as it has been in eSports. For now, it appears that the television media rights and the partnership categories that spawn from them will continue to dominate the revenue model of traditional sports.
Gambling in eSports has gotten out of control and could get even worse without proper regulations. There are two forms of eSports betting: cash betting on professional eSports games and skin betting. The first gambling companies to enter into eSports already had a foothold in the traditional sports industry. After noticing the exponential rise in eSports viewership and lack of eSports specific regulation, these companies pivoted into eSports in an attempt to capitalize off the emerging industry (Greer, Rockloff, Browne, Hing & King, 2019). In the years following the success of these firms, new betting platforms were created that offered their services exclusively to the eSports market (Greer et. al., 2019). Skin betting refers to the practice of using in-game cosmetics to bet on eSports games or as collateral for online games of chance (Greer et. al., 2019). For several years the eSports betting industry operated completely unchecked, posing a slew of ethical issues, particularly around competitive integrity and underage gambling (Dos Reis, 2017). While there have been crackdowns by marketplace operators and legislative bodies, many of the problems still exist today and new ones are emerging as eSports continues to mirror the gambling complex of the wider sports industry.
The Rise of eSports Betting: Cash vs. Skin Gambling
Skin gambling has routinely exploited the younger demographic of eSports viewers and has operated with far fewer constraints than traditional betting. Skins are typically acquired by in-game achievements, randomly through “loot-boxes”, or directly via purchases on the Steam marketplace (Greer et. al., 2019). These skins are typically tiered by the rarity with the most expensive skins going for tens of thousands of dollars and serving as an indicator of prestige (Greer et. al., 2019). Creating a Steam account where skins can be stored and sold is extremely easy and lacks any regulation. Potential users only need to be 13 years old, have a valid email address and if they want to make purchases on the account, any valid debit, credit, or gift card is required (Greer et. al., 2019).
Additionally, some sites allow consumers to trade their skins for tokens that can be used to play games of chance such as roulette, crash, and even poker. The winnings on these sites are higher valued skins but they can be withdrawn and sold on third-party sites for real currency. The excitement that is generated from users winning on these websites makes for extremely popular reaction-based digital content.
Under-Regulated Platforms and the Risk to Youth
As such, some social influencers have built their brands around this form of skin gambling which can cause more youths to develop an interest in betting. There have also been several high-profile scandals where social influencers mislead consumers about their financial connections to these gambling sites. For example, in 2016, Youtube stars Trevor “TmarTn” Martin and Tom “Syndicate” Cassel published videos where they gambled with skins on the website “CSGOLotto” (Frank, 2016). In their videos, Martin and Cassel claimed that they were simply using the sites for fun, when in fact they surreptitiously owned the site and were using a backend function to increase their odds of winning to create more thrilling content (Frank, 2016). However, their reactions to winning on the site were so fake that anonymous watchdogs investigated and caught wind of their fraudulent behavior (Frank, 2016). Scandals such as this caused some changes to regulation, primarily by the owner of Steam, Valve Corporation. Valve was able to take down many skin betting sites that required users to sign-in with their steam accounts in order to bet with skins (Greer, et. al., 2019). But without any government legislation to back up their rules, new sites have emerged and lackadaisical behavior by Valve has allowed them to operate unchecked (Greer, et. al., 2019). Without proper enforcement, the threat to the easily exploitable youth demographic of eSports will remain in perpetuity.
Despite crackdowns from Valve and game developers, skin gambling remains one of the biggest ethical issues that exist within eSports. Children are indoctrinated into skin gambling through in-game loot boxes. Technically, loot boxes can be opened for free if a player receives enough value from natural skin drops in the game to trade their items for a loot box key. But, the loot boxes are essentially slot machines that possess addictive qualities that can make any human make poor decisions, regardless of age. Adding onto that is the element of prestige that comes with having high valued skins, which further incentivizes individuals to bet. Most children do not have access to large bank accounts that they can pull money from to fuel their skin gambling addiction so those that have not formed a shell of integrity may attempt to use their parent’s credit card (Hardenstein, 2017). There are no additional authentication checks needed to use a credit card to buy skins on the Steam marketplace. Furthermore, credit card information could already have been linked to the children’s Steam account when their parent’s purchased games for them (Hardenstein, 2017). This means that children would not have to steal their parent’s credit card information to have access to an enormous amount of money to gamble with. It was several high-profile cases where disgruntled parents sued Valve for their lack of restrictions on skins and personal finances that led to the crackdowns that currently exist (Hardenstein, 2017). However, every time a skin sells on the Steam marketplace, Valve takes a 10% cut and the associated game developer to the skin being sold takes a 5% cut (Hardenstein, 2017). This made it in Valve’s best interest to keep the current system in-tact albeit with slower trading times.
At its peak in 2016 the skin gambling market for a single eSports title, Counter-Strike: Global Offensive (CS:GO), was worth $4.6 billion USD. Skin gambling in CS:GO was seven times more than total eSports cash betting at the time ($649 million USD) and more than four times the revenue that the entire competitive eSports industry is projected to make in 2021 (Hardenstein, 2017). These extraordinary numbers represent a fraction of the money that people are willing to spend within the eSports space and why many betting companies are sponsoring eSports teams and tournaments. With such a significant amount of unregulated money floating around in eSports, people will look to capitalize off the system in any way that they can. Perhaps the worst case of exploiting the skin market is when competitive eSports teams purposely lose a game in order to secure a large number of valuable skins. The visibility of the top level of eSports competitions makes it difficult to “throw” games without getting caught. However, because betting options still exist for semi-pro games that could average less than 100 viewers, there are high reward and low-risk opportunities for gamers who care more about money than competitive integrity (Hardenstein, 2017).
Match-Fixing, Integrity Threats & the Business of Betting
Match-fixing is an unfortunate consequence of industry success that exists in traditional sports too. Cases like the Black Sox scandal in 1919 and supposed match-fixing by NBA referee Tim Donaghy are clear examples of how badly sports can be impacted when the motivations of players and officials are in the wrong place. The threat of these events happening in eSports is much greater, though, as very few regulatory bodies exist specifically for eSports’ competitive integrity. Moreover, the methods by which matches are fixed benefit companies like Valve as well as game developers. While it is unlikely that matches will be fixed at the top of eSports, several infamous incidents have rocked the industry and created a corrosive environment where fans are quick to distrust the results of games that don’t go in their favor.Â
The lack of regulation and surveillance of lower-level eSports tournaments puts players in compromising ethical situations. It is understandably very difficult for amateur and semi-professional eSports players to break into the top of the scene. For the players that want to benefit financially from eSports but do not believe that they will become professionals, match-fixing is an easy way to make money (Hardenstein, 2017). Furthermore, without a robust regulatory body to prevent teams from match-fixing, players can repeat this process over and over again until they get caught or lose enough so that their games are not listed on the common betting sites (Hardenstein, 2017). Valve attempted to put an end to match-fixing back in 2015 when they banned four players from the CS:GO team iBUYPOWER, who at the time were in contention for the best team in North America (Hardenstein, 2017). The punishments that were levied by Valve banned the four players, along with several accomplices who helped facilitate and bet the skins, for life from Valve-sponsored events (Hardenstein, 2017). This meant that these players could no longer compete at the Majors and it essentially ended their CS:GO careers. As time has passed, fans and players have clamored for the iBUYPOWER players to be unbanned, but Valve has never even entertained the subject in the past 5 years. Valve believed that such a strong message would prevent anybody from match-fixing in the future, but this created a careless attitude that has allowed match-fixing to happen again across CS:GO and other eSports titles (Hardenstein, 2017). Without proper regulation, what was once a significant part of the eSports economy has been harmed by match-fixing and the distrust that fans now feel. People are being robbed by random eSports athletes who have decided that their success in the eSports industry will not be defined by the games they win but by the money they make when they lose. Sites that allow people to bet on these lower-tier matches and tournaments need to be hit with sanctions and legislation should be passed that specifically focuses on controlling the eSports betting market. Unfortunately, there will always be a small group of players who try to throw their games, but with the right leadership the size of this group can be reduced and the negative impact of their actions can be diminished as well.
What Needs to Happen: Regulation, Transparency & Responsible Gaming
eSports organizations that partner with betting sites help to fuel the system of unethical behavior that has plagued eSports over the past decade. It seems as though every party involved in eSports is willing to turn a blind eye to the ethical issues that betting presents because there is so much money that is created by gambling. eSports teams are heavily reliant on sponsorships to fund their teams and operations with an average of 58% of eSports revenue being derived from sponsorship sources (Newzoo, 2019). While it is important that eSports organizations are developing large sponsorship contracts, and even more so with companies that don’t traditionally do business in eSports, partnering with betting companies could be sending the wrong message to fans. Almost 20% of eSports fans are under the age of 18 and exposing them to activities that should be illegal at their age presents a slew of ethical and moral issues (Newzoo, 2019). Younger individuals will forge positive associations with betting companies as they trust that their favorite team has their best interest in mind. Until eSports betting receives proper regulation, organizations that partner with these betting sites are accomplices in the unethical behavior of exploiting younger eSports viewers. Organizations need to either take a stand against these betting companies or change their marketing strategy so that it does not paint gambling in such a favorable light.
Sources:
Dos Reis, V. (2017). Q&A: The Rise of Esports Betting and the Challenges the Industry Faces. Gaming Law Review, 21(8), 630-636. doi:https://doi.org/10.1089/glr2.2017.2189
Frank, A. (2016, July 04). Counter-Strike YouTubers revealed as owners of gambling site they promoted (update). Retrieved October 20, 2020, from https://www.polygon.com/2016/7/4/12093546/csgo-lotto-tmartn-syndicate-youtube-disclosure
Greer, N., Rockloff, M., Browne, M., Hing, N., & King, D. L. (2019). Esports Betting and Skin Gambling: A Brief History. Journal of Gambling Issues, 43. doi:10.4309/jgi.2019.43.8
Hardenstein, T. (2017). Skins in the game: Counter-strike, esports, and the shady world of online gambling. UNLV Gaming Law Journal, 7(2), 117-138.
Hums, M. A., Barr, C. A., & Gullion, L. (1999). The Ethical Issues Confronting Managers in the Sport Industry. Journal of Business Ethics, 20(1), 51-66. doi:10.1023/a:1005951720456
Newzoo Global Esports Market Report 2020. (2019, November). Retrieved October 20, 2020, from https://newzoo.com/insights/trend-reports/newzoo-global-esports-market-report-2020-light-version/
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