It had been more than three hours of tense, back-and-forth combat—projected over the massive Jumbotron at San Francisco’s Chase Center—when the sellout crowd, smashing inflatable lightning batons together and screaming in excitement, felt victory was near .
A South Korean e-sports team, DRX, led their video game characters to the rival T1 team’s home base and smashed the Nexus, a blue gem, clinching this year’s League of Legends world championship.
Fans roared in approval, fireworks exploded, winners hugged, and losers sobbed into their keyboards. Executives from Riot Games, the publisher of League of Legends, presented DRX with diamond rings sponsored by Mercedes, in honor of the pinnacle of the professional video game scene.
It was a perfectly choreographed event, the kind of spectacle game publishers had promised investors from the traditional sports world when they first pitched in the mid-2010s to put their money into the burgeoning esports industry.
“I remember seeing a team come out and the fans going crazy and asking for autographs. I thought, ‘Oh my God, this is exactly like our experience,'” said Zach Leonsis, the son of Ted Leonsis, owner of the NBA’s Washington Wizards and the NHL’s Washington Capitals. The younger Mr. Leonsis invested in an e-sports team in 2016.
But despite the industry’s growth and appeal to the young consumers that traditional sports owners are desperate to attract, the money hasn’t followed suit. Some sports owners have soured the industry’s near-term prospects after discovering that the money-making methods in traditional sports — such as building fanbases in specific cities and eye-catching lucrative deals with television networks — don’t always apply to esports.
Most have yet to make a profit or recoup their investments, and the game publishers that control the biggest competitive leagues in North America, such as Riot and Activision Blizzard, are running those leagues at a loss or just beginning to break even.
While major esports events have sold out buildings like the Chase Center and draw tens of millions of viewers in China, tickets cost less than traditional sports games, and far fewer Americans watch esports than the 12.4 million who watch the 2022 NBA watched finals or the 17 million the NFL averaged for games in the 2021 regular season, a difference that means less interest from advertisers.
Most importantly, leagues like the NBA and NFL make billions of dollars each year through broadcast deals with television networks, while many esports are streamed for free on sites like YouTube and Twitch. Some early revenue forecasts included projected broadcast deals with Twitch and YouTube that were less lucrative and consistent than expected.
Of course, esports investors didn’t expect the industry to displace traditional sports within a few years. But some are still impressed by the early return.
“They definitely pitched to us that the growth of these leagues would be lightning fast, and we were all drinking the Kool-Aid,” said Ben Spoont, the CEO of an esports organization called Misfits Gaming, whose backers are the NBA’s owners Orlando Magic and the NFL’s Cleveland Browns. “What’s happened is that growth hasn’t come out as fast as we hoped.”
There are other challenges. Most League of Legends competitions in North America take place at Riot’s arena in Los Angeles, which is home to many teams. That deprives esports teams of the opportunity to monetize hosting games or build a fan base in a specific region.
Activision wanted to change that with leagues based on Overwatch and Call of Duty, the first-person shooter games. Both would hold home and away games, with teams spread across the country like traditional sports teams. Activision charged investors $20 million to join the Overwatch League.
But the competition had just gained momentum when the Covid-19 pandemic forced it to cancel in-person events. It has struggled to gain traction ever since. Activision allowed teams to defer fees to compete in the league, and is now helping teams cover their costs by paying each of the league’s 20 teams about $1 million this year, according to a person with knowledge of the league. competition finances.
“Even with the recalibration due to the pandemic, we’ve had packed arenas and record viewership,” said Joe Christinat, an Activision spokesperson, adding that there was “overwhelming enthusiasm” for the new Overwatch and Call of Duty games . “Our fans want these competitions and we will continue to work for them.”
Investors have also realized that game publishers’ incentives don’t necessarily match their own. Publishers can afford to exploit money-losing esports leagues as long as they generate interest in their profitable video games, so they sometimes prioritize growth over revenue. For example, Riot could be hesitant to sign a contract to broadcast League of Legends exclusively on YouTube or Twitch, as it would prevent viewers in China, where both services are blocked, from tuning in.
Such conflicting objectives have sometimes led to tense negotiations.
“It’s a push and pull,” said Kirk Lacob, the son of Golden State Warriors owner Joe Lacob. “I’ve had long conversations with various members of Riot over the years.” In addition to serving as executive vice president of basketball operations, the younger Mr. Lacob oversees the Warriors’ e-sports teams.
Kirk Lacob’s position is common among the sports owners who have bought or invested in esports teams, a list that includes Stan Kroenke of the Los Angeles Rams, Robert Kraft of the New England Patriots, and Hal Steinbrenner of the New York Yankees. . Mr. Lacob, a former gamer, discovered the competitive gaming scene in recent years and was enthralled by the prospect of reaching a young and growing audience. He remains bullish on the industry, but would like to see some results.
“I do believe that where there’s eyeballs, where there’s usage, ultimately there’s revenue,” he said.
Gaming executives urge patience. They say e-sports, popular in Asia for decades, is still on the rise in North America and should be viewed more as a high-growth start-up than a fully mature business. U.S. viewers watched an estimated 217 million hours of esports content this year, according to data company Stream Hatchet, up from 147 million in 2018. “We often say we’re still in the leather helmet days of the NFL,” said Naz Aletaha, Riot’s global head of League of Legends esports.
Many investors in the space still believe esports will eventually become a dominant, profitable industry. But in the short term, some are “very frustrated,” said John Needham, Riot’s president of e-sports, adding that Riot has been trying to convince investors to embrace a different monetization model.
While sponsorships still make up the bulk of revenue, microtransactions are a cornerstone of Riot’s strategy: selling recreational League of Legends players in-game items for their characters themed to real-life esports events like the world championship.
It sounds like a niche source of income, but the first numbers were striking. When Riot hosted its 2022 championship event for Valorant, another esport, it made $40 million in microtransactions alone. Half of that went to the league’s teams through a revenue-sharing agreement.
“Here we are going to disrupt the broadcast revenue formula because it is scalable,” said Mr Needham.
For now, the costly effort of fielding competitive teams is simply a catalyst for the real revenue-generating operations at many esports organizations. Prominent teams like FaZe Clan and 100 Thieves have morphed into more mainstream lifestyle brands that provide viewers with apparel and live streaming entertainment. FaZe Clan, which went public this year in what was seen as a benchmark for the industry, is losing money and cutting costs as shares of its stock plummet.
Felix LaHaye, the CEO of United Esports, a gaming marketing agency, likened competitive play for esports organizations to a car company fielding a Formula 1 race team – an expensive venture that attracts eyeballs and prestige.
“It creates value elsewhere in their ecosystem,” said Mr. LaHaye. “It’s worth having a loss leader in terms of a product that creates the brand, and then you end up selling normal products to people.”
Even Team Liquid, considered one of the more competitive esports organizations, has made much of its money elsewhere and now has nine separate sources of income, including owning an esports encyclopedia website, said Mark Vela, Axiomatic’s CEO. Gaming, Team Liquid’s ownership group.
“It’s a natural evolution,” said Mr. Vela. “Everyone needs to step back and see what really works for us here.”
Team Liquid, which brought in more than $38 million in revenue last year, is not yet profitable, but Mr. Vela, whose ownership group includes Leonsis’ father-son duo, said e-sports remains attractive because of the rare type of young, wealthy viewer they attract.
Mr. Spoont is also optimistic for the long term, but he does not want to wait. In July, he sold his European League of Legends team to a Spanish esports group for about $35 million. He said he was spinning Misfits to focus on content creation, in part because it could be another decade before competitive esports reach their potential.
“We were trying to achieve as an industry what took the NBA 50 years, but we were trying to do it in a five-year span,” he said, referring to the many NBA teams that weren’t immediately lucrative businesses. “Turns out it’s not happening.”
