The people who lead the biggest Western game publishers are no longer in touch with the people who play games. The leadership of major publishers is optimized for financial engineering, not creative breakthrough. Making fun is a second-tier priority. While there’s never been more professionalism in the games industry there’s never been less heart.

– Owen Mahoney, fmr CEO of Nexon (2010-2024)

One of my all-time favorite genres of content is “retiring CEO with no worlds left to conquer gets radically candid about how their industry actually works.”

These takes are often unbelievably insightful, hilarious, and thought-provoking. Unfortunately, it’s pretty rare to hear publicly from highly accomplished execs who aren’t shilling their portfolio or heavily constrained by a board, shareholders, etc. from spilling the tea.

Enter Owen Mahoney!

Owen was the CEO of Nexon for 15 years before wrapping up his tenure in 2024. While he’s still on the boards of Hasbro and Logitech, earlier this year he started dropping essays with “what are you gonna do, fire me?” levels of candor about video game development.

They are… an absolute delight.

Among the topics he’s covered:

• A CEO’s internal checklist for game pitches (and the waterfall considerations, such as: will the developer pitching me quit if I don’t green light this?)

• The mental model used at Nexon to allocate resources and map the games industry (according to this model Roblox is operating in a different industry from CDPR)

• Incinerating the modern Western AAA gamedev meta with passion you’d expect from a popular YouTuber rather than the CEO of a publicly-traded game company (which I suspect he would say is part of the problem!)

If you have any interest in the business of tech or video games, Owen is a golden follow.

OK, let’s move on to post-apocalyptic looting!

ARC RAIDERS: BETA OR SHADOW DROP INCOMING?

One of two things is going to happen during Summer Game Fest this week:

1. ARC Raiders is going to release in some form, triggering an avalanche of joy

2. ARC Raiders is not going to release, triggering an avalanche of disappointment

I’m sure fans will respond with reasonable restraint either way!

ARC Raiders, the highly anticipated debut extraction shooter from Embark Studios, is currently #8 in Steam wishlists and drowning in rave reviews from tastemakers like Tomographic, Shroud, and JackFrags.

Most importantly, it is incredibly fun to play.

Extraction shooters are a notoriously inaccessible and sweaty genre, but Embark has found a magical product equilibrium across time-to-kill, incentives for collaboration vs. gunning down players on sight, NPC AI, public comms, etc.

The result? Consistent fun and cinematic runs (watch from 40:28!!)

It’s all good vibes for ARC Raiders heading into Summer Games Fest.

Patrick Söderlund, Embark’s CEO, has been vocal over the years about how Western game development needs a drastic overhaul. It’s got to be a remarkable feeling for a studio co-founded by industry veterans disillusioned with the old way of developing and publishing games to see how fans have embraced their vision coming to life.

If that ethos sounds familiar by the way, that’s not a coincidence: Nexon acquired a majority stake in Embark back 2019. The CEO who oversaw that transaction?

Owen Mahoney.

According to Bloomberg I have a hot take: If every other kid is currently using ChatGPT/Gemini to get through school work today, “players won’t tolerate AI in games” takes are inevitably going to end up in “lol can you believe old timers used to believe this?” deck slides in the near future.

Similar to how most reasonable people would agree smartphones drive a lot of unhappiness– critics have great points!– but also personally average 6+ hours of screen time daily.

Anyone working in the industry in 2018 remembers the furious reaction by longtime Diablo fans to Blizzard’s announcement of a Diablo mobile title at Blizzcon. Critics who came away from that debacle with the takeaway “mobile: gamers don’t want it” absolutely missed the plot.

Poorly executed AI integration will definitely get dunked on, just like poorly executed mobile game announcements. The flip side is when done well AI won’t even register as an issue. Players will focus on how resonant the actual product or feature is, not the underlying tech stack. Which is the same as it ever was.

That brings us to AI Darth Vader!

AI VADER

It’s an interesting time for gaming: despite a ton of recent tailwinds the industry has been notoriously slow to embrace AI, particularly in flagship games with 100M+ monthly active users.

Some of this is likely due to fear of current player backlash or still-fresh memories of crypto gaming debacles from just a few years ago.

And you know what? Understandable.

That said, the drought broke recently when Epic Games x Google Gemini x Eleven Labs announced the launch of an AI Darth Vader NPC in Fortnite. After a little less than two weeks of stress-testing by one of the largest player bases in gaming the overall verdict is… overwhelmingly positive?

Good faith skeptics have largely responded with grudging admiration (Fortnite’s AI Darth Vader Is Unfortunately Very Funny.)

Most players have responded with a mix of curiosity, gleeful limit-testing (of course), and delight at how responsive Vader is:

• Provoking him about Padme Amidala or mocking him as “good boy” can trigger Vader to un-ally with the party and seek immediate murderous vengeance

• Asking about late rapper Juice World can get you an admiring eulogy about the rapper and the impact of his music on the galaxy

• Trying to provoke a reaction with sexual innuendo can get Vader to sternly recommend you seek professional help

There were hiccups along the way as Vader responded to players gleefully clipfarming him by swearing, falling for bait, and generally crashing out. Honestly though? Pretty tame considering who Vader was up against.

Let’s face it: no AI safety plan is going to survive first contact with gamers.

On that note, Epic, Google, and Eleven Labs deserve their flowers. It was genuinely impressive how quickly they were able to whack-a-mole issues and get Vader to an entertaining-but-not-feral equilibrium without lobotomizing what made him amusing in the first place.

Epic also deserves credit for making several high EQ comms decisions before and during launch, including emphasizing:

1. James Earl Jones consented to AI allowing him to voice Vader even after death

2. His living family was on board with AI Darth Vader in Fortnite

3. Google wasn’t using player comms to train their models

PARTING THOUGHTS

Fortnite’s AI Vader collab feels closer to a nifty proof-of-concept than a watershed moment for revolutionary new AI NPCs. That said, it was nice to have a throwback moment of a AAA video game successfully acting as a proving ground for bleeding edge tech.

On a related note, if you’re the type of person who (reasonably, IMO) occasionally feels existential dread thinking about what’s going to happen in a future where AI has decimated knowledge work, shared sense of truth/reality, and human connection…

…consider playing Mimesis, the upcoming hit from ReLU Games where AI-powered NPCs trained on your team’s voice comms and movement patterns will try to trick you into trusting them so you can be hunted down and killed :D

The future doesn’t just have to be terrifying– it can be hilarious too!

The closed beta runs from June 4-6 and you can apply to be a tester here.

"The whole story of [the Sandfall Interactive team] is basically an RPG that makes no sense still to this day."

Guillaume Broche

Every so often you see a winner in the games industry whose origin story is so peak it almost overshadows the success that made you interested in the story to begin with.

I was recovering from jet lag this past week and my “well… I woke up at 3 AM, now what?” strategy was Clair Obscur: Expedition 33, the latest indie hit to break containment this year.

My take: Expedition 33 is a 10/10 masterpiece with gameplay that’s a brilliantly executed hybrid of turn-based JRPG strategy x “git gud” rhythm combat often associated with Soulslikes.

I rarely use “masterpiece” to describe content but it’s a fairly popular opinion of Expedition 33:

• Sold over 2 million copies in its first 12 days (while available Day 1 on Game Pass, which deflates sales numbers)

• Outperformed industry bellwether GameDiscoverCo’s sales forecast by 6.5x

• Currently a 92 on Metacritic and “A 10 if there ever was one” for Paul Tassi

All this despite being a new IP, a debut title, and the product of a small French indie studio with few industry vets.

Not exactly the tried-and-true formula.

So… how does a game like Expedition 33 get made?

Pretty straightforward:

1. Bored middle manager at Ubisoft reflects that it will take 25 years to accumulate the internal clout needed to credibly pitch his dream game.

2. Said manager posts to Reddit seeking voice actors willing to record lines for free to make a demo.

3. Former private equity investor and astronaut trainee (seriously) responds to the post because why not?

4. Kepler Interactive (publisher behind cult hit Pacific Drive) takes a look at the demo and says “hey this looks cool, actually– let’s cut you a check.”

5. …

6. Profit!

Easy, no?

Gene Park has a fantastic write-up on the full story that’s well worth your time.

It’s very funny to me that the outlier success of Expedition 33 has triggered a parade of LinkedIn-coded thinkpieces like “How Clair Obscur 33 Rewrote The Gamedev Playbook.”

Hey, I get it: financiers crave consistency and game development craves capital.

There’s an overpowering incentive to identify The Blueprint that allows for consistent, replicable success in game development (most recently: AAA studio pedigree!) and leverage it to get game games funded.

And it’s true: Sandfall Interactive did capitalize on tailwinds to deliver a smash hit at a modest price point during a period of industry turmoil and ballooning dev costs.

It is cool to see nimble teams leverage Unreal to deliver eye-popping graphical experiences that would have been financially unfeasible a decade ago.

I’m just firmly in the camp that believes meta/playbook/blueprint discourse confuses sprinkles with sundaes. For the record, I love sprinkles.

Successful single-player game-making is an exercise in creating resonant art, not shiny and hollow SaaS vehicles, much to the chagrin of tourists investing in the industry. Monetization, user acquisition, etc. are all important, but if the core experience doesn’t resonate they simply don’t matter.

I’m with Larian CEO Swen Vincke who (sort of) called Expedition 33 as GOTY last December at the Game Awards. The playbook for making great single player games is the same as it ever was:

1. Assemble a small group of passionate, highly competent misfits

2. Have them outline the game they dearly wish existed but doesn’t

3. Secure funding

4. ...

5. Profit as a byproduct of having fun building something you really, really care about with people you really, really like

Sandfall Interactive checked every box and deserves all the flowers.

Anyways, Clair Obscur: Expedition 33 is a masterpiece and if you’re into RPGs it would be gaming malpractice to not pick it up.

Oh, and don’t forget to play Maelle in the Gestral Village tournament so you get her most OP weapon early! Seriously, it’s a real pain acquiring it later.

I’ve noticed feral companies hitting the top of the charts in game development, content creation, and product marketing with steadily increasing frequency.

A recent example:

Every month CreatorIQ publishes a ranking of beverage brands’ social performance. My reaction to last month’s ranking was immediate:

What is Gamer Supps and how is it outperforming Monster and Pepsi?

Earned media value isn’t revenue, but still… what?!

My first impression of their website was: oh, it’s gooner marketing and creator partnerships.

As I dove deeper and spoke to creators and insiders, however, it became clear I had underestimated them. The memes were downstream of a well-run machine with:

• Great execution: Fans consistently rave about GS mix texture and flavors, especially compared to competitors. They nailed sourcing.

• Deep partner alignment: GS has quietly developed a strong reputation among large creators for being easy to work with on deliverables, product, and creative.

• Commitment to the bit: GS knows their audience and will meme to within a nanometer of what’s socially unacceptable. The danger is part of the draw!

Paul Graham would be proud (I think.)

—

GOING FERAL

I was investing in D2C gamer consumer products around the time Gamer Supps was founded (~2017) and I vividly remember the consensus of the era was that gamers wanted their drinks marketed with the same sleek professionalism used by Razer to hawk mice and Ladder to hawk protein powder:

• A scowling esports athlete with crossed arms

• Taglines like ELITE PERFORMANCE and DRINK OF CHAMPIONS

• A logo equally appropriate for a fintech SaaS company

Guacamole Gamer Fart 9000 and Grandpa’s Ashes were not on the whiteboard, and yet here they are in 2025 soaring past Mtn Dew on the timeline.

Feral brand voice isn’t for the faint of heart: when it goes wrong it goes very wrong. It also has trade-offs baked in even when it goes right. A truly feral brand will never have the universal appeal or addressable market of a Coca-Cola.

The thing is… upstart teams and creators don’t need universal appeal to secure great financial outcomes and have fun along the way. And for a feral brand seeking an edge to stand out in a crowded marketplace, most people turned off by Guacamole Gamer Fart 9000 or waifu memes were unlikely to become customers anyways.

When Paul Graham wrote his famous essay about doing things that don’t scale I doubt he had anime thirst traps in mind, but the ethos is consistent. If you’re willing to do things legacy juggernauts and status-conscious competitors wouldn’t dare, you can delight users in ways they can’t.

We’ve recently seen this trend becoming more consistent in gaming: friend-of-the-newsletter Ryan Rigney has specifically called it out as a consequence of industry deprofessionalization.

The breakout PC game hit of 2025 (so far) is Schedule I: a cheerfully absurd cozy co-op drug dealing simulator. Popular creators like CaseOh have repeatedly made the game go viral by building rapport with persistent NPC customers or accidentally frying them with poorly-crafted fictional designer drugs.

That’s way beyond spicy tweets– Schedule I has unhinged core gameplay loops.

Twitch streamers long ago discovered that ferality is one of the most reliable ways to capture attention in an infinite content marketplace, so the increasing frequency of feral design in indie games is leading to more and more perfect creator-dev pairings.

Schedule I is estimated to have generated $100M in revenue in its first month and has hovered around 100,000 concurrent players . It’s also been a consistent engagement monster for creators across socials.

Similarly, 2024’s indie darling Palworld shattered multiple Steam records with the unofficial tagline “Pokémon: But With Guns!” The definitely-not-a-Pokémon-clone published by Japanese indie studio Pocketpair features gun-toting Pals, industrial-scale labor exploitation of Pals, and Depresso: the adorable gloomy Pal who drowns their sadness with energy drinks.

The Pokémon Company (TPC) may be willing to sue Pocketpair for IP infringement, but it’ll be a cold day in hell before they’re willing to arm Pokémon with .50 cal machine guns. Palworld’s feral design can’t be fast followed by a brand-conscious juggernaut the way Valve and Riot fast followed Autochess or Instagram cloned Snapchat Stories.

Pocketpair isn’t the first developer to try making a Pokémon-inspired game, but they are by far– BY FAR – the most feral.

The deftly absurd, delightfully unhinged indie title has generated roughly a cool $500 million in a little over a year and peaked at over 2 million concurrent players, good for Top 5 all-time on Steam. No other Pokémon-like has cracked the Top 100.

Admittedly $500M is significantly less than what a mainline Pokémon game makes but… who cares?

—

PARTING THOUGHTS

There was a time when sterile professionalism and brand safety were broadly viewed as a useful signal that a company was well-run, customer-focused, and competent.

For companies trying to make money on the internet that signal is harder to distinguish from noise with each passing year.

Professionalism-as-a-signal is still valuable in certain verticals: few people want feral accountants or home insurers. But for companies tied to culture and gaming, there has clearly been a slow but steady vibe shift in favor of the deftly unhinged.

It’s also noteworthy this cultural shift started before LLMs and AI agents became widely available to generate infinite polished slop on demand.

Products and voices that are genuinely unpolished, deftly absurd, and… well… feral can cut through the noise of the attention marketplace extremely effectively. It’s a risky trend to follow, sure, but one that’s paying off with increasing regularity and with plenty of tailwinds suggesting it’s accelerating.

Anyways, as far as I can tell that’s how meme caffeine powder outperformed Pepsi (NASDAQ: PEP) last month.

—

Intro

Wow. Based on Part I it sounds like esports is doomed?

All esports are not doomed!

That said, it’s pretty clear that this recent era of esports modeling itself after traditional sports is hurtling towards an unhappy ending. The product similarities are obvious, but traditional sports were never the right mental model for the business side of esports.

Still, I believe there are plausible paths for a small number of esports to become $1B+ ecosystems, though it will require a ton of unglamorous iteration and experimentation to get there, particularly as esports have fallen out of fashion in many investment circles.

For all its macro challenges, the fundamentals of esports remain the same:

• In an era where audiences for live programming are increasingly fragmented and attention is at a premium, a small number of esports continue to reliably draw large numbers of fans to broadcasts and venues. Cutting through hype and abstraction, at a baseline level that’s valuable to brands, broadcast platforms, and venue operators among others. 

• Esports offer a unique social surface area for publishers to build affinity for their game IP outside of the confines of the game itself. Winning a ranked ladder match is a completely different type of engagement from spending a Sunday with friends on Discord cheering on your favorite player or team in a championship match.

• Video game IP is ascending culturally, and while it’s important to be honest that hardcore competitive content isn’t automatically correlated with the growth of the video games industry generally, the readily addressable market for esports is still growing.

Is that enough?

If you believe that esports products have already more or less reached their final form then it’s understandable to say no, that’s not enough, and write them off as a stack of loss-leading marketing programs in a trench coat trying to cosplay as a high-growth industry. 

It’s important to be realistic that the overwhelming majority of esports ecosystems will likely continue to top out as grassroots communities (e.g. Super Smash Bros Melee) or moderately-subsidized publisher marketing programs (e.g. Halo) that allow a handful of people to make a full-time living and delight a small but passionate fanbase while having no realistic shot at creating billion-dollar entertainment products or venture scale outcomes. 

That’s perfectly fine, and actually akin to traditional sports: no amount of private investment is likely to make curling or ultimate frisbee consistently fill stadiums in the long run, but that doesn’t tell us much about the prospects of basketball or football.

Esports has numerous examples of ecosystems that can persist at a grassroots level through pretty much anything, as well as glitzy, highly-subsidized ecosystems that can scale if publishers are willing to sustain eye-watering losses. 

The real question is: can it cultivate ecosystems which can actually scale sustainably?

Personally, I believe yes.

Outlier esports– I’m talking about a handful of ecosystems per decade if that– have barely begun to scratch the surface of the innovation space at their disposal. More immediately, there’s clearly a lot of room to improve on the basics like monetizing broadcast rights effectively, which the industry has struggled mightily to figure out.

OK, so how does an esport scale sustainably?

First and foremost: there’s no forcing scale in an ecosystem that doesn’t have organic popularity. That’s how you get cash incineration machines, an esports industry specialty.

Second: scaling an esport only really makes sense if the underlying video game is wildly popular, profitable, and has demonstrated longevity to a point that the publisher is serious about expanding the IP beyond video games. Needless to say, this is an extremely rare mix: these are outliers of outliers. 

For the overwhelming majority of competitive ecosystems, chasing scale is an exorbitantly expensive wild goose chase. It’s far more realistic to grow organically or via mild publisher subsidies with the goal of building a successful marketing program that doesn’t need to be self-sufficient, particularly given the rarity of longevity for video games.

Scaling an outlier esport is both expensive and outside the core competency of game development, so it requires a publisher with strong conviction in cultivating IP beyond just the gaming context and building a flywheel to monetize that affinity in Disney-like fashion. Think Nintendo partnering with Comcast to build a Super Nintendo World amusement park, or Riot Games partnering with Fortiche to deliver a #1 Netflix hit in Arcane. 

I’m generally skeptical of the incentives of publishers that don’t have a long-term view of building a flywheel to monetize their IP trying to take a hands-on role in scaling up their competitive ecosystems beyond marketing programs. When the going gets tough they have every reason to cut bait, and why wouldn’t they? Scaling esports revenue is an expensive, difficult, and improbable-to-complete sidequest. 

Third: once there’s a critical mass of grassroots enthusiasm, the most important business priority is for publishers to collaborate with third parties to develop and grow esports-specific revenue streams to meaningful levels. The temptation to simply piggyback on in-game video game monetization is powerful, but past a certain point that approach is a dead end of warped incentives and inefficient subsidies that inevitably get scaled back or pulled altogether.

While I don’t claim to have a silver bullet solution on how esports can scale to multi-billion dollar ecosystems in the short term, I do have several predictions on where some key breakthroughs for the esports industry will come from in the years ahead:

1. Broadening the Base

2. Interactive Monetization 

BROADENING THE BASE

Prediction: A publisher with strong conviction in expanding the depth of their video game IP across many different mediums (e.g. film, television) is going to devote significant focus and resources to broadening the fanbase of an organically popular esport beyond core gamers and reap massive rewards. Ecosystems with less legible products will try to mimic their strategy and fail.

The single most important strategy to increase esports-specific revenue is to broaden the fanbase. Sponsorships, broadcast rights, merch: all tried-and-true forms of revenue generation that are the cornerstones of any sustainable ecosystem benefit from growing the size of the fanbase.

This may sound like an obvious north star (duh, just get more popular!), but many suggestions from industry stakeholders around how to monetize esports center around trading future growth for up-front cash by optimizing for the amount of revenue generated per current fan (e.g. paywalling broadcasts.)

Furthermore, given how hardcore the underlying games of most popular esports are, appealing to a more casual audience is viewed by many as a fool’s errand. The argument is that the best approach is increasing revenue per fan from a relatively static audience.

And in fact… that’s actually correct for esports that stakeholders believe have matured and won’t meaningfully grow over time, which is most grassroots and moderately-subsidized ecosystems. It’s also understandable given how many esports fans (60% in some ecosystems) watch esports primarily to get better at playing underlying video games.

However, for games with aspirations to have multi-generational longevity and sustainable growth, outlier outcomes demand ambitious vision and a willingness to challenge conventional wisdom.

For example: I’m skeptical that “esports fans have to be players” is an immutable law with no exceptions.

I predict a publisher with a breakout competitive title that has reasonably high legibility to casual observers is going to seriously commit to broadening the profile of fans of their competitive products from hardcore gamers to anyone that enjoys dramatic storylines, charismatic players, and the thrill of competition.

This is definitely not a short-term prediction, but I don’t think esports’ best days are in the near future.

The outcome will be an esport that is widely popular with fans who may not even play the underlying video game. While completely normal for traditional sports like football and baseball, this would be a groundbreaking outcome for a major esport.

Trading dollars today for fans tomorrow also only makes sense if stakeholders are confident in their long-term upside– not exactly descriptive of the status quo for third parties in esports, which is the main reason why I believe this investment must come top-down barring unusual situations like a publisher licensing an esports ecosystem to a third party like the Saudi Public Investment Fund to operate.

A compelling product isn’t enough by itself, though: there’s strong empirical evidence that the specific keys to widening the fanbase for an existing competitive entertainment product are broad distribution, accessible storytelling, and hero generation.

Formula 1 racing offers a recent compelling case study on how that’s done.

– 

As fellow competitive entertainment products, today’s outlier esports face many of the same struggles that F1 did prior to its ownership change in 2017 by Liberty Media.

• Passionate fandom but niche popularity

• Limited focus on expanding the fanbase 

• Lack of accessible anchor content outside of competitive broadcasts

• Hyperfocus on competitive nuances and results with limited focus on human storytelling

• Lukewarm interest in broadcast rights in the United States

• Slow progress on appealing beyond a primarily male fanbase

Previous F1 boss Bernie Ecclestone once laughed off the idea of F1 going after a new generation of fans in an interview, saying “I'd rather get to the 70-year-old guy who's got plenty of cash. So, there's no point trying to reach these kids..."

Within 5 years of Liberty Media at the helm:

• The average age of an F1 fan dropped from 36 to 32

• Viewership doubled

• Female fans went from comprising 8% of F1’s fan base to a staggering 40% 

• US broadcast rights went from being valued at $4 million to ~$80 million (per year)

It’s safe to assume that the population of racers (street or professional) around the globe did not jump 100% in those five years, nor were most new fans tuning in looking to improve their hairpin turns or overtakes.

So, how did Liberty do it? Where did they find all these new fans that weren’t racers?

The focal point of Liberty’s strategy for growing F1 was broadening the fan base rather than just doubling down on monetizing more efficiently from existing superfans. The crown jewel of that strategy turned out to be the now-famous Netflix series “Drive to Survive.”

As Ben Thompson of Stratechery put it in an excellent piece on F1’s rise, the show “made everyone a star, from the most obscure midfield driver to team principals and CEO.” While seemingly a show about racing, its focus was actually mainly on human interest storylines and politics: backstabbing billionaires, teammates who cared as much about one-upping each other as the rest of the field, and colorful team principals ranging from easy-to-root-for underdogs to raging narcissists.

Importantly, the producers of Drive to Survive got unprecedented access and editorial discretion. The show was not a puff piece produced in-house; the producers were empowered to shine a bright light on drama where they saw fit in service of the greater story. They were also free to aggregate stories from across the grid rather than being forced to release 10 competing team-specific mini-series.

Everyone likes a champion, but Drive to Survive found resonant storylines and made stars of participants all over the grid, including the bottom of the standings. That’s a rare achievement.

The show had broad appeal far beyond racing fans– one didn’t need to be an expert on oil cooling or drag reduction to find Daniel Ricciardo’s roguish charm dazzling or Max Verstappen’s maniacal pursuit of greatness inspiring. While racing of course played a role in the narratives, the emphasis was as much on the human competitors as the race outcomes.

All that said, it’s important to note that Liberty’s strategy wasn’t simply:

Step 1: Make Netflix documentary

Step 2: ???

Step 3: Profit

Liberty leaned heavily into social media promotion, changed rules to dramatically increase fan engagement for drivers, aggressively wooed mainstream celebrities for crossover moments, built its own streaming service, and shifted the race calendar to make sure that key markets like the US got high-profile races (e.g. Miami, Las Vegas) among other steps to raise the profile of its product. 

Drive to Survive wasn’t just a breakout hit, it was the culmination of a broader philosophical shift towards broadening the profile of an F1 fan from hardcore motorsport enthusiasts to anyone that enjoys dramatic storylines, charismatic athletes, and the thrill of competition. 

The addressable market for the latter is much larger, as it turns out.

–

What’s the lesson here for outlier esports?

Translating F1’s strategy to an esports context, the playbook would look something like this:

• Embrace the north star of broadening the fanbase beyond just hardcore players

• Invest in accessible content which isn’t primarily geared towards hardcore fans and exists independent of broadcasts 

  • Gameday shoulder content and “newbie streams” are not nearly enough

• Build brands for pro players that extend beyond their competitive results

• Leverage distribution channels (e.g. creator YT channels, Netflix) that increase the likelihood of reaching audiences who may not be familiar with the underlying game

• Work with high-profile public figures (in particular content creators) who can create fun crossover moments or even deliver as ecosystem partners

One specific advantage top-flight esports have is that quite a few of the most popular content creators in the world are massive fans. Mr. Beast is a long-time admirer of League of Legends and has eyed buying a professional team for years. Brazilian creator Gaules has publicly claimed to have spent millions of dollars for licensing rights to co-stream Counter-Strike tournaments. Offline TV star Disguised Toast created his own esports team and generates entertaining and insightful meta-content about the trials and tribulations of running an esports team.

The list goes on: just as F1 leveraged the brands and distribution of mainstream celebrities (e.g. pre-slap Will Smith) to get in front of new audiences, high-profile esports ecosystems have similar opportunities with content creators that are some of the world’s foremost experts on digital content and community cultivation. More than a few mainstream celebrities are enthusiastic gamers and esports fans also.

Still, motorsport and competitive gaming have many differences– far too many to list here! Notably, the former has been around for decades and isn’t in any realistic danger of a new type of motorsport coming out next year to take its crown (always a risk in gaming.) Formula 1 also only has 20 drivers as of 2023, which is a much more manageable cast of characters to humanize and elevate than say the 24 teams which competed in the most recent CS:GO Major or League of Legends World Championship.

It’s also quite a bit easier to follow a race than it is to make sense of the visual frenzy of teamfights in popular esports like Overwatch, DOTA 2, and League of Legends. Shooters like Valorant and Counter-Strike as well as fighting games like Street Fighter and Mortal Kombat do better in this regard, but it’s still a fundamental challenge that esports face when chasing a broader fanbase, and there’s just no sugar coating that. 

That said, if anything, this further underscores the importance of emphasizing human storylines as the core value proposition for new fans. 

I strongly believe that an ambitious publisher will decide that broadening their esport’s fanbase is a windmill worth tilting at, invest seriously behind that conviction, and reap massive rewards.

INTERACTIVE MONETIZATION

Prediction #2: A publisher is going to revolutionize participatory fandom by leaning into the livestreaming equivalent of in-game microtransactions for esports broadcasts. 

There’s an odd contradiction about esports: despite the industry’s reputation for being on the bleeding edge of tech and entertainment, its monetization and interactivity is generally old-school. Current monetization is mostly focused on sponsorships, live events (which commonly run at a loss), and in certain cases broadcast rights. Interactivity is mostly limited to chat. 

This is strange because video games differ from traditional entertainment like TV and movies precisely because they’re highly interactive– players don’t just sit back and watch the action unfold; they have agency in navigating stories, customizing characters, and manipulating environments. 

The ability for a player to have a say in what happens next is foundational to the appeal of the medium.

Streamers on platforms like Twitch and YT long ago figured out how to lean into the interactive nature of livestreaming by offering shout-outs personally or via text-to-speech (TTS) in real time in exchange for donations. A key subset of viewers who would scoff at the idea of disabling Adblock or paying a subscription to access content are willing to pay for the experience of having a creator interact with them in real time in front of their live audience, and that behavior funnels millions into the pockets of gaming content creators. 

In recent years, an increasing number of creators and platforms like TikTok (via LIVE) have leaned further into interactivity, offering viewers the ability to alter the stream experience itself via one-time purchases, an approach similar to microtransactions in live service games. 

This isn’t just dabbling– TikTok recently became the first-ever app to surpass $1 billion in consumer spending within a single quarter, primarily powered by one-time purchases of gifts on LIVE which appear on-stream.

It’s notable that the top ten apps in the US for one-time purchase revenue in 2022 consisted of 9 games and TikTok. The user behavior of one-off impulse purchasing has been foundational for modern monetization of both live service video games and live streaming, yet despite that being the exact intersection esports sits at, one-time purchases haven’t been an area of focus for major esports broadcasts.

CodeMiko, a VTuber who has built monetization tooling to allow viewers to interact with streams in novel ways, is an emblematic example of this trend. She offers a menu of options for fans to choose from such as changing the proportions of her avatar’s head, muting/unmuting her, having a variety of objects such as confetti and crash dummies fly all over the screen, and even “killing”/”resurrecting” her avatar– all in real time! She has stated in interviews that her monthly revenue more than tripled after she began offering what are effectively interactive microtransactions to her streaming audience.

The results for viewers range from good-natured fun to absolute screen-drowning chaos. 

Bleeding edge content creators and younger platforms like TikTok are pushing the envelope on interactive monetization at a time that esports monetization appears stagnant and market leader Twitch appears more focused on rent-seeking than product innovation.

You can probably tell where this is heading: esports has been taking its monetization cues from traditional sports for the past decade with results that speak for themselves. It’s past time for esports to take a harder look at video games and content creators.

This revenue stream is unlikely to be in the ballpark of exclusive streaming rights deals or robust sponsorships in the short-term– more of a garnish than a main dish at first– but that’s okay. The success of one-time purchases both in games and streaming platforms suggests that interactive monetization and one-time purchases have a high ceiling and if done correctly can make products both stickier and more immersive for fans.

–

What will this look like in practice? 

The playbook for esports can’t simply copy the homework of streamers or games: live thank-yous from pro players and screen-drowning animations would not naturally fit within a competitive broadcast with hundreds of thousands (or even millions) of viewers tuned in. Fandom in esports is also generally not rooted in a parasocial relationship with an abstract tournament or league (unlike the creator-fan relationship), which means exploration of motivations and product offerings will be an important and ongoing process.

My prediction is that the first ecosystem to crack esports-specific interactive monetization will lean into (1) the immersive pull of interactivity and user-influenced (if not generated) content (2) the appeal of flexing, and (3) the empowerment of fans (particularly those watching at home) to act as the 12th man. 

It may look directionally like offering a crowdfund-oriented product which allows viewers to manipulate the venue and broadcast itself (not just chat) within specific constraints, e.g. changing the stage lights to the colors of the team with the most fans donating/subscribing. The goal would be to give superfans who aren’t in the arena– the vast majority of the audience– an avenue to coordinate flexing with fellow fans, visually support their favorite teams, and mimic the effect of a home crowd advantage.

A simpler possibility is that a publisher will simply create an alt stream where viewers can alter the broadcast in a fun and potentially chaotic fashion, similar to a TikTok LIVE stream. This would also create interesting collaboration and revshare possibilities with teams and players but also co-streamers who can exhort fans to make purchases live on stream.

From an incentives perspective, all revenue generated by these kinds of interactive offerings would clearly be attributable to the esports product and even specific teams or players. Importantly, all major stakeholders are incentivized to grow the revenue of these kinds of direct esports offerings because there’s no direct cannibalization from video game revenue.

The stakes are also lower for experimentation since these purchases aren’t directly interacting with the publisher’s crown jewel. 

—

Some may roll their eyes at the idea of esports broadcasts taking cues from content creators or question if the behavior for esports products is comparable to solo creator streams.

For the former I would respond with two points: first, for many games, co-streams of esports broadcasts run by content creators are not only major sources of viewership but in many cases attracting more viewership than the main broadcast. It’s fair to assume these audiences are receptive to streamer culture, and the horse has already left the barn with regard to publishers ceding control of the broadcast experience to third parties in exchange for more viewership.

Second, there is strong anecdotal evidence that stiff suit-and-tie professionalism is out of sync with the tastes of younger audiences generally. Even ESPN and the NFL have loosened up a bit in an effort to be more approachable to fans with the Manningcast. It’s absolutely possible for esports broadcasts to remain (reasonably) brand-safe and compelling while also leaning into playfulness and experimentation.

As for the latter objection, it’s a fair one: an esports broadcast is offering a different value proposition than an individual creator in some key ways. There’s very little data available on how to calibrate correctly when rewarding fan donations and subscriptions with livestream offerings that aren’t backed by a parasocial relationship– but that’s in part because experimentation around these concepts has not been a priority for flagship esports products. 

Given publishers’ embrace of co-streams and assuming interactivity and immersion are important goals for esports product owners, this seems like an area well worth exploring further.

CONCLUSION

Esports have been at the right place at the right time so consistently over the years that as an industry it’s hard to count out, even if individual eras often end with spectacular wipeouts.

In 1999, when the first iPhone was almost a decade away and up-and-coming teenager Britney Spears had just released her debut album, Blizzard’s smash hit StarCraft developed a competitive ecosystem that quickly became the pinnacle of esports globally. In particular it became a cultural phenomenon in South Korea, where at one point there were three cable TV channels broadcasting StarCraft esports matches 24/7. 

StarCraft as a video game was wildly popular (for the time) around the globe including in the West, but early mass adoption of consumer high-speed internet in Korea propelled it to a level of popularity and mainstream appeal no other esport had previously reached.

The game had a decade-plus run of immense popularity, is near-universally respected as a masterpiece, and continues to be a staple for gamers of a certain age. However, its sequel StarCraft II couldn’t replicate the magic of the original. More broadly, the genre of real-time strategy fell by the wayside as modern FPS games, MMOs, Battle Royales, and MOBAs pushed forward and won over the following generations of gamers.

Nevertheless, esports marched on.

The development of in-game microtransactions and the live service game model– incentivizing keeping games alive rather than supporting with a skeleton crew after launch to sprint towards development of a sequel– made long-term engagement with games lucrative in a way that hadn’t been true for traditional box games during StarCraft’s heyday. This incentives-driven strategic shift directly fueled an esports renaissance in the early 2010s led by DOTA 2, League of Legends, and later CS:GO.

Live streaming made esports broadly accessible to a massive digitally-native audience in a way that wasn’t possible during the 90s dial-up-and-cable-TV era, which dramatically expanded the viewer base and commercial viability of sponsorships for all popular esports. Sponsorship deals for top esports today– despite some high profile hiccups– are orders of magnitude larger than what they were at the height of the StarCraft II era.

The point is this: from modding to broadband internet penetration to digital microtransactions to live streaming platforms to the rise of the creator economy, esports have reliably capitalized and grown in the wake of major new tech and gaming trends even as specific titles and third parties have shuffled in and out.

The audience interested in professionals playing video games at the highest level existed back when video games were niche products totally outside of the mainstream and have since grown two steps forward one step back ever since. Figuring out the specifics of how to build sustainably on top of that foundation has been a bumpy ride, but the size of the addressable audience and resonance of video game IP is only going one way.

Yes, there are catastrophic failures every era– the industry is clearly cyclical– but after each downturn the peak of the next cycle has been higher than before. 

The work of building sports takes decades, and esports are no exception. It’s a delightfully chaotic, highly ephemeral industry that ultimately lives and dies by the whim of multi-billion dollar game publishers, with no clear winner-take-all outcomes for third parties.

Quite a pitch for founders and investors!

That said: the products delight millions, have a strong gravitational pull for community-building, and the industry itself has an enormous amount of blue ocean for innovation and a strong track record of innovation alongside tech and gaming breakthroughs.

For many, that’s enough.

The crucial work for the next generation of esports builders and torchbearers is figuring out how to grow esports-specific revenue to align the incentives of publishers with third parties while having direct exposure to the upside.

I have strong conviction that a major catalyst for the next era of esports will be found in an extreme on the spectrum– either interactive monetization for superfans or broadening the addressable fanbase.

If there’s one thing I’m sure of though, it’s this: esports is an industry powered by fans and builders who simply can’t end on a loss, and that resilience means this industry has many eras yet to come.

–

If you enjoyed this piece, drop me a line!
@AviBhuiyan

Also, check out the larger project this essay is a part of: The Esports Reckoning

Hello there!

This essay is my white whale: mapping the incentives architecture of esports, how they’ve gotten the industry to a chaotic status quo, and how (specifically) the industry will need to innovate to move forward to brighter days.

I’m a Riot Games alum who in a previous life ran day-to-day operations for its flagship League of Legends esports product in North America (LCS) and have since worked with a wide range of clients from NBA teams and family offices to game publishers and blue chip brands about video game marketing, particularly esports and content creators.

I’ve condensed years of working experience, hard-won learnings, and candid conversations with industry decision-makers and line workers all into one piece. It’s one of the longest essays I’ve ever written, but I couldn’t do the topic justice any other way.

This piece is divided into two parts: Part I frames the incentives and challenges, Part II is about solution spaces.

I hope you enjoy!

– Avi

Intro

Esports is an emerging industry with exciting products but lackluster business models.

Much of the hype and controversy around runaway investment in the esports industry in recent years stems from confusing the ability to fill stadiums and draw impressive viewership with the ability to cultivate sustainable, large-scale, independent businesses. 

To many this may sound like a failure of imagination if not an impossibility. How can products that attract so much viewership and sell out arenas1 possibly struggle to generate scalable, sustainable value for everyone involved?

The short answer is that popular esports are built on top of existing video games that are definitionally2 even more popular and already have existing, robust business models which overshadow the upside that could reasonably be expected from esports revenue as it exists today. 

The fact that esports are companion (rather than standalone) products results in distorted incentives for all major stakeholders in the industry.

Let’s put esports in context. The total global esports industry generated roughly $1.3 billion last year, with Asia accounting for more than half of that.3 Reaching the $1B mark is a solid achievement. However, it’s worth keeping in mind the scale of the underlying video game titles esports are built on top of:

• Fortnite4: $5.8 billion (2021)

• Call of Duty5: $3 billion (2020)

• League of Legends6: $1.75 billion (2020)

• Counter-Strike7: ~$600+ million (2022) [Editor’s note: Since publication I’ve been told privately the number is far higher. Take this as a very low estimate.]

• Free Fire8: $440+ million (2022)

And of course we’re talking about a parent industry that is simply gigantic:

These are some of the most valuable entertainment properties in the world, several of which generate more revenue by themselves than the entire global esports industry in aggregate.

Imagine a world where selling basketballs is ~100x more lucrative than the NBA, and basketball maker Wilson owns the underlying IP of the sport. The NBA has to revshare when they broadcast basketball games and lobby Wilson if it wants to make any rules changes to the game. If Wilson ever decided to not renew the NBA’s basketball license, the league would be toast9.

That’s a close-if-imperfect analogue to where most esports are today. In such a world the NBA would have very different economics and be much less in control of its own fate. 

Just as the NBA, Steph Curry, and RDC World share connective tissue in the basketball ecosystem while having different incentives, so too do publishers, pro players, and streamers/YouTubers.

The last decade for professional esports has seen a spectrum of publisher approaches to building a competitive gaming ecosystem.

These experiments have been seeking to answer many questions, but from a business perspective three in particular have loomed large:

1. Are esports ecosystems basically loss-leading marketing programs meant to delight players and drive engagement and retention in video games? The gaming equivalent of Costco rotisserie chickens?

For the overwhelming majority: yes. However, there are exceptions!

2. If esports can become sustainably profitable entertainment products, can they also grow to a scale comparable with top-tier traditional sports like football and basketball?

In the long run it’s possible, but it’s also a bit of a trick question: traditional sports are a misleading business analogue for esports since individual video games generally don’t have the longevity of sports. 

3. Of the esports that can scale to that level, is it realistic for third parties to expect meaningful participation in the upside alongside publishers? 

It depends on how you define the upside. Esports-specific upside? Yes, there’s plenty of precedent there. Upside in the underlying video game? That’s an uphill battle to say the least.

The early returns are in, and they strongly suggest that much of our conventional wisdom about esports is probably wrong: sustainability doesn’t lie on the other side of simply mimicking traditional sports products like the NFL or NBA, nor by doubling down on esports as marketing to justify more revenue share from video games. 

We’re going to answer all of these questions and more, but first we need to set the table: how the esports industry operates, where it generates value, and what the incentives of its major stakeholders are. 

Correctly mapping the incentives of key actors is crucial for identifying realistic ways forward rather than getting bogged down in wishful thinking or bag-pumping narratives, both of which have contributed to this latest cycle of hype and collapse.

Third parties essentially building sandcastles on publishers’ private beaches has not proven to be a great recipe for generating sustainable returns, but alternatives that don’t align with publisher incentives are just talk.

Let’s kick it off by examining the most common analogy about the industry: that esports are the natural digital extension of traditional sports. 

ESPORTS VS. TRADITIONAL SPORTS

The typical explanation for why esports should look to traditional sports for how to professionalize and scale goes something like this:

Esports are sports–it’s literally in the name! You’ve got world-class pros competing in front of cheering fans to determine who’s the best and raising a trophy at the end. That’s literally the exact same dynamic as basketball, football, etc. Esports currently monetize fans at a much lower rate than traditional sports do, but if they can catch up to their analogue siblings the industry can compete with FIFA/NBA/NFL in the not-too-distant future.

While there are many 1:1 similarities between traditional sports and esports on a product level (fans chanting in arenas, trophies, referees, etc.) from a business perspective they are crucially distinct.

Blurring the similarity in product characteristics with the differences in business incentives is where many smart people get tripped up when drawing comparisons between esports and traditional sports.

There are many ways that the business conditions for esports and traditional sports are distinct– way too many to list here– but two in particular stand out: lifespan and the publisher incentive to prioritize the interests of a game over an esport.

LIFESPAN

“Consumer preferences for games are usually cyclical and difficult to predict. Even the most successful games remain popular for only limited periods of time, and this popularity is increasingly dependent on the games being refreshed with new content or other enhancements.” — Activision Blizzard (Form 10-K 2022)

This is the big one. 

The pace of fandom change in traditional sports is measured in decades or even centuries, while in video games it’s measured in years, if not months. It’s comparing ocean liners with rockets– both get things from point A to point B, but similarities break down quickly from there.

The time horizon for esports businesses to create value before the underlying game hits a plateau or begins terminal decline is completely different than the dynamic for traditional sports, which makes long-term investment in individual games much riskier.

The single greatest challenge for any esport trying to match or surpass the trajectory of traditional sports goliaths like football and basketball is that it’s unlikely to be popular enough for long enough to build critical mass, cultivate intergenerational fandom, and imprint in cultural consciousness for the long haul. 

As well, even for games which don't plateau in the short-term, the endless stream of new games released into popular genres like first-person shooters means the battle for mindshare and relevance with direct competitors is material and never-ending.

–

In 2000, the most popular traditional sports in the United States were football, basketball, and baseball. By 2023 they were… still football, basketball, and baseball10. 

If we look further back, boxing was extremely popular in 1900 but by 2000 had fallen out of fashion as sports like basketball and football rose up the ranks11. Similarly, baseball had become much less popular relative to football. While there were major trend shifts, they happened over the course of many decades.

Esports looks a bit different.

In 2010 StarCraft II was viewed by many as the pinnacle of the industry after its predecessor had been broadcasting on multiple cable television channels in Korea for years.

By 2013, Starcraft II was grappling with “dead game” memes while League of Legends sold out the Staples Center for its world championship and spun up dedicated regional leagues all over the world. 

By 2016, Overwatch was gaining meaningful market share on League of Legends in Korean PC bangs (cafés), an event hailed by some industry observers as a passing-of-the-torch moment. By 2017 it was attracting a stampede of high profile investors from the traditional sports world to join a franchised Overwatch League (OWL) with city-based teams.

By 2018, Fortnite dances were commonplace goal celebrations by FIFA stars and Drake played games with Ninja in an internet-breaking moment. An unprecedented $100 million competitive prize pool was put up for grabs in a Fortnite Competitive ecosystem that rebuffed partnership with esports teams and actively avoided using the word ‘esports’ at all.

By 2020, Valorant emerged from Riot’s R&D lab and immediately began jockeying for pole position with top-dog tactical shooter Counter-Strike, drawing immense viewership on streaming platforms and luring away many high profile CS veterans. 

By 2021, the Overwatch League was suffering from low viewership, hemorrhaging sponsors in the wake of scandals12, and by all outward appearances giving up on its highly-touted strategy of playing live matches in city-based studios around the world in a fashion reminiscent of traditional sports13.

In 2023, Valve announced that Counter-Strike 2 was being released with a suite of major updates, resulting in record-breaking player counts14 and strong optimism that one of the greatest esports of all time was starting a bright new era. Several months later, Activision Blizzard announced an upcoming owner’s vote on potentially dissolving the not-yet-decade-old Overwatch League15.

All this to say…

When a professional sports team is weighing whether to lay concrete to build an arena, a critical assumption that makes that investment justifiable is that the sport the arena is being built for will still be popular by the time construction is finished. 

If football could reasonably be eclipsed by pickleball which in turn could be overtaken by Calvinball– all within the space of a decade– capital allocation decisions around traditional sports would look completely different. 

Though there are a handful of outlier games and franchises that have proven they can sustain competitive scenes over the span of decades such as Valve’s Counter-Strike or Nintendo’s Smash Bros, the overwhelming majority of games begin ramping down in viewership and revenue within a year of release.

We have little idea what a century-old esport looks like because personal computing hasn't been around that long, so there’s forgivable temptation to lean into analogies. However, we should be extremely cautious about drawing 1:1 business parallels between esports and traditional sports given their dramatically different life cycles. 

Products driven by short-term incentives tend to develop very differently from ones which have the luxury of optimizing for the long term.

THE GAME WILL ALWAYS COME FIRST

Publishers own the IP of underlying video games which gives them a level of control that doesn’t exist for traditional sports like basketball and football, where inventors do not own the underlying IP. 

Combined with the fact that esports aren’t the publisher’s core product, the incentives between players, publishers, and third parties like teams aren't as simple or aligned as “do whatever it takes to increase the size of the [esports] revenue pie” as is generally the case for traditional sports leagues.

Publishers have a finite amount of dev resources and strategic focus, and when there are meaningful trade-offs between an esports ecosystem generating several million dollars in revenue annually and a flagship 10,000 hour game that generates many times that with better profit margins, it’s not a mystery which one the publisher will optimize for.

There are truly countless examples of this, but several immediately come to mind:

• Following development of an esports community in Super Smash Bros. Melee, generally considered one of the greatest esports of all time, Nintendo toned down mechanical skill expression in later titles in the franchise. This decision was widely panned by the competitive community and generated significant controversy. Legendary producer Masahiro Sakurai famously responded that top-level competition is simply not at the core of his philosophy for the design of the Super Smash Bros franchise, which is intended to be an accessible party game first and foremost. When asked about this controversy in 2018, Sakurai remarked “I think a lot of Melee players love Melee. But at the same time, I think a lot of players, on the other hand, gave up on Melee because it’s too technical, because they can’t keep up with it... and I feel like a game should really focus on what the target audience is.”16

• Overwatch was released as a 6v6 game in 2016 but shifted to 5v5 gameplay for its sequel in 2022, in part to make the game more accessible to casual players by lowering the cognitive load of a match.17 This decision dramatically changed the competitive metagame and more importantly eliminated one starting roster spot for every team in the Overwatch League–yet the change wasn’t voted on by teams or players: they were simply informed what the latest iteration of the flagship product was going to be and expected to adjust. This makes perfect sense from the publisher perspective given that game developers are optimizing for a player base in the tens of millions, not just professional players or hardcore fans of competitive content, but therein lies the point18. 

• Valve has long been the industry leader of using bundles of in-game goods to fund prize pools such as DOTA 2’s Battle Pass. However, this year Valve announced that they are sunsetting their iconic Battle Pass and more generally de-emphasizing the role of esports in the game’s product roadmap. As they explained in a blog post “Last year, we started to ask ourselves whether Dota was well-served by having this single focal point around which all content delivery was designed… Most Dota players never buy a Battle Pass and never get any rewards from it. Every Dota player has gotten to explore the new map, play with the new items…”
  

Esports are ultimately companion products— some might call them side businesses for publishers— which means that while opportunity exists to build them into world-class entertainment properties, they face major constraints and instability for which there is no analogue in traditional sports.

So if traditional sports aren’t the right analogue for esports, how about video games generally? 

GAMING REVENUE VS. ESPORTS REVENUE

A popular investor pitch about esports over the past decade goes something like this:

The games industry is so big and gaming’s cultural impact is widening every year! If esports can capture just X% of the industry’s output, it will be massive and sustainable. Betting on esports is a bet on gaming– and how can you bet against the long-term trend of gaming?

While there’s a kernel of truth in there, it’s not exactly the right mental model. 

It is true that video games are a massive entertainment industry and trending upwards culturally, which definitely is a long term tailwind for the esports industry. However, it’s important to be clear why conflating the overall games industry with esports is a first-order mistake that warps understanding of esports’ total addressable market size (TAM) and incentives as they relate to the games industry.

The global games industry is currently estimated to generate north of $200 billion annually19. Esports is projected to account for less than 1% of that20 through direct monetization, which is unsurprising when you consider (1) how few games can sustain esports ecosystems, and (2) the limited nature of direct esports monetization today. 

Esports are built on top of a tiny pool of games that are not only popular but have hit a hat trick of wildly challenging conditions, namely that they: 

1. are fun to play 

2. offer competitive multiplayer21 with 10,000+ hours of replayability 

3. are compelling for spectators to watch 

This is, to put it mildly, an uncommon achievement.

Esports occupy the very bottom of a gigantic gaming funnel: creating a 10,000 hour game that is competitive, fun to play, and compelling to spectate is excruciatingly difficult and rare to pull off… and yet that’s the minimum requirement for an outlier esports ecosystem to develop22. 

If large competitive ecosystems could develop around unpopular games (or once-popular games that have fallen on hard times) that would be a game-changing dynamic for the industry and third parties in particular… but to this point there are no successful examples to point to.

This dynamic frames the perspective of many of the most prominent game publishers of top esports titles, which often23 goes something like this: 

Our wildly profitable 10,000 hour game is a golden goose which we prioritize above all else. That said, we care deeply about our IP and are intrigued by the idea of building entertainment properties on top of it, including but not limited to competitive ecosystems to give the IP more depth. We want to make sure that any entertainment properties built on top of our IP adhere to our standards, don’t dilute our brand, and are run with our best interests (e.g. not benefiting competitors) in mind. If you don’t like that, feel free to build on top of someone else’s IP or make your own game.

It’s worth emphasizing: successful publishers of 10,000 hour games tend to deeply care about their IP. Given their high-profile status and use of game IP, esports are an important part of the IP flywheel independent of how much revenue they generate directly . This makes most publishers reluctant to give full freedom to third parties who definitionally don’t have the same long-term incentives and strategic context to steward the IP effectively.

From the publisher’s perspective, the overwhelming majority of value created for games and their esports originate from the fact that the developer/publisher built a game good enough to sustain a vibrant competitive ecosystem in the first place. That belief is well-supported by the overflowing graveyard24 of esports where third parties and publishers tried to force a professionalized ecosystem around a game that didn’t hit the fun-to-play/compete/spectate trifecta. 

If esports teams or tournament organizers were able to resurrect a game from the dead or catapult a game from humble beginnings to the top of the charts with esports content, that would change the industry landscape dramatically: truly undeniable value creation that would get every publisher in the industry paying attention. 

Unfortunately, no such attempt has yet worked out. 

Interestingly, by contrast, there are several examples of gaming content creators catapulting well-designed games from a quiet start to the top of public consciousness such as AmongUs25 and Apex Legends26. That’s a rabbit hole we’ll come back to shortly.

The blunt truth is that it’s just orders of magnitude harder to develop and publish a 10,000 hour video game than it is to run a great tournament or build a strong roster of players. That doesn’t mean there’s no value in the latter, but it drastically weakens leverage and any argument crediting a significant portion of a game’s success to the competitive ecosystem.

The graveyard of unsuccessful games that tried their hand at esports as a marketing strategy is also very crowded– even the most diehard esports fan would readily admit that the magic formula is great game + great grassroots competitive interest. There are no thriving esports ecosystems without extremely successful underlying games.

Third parties commonly respond that esports deliver value later in a game’s life cycle rather than at the beginning: that is, even successful games eventually fade in popularity but esports ecosystems keep them dynamic and engaging to the broader player base by extending their prime, sort of like the gaming equivalent of a Lazarus Pit.

It’s a compelling theory on its face– but is it true? And more importantly: even if true, would it incentivize publishers to actually share more upside with third parties? 

So far the answer has been “unclear, but probably not.” Let’s delve into why that is.

/// DIRECT & INDIRECT VALUE ///

As far as value generation goes, esports generate most of their revenue through three mechanisms, which we’ll classify as direct, indirect, and hybrid. 

1. Viewership and attendance of professional competitions (direct) 

2. Increasing engagement and non-esports-specific purchasing in video games (indirect)

3. Increasing esports-specific purchasing within video games (hybrid)

Direct revenue is pretty straightforward to calculate, and since it doesn’t implicate video game revenue, it’s usually not a hot-button issue. Stakeholder incentives are generally aligned when it comes to direct esports revenue: everyone benefits from an increase in value of media rights, sponsorships, etc. and the revenue coming in is easily attributable to the ecosystem.

Examples of direct revenue include fans paying for offerings such as tickets for live events, merch, concessions, access to gated content or perks, and the like. On the B2B front, platforms (e.g. Twitch, YouTube) pay for broadcast rights, while brands pay to have their products featured in the competitive ecosystem. 

Indirect revenue is… not so straightforward to calculate.

Publishers generally focus on player acquisition, engagement, and retention when measuring the performance of marketing strategies for video games. Esports typically provide value by boosting retention and engagement but do little for acquisition, since people unfamiliar with a game are unlikely to follow its hardcore competitive content. 

Indirect value generation can play out in a variety of ways. A college student who had previously churned out of the game might be inspired by watching a hype championship finals and decide to reinstall. A teenager might watch a pro player dominate in a tournament using a particular champion and start playing it themselves, and over time buy cosmetics for it.  You get the idea. 

Attribution for this kind of value generation is generally pretty challenging to measure.

Most games also offer in-game bundles or cosmetics specific to their esports ecosystem, which we’ll refer to as hybrid revenue since it implicates both the underlying video game as well as the appeal of the esports ecosystem specifically.

This brings us to one of the most important and controversial questions in the industry: how much revenue do esports indirectly generate for their underlying video games? 

The answers generally look something like this:

“Esports Can Be Standalone Entertainment Properties” Publishers: Esports may have some impact on in-game revenue, but the long-term value is in building new entertainment products that highlight our IP while generating revenue independent of the in-game store. There’s real money and cultural capital at the end of that rainbow, so we’re willing to burn cash in the short term and partner with third parties who are experts at building brands and entertainment/sports properties to get there. 

“Esports Is Just Marketing” Publishers: Esports do not materially impact in-game revenue. They’re niche products that mostly appeal to hardcore fans rather than the broader player base. They can be useful engagement and marketing mechanisms, but they’re not a core pillar of our strategy for in-game monetization. Making our competitive ecosystems profitable isn’t a major priority– we’re committed to supporting them and even sustaining losses up to a point, but we’re not interested in unsustainably hyping them up to be more than what they are: marketing programs that don’t need to make a profit to be strategically valuable.

Third-Party Stakeholders: Esports are a cornerstone of video game marketing! They’re crucial for retention and extending the lifespan of games. Publishers get millions in free exposure from esports competitions, and we should get our fair share of that immense value creation.

Stakeholders generally agree that esports deliver marketing value, but there is no general agreement on how to quantify that value.

Game publishers understandably tightly guard specific metrics about their games, particularly those relating to revenue. Data surrounding the impact of marquee esports events on in-game revenue generation may exist, or it may not. If it does, the game publishers aren’t sharing that information externally. This leaves third parties in esports data-blind on how much value they generate for underlying games and understandably mistrustful that publishers are valuing their contributions fairly. 

Anecdotally, the broad range of enthusiasm levels among publishers of popular esports titles suggests that the data on how much indirect value esports deliver probably doesn’t point to an obvious conclusion one way or the other. It’s also possible that the impact varies widely by game.

If the narrative that esports generate enormous amounts of revenue that publishers are pocketing for themselves were obviously true, you would expect to see near-universal embrace of esports by publishers, but that’s definitely not the case. Still, only publishers can know for sure.

Calculating how to reward indirect value creation is a high-stakes question between video game publishers and other esports stakeholders because again: the TAM of the video game’s player base is significantly larger than the fanbase of the esport, meaning even mild impact on in-game revenue will typically far surpass what would be a considered a huge win in direct esports revenue generation.

This dynamic often leads to a sort of Dutch disease27 where the easiest answer to increasing esports revenue (just get more revshare from the game!) crowds out focus and innovation on other potential revenue streams, including the most empirically promising path: doing whatever it takes to increase direct monetization, e.g. by making media and sponsorship rights more valuable and the viewership experience more interactive and monetizable.

But is this question a red herring?

Zooming out, it’s important to recognize that publishers have multiple avenues by which to market their games and drive indirect revenue outside of esports (e.g. working with content creators who can expose games to much broader audiences since their content is generally more approachable to players who aren’t already fans of the game), which further complicates resourcing questions and diminishes the bargaining power of external esports organizations and sometimes even publishers’ internal esports departments.

VALUE OVER REPLACEMENT MARKETING

In 2021, popular Spanish content creator TheGrefg shattered Twitch’s concurrent viewership record when he revealed he was partnering with Epic to release his own in-game cosmetic in Fortnite. 

It’s hard to overstate the optics of a single content creator’s literal advertisement for a Fortnite skin attracting more viewers to a single Twitch broadcast than every esports event ever broadcast on the platform28, including Fortnite’s own World Cup. 

It’s fair to say that Fortnite’s publisher, Epic Games, may have taken note.

Epic is the emblematic example of a world-class game publisher with an iconic 10,000 hour game that made a massive investment into competitive content29, experienced results far short of expectations (missing esports revenue targets by $154 million in 201930), and has subsequently shifted focus31 and marketing dollars in other directions. This includes ramping up collaborations with celebrities like Ariana Grande and LeBron James as well as content creators such as TheGrefg, Loserfruit, and Ninja. It also includes dynamic in-game tie-ins with the owners of iconic IPs like Marvel and Attack on Titan.

Critics can argue that if Epic had made decisions differently, the outcome for Fortnite Competitive could have been meaningfully rosier. While possibly true, a more broadly applicable learning is that even though esports deliver marketing value for video games, they don’t operate in a vacuum: there are compelling alternatives for publishers to invest in. 

The general consensus in the games industry has been that by virtue of cultivating direct relationships with their audiences, content creators can generally jump between games with minimal friction and take their viewers with them. As a result, creators can offer great value to game publishers but are less reliable than esports ecosystems, which can’t simply pick up and move to a different game. This is the trade-off. 

While somewhat comforting for esports optimists, being the “sure thing” isn’t necessarily the most compelling branding nor does it typically grant much leverage. Esports are generally viewed as one part of a balanced marketing strategy, not outlier secret weapons that deliver more ROI than any other marketing channel.

Esports-specific bundles and in-game items are fairly common in the industry today, but few fans are aware they’re often viewed by publishers as a subsidy for esports rather than a serious money-maker for the underlying game.

Privately, many prominent game publishers have long found it challenging to calculate exactly how much value these in-game tie-ins generate due to the fact that they’re supporting popular players/organizations vs. how much is being generated from the fact that they’re high-quality cosmetics in one of the most popular video games in the world. In recent years, publishers have gotten increasingly candid publicly about these concerns.

Cannibalization of revenue is a serious consideration.

For example, if the publisher of a top esports title releases a Halloween-themed skin for one of their most popular characters32 vs. an esports-themed skin for that same legend, which will sell better? 

Turns out that’s a bit of a trick question.

Clearly a skin for a popular hero in a game with millions of monthly active users will sell regardless (and conversely, esports cosmetics in unpopular games won’t), so the more relevant question is actually how many people would have bought a cosmetic for the champion regardless of whether it had an esports tie-in or not. 

Some additional questions to consider: in a world where the publisher releases both a Halloween and esports cosmetic, how many sales of the Halloween skin (which doesn’t require a revshare with esports orgs and players, making it more lucrative) would be cannibalized by the fact that an esports skin (which does) is also available? As the ecosystem grows in size, how can a publisher avoid flooding a game with esports tie-in content, especially if there are dozens of teams scattered across multiple regions?

These questions aren’t abstract, nor are the answers universal. 

Riot Games recently revealed the impressive stat that three of League of Legends’ top six best-selling skins of all-time are esports-themed (each year Riot creates 1 line of skins honoring World Champions), but that they are struggling to create cosmetics that can move the needle for the other ~100 teams in the LoL esports ecosystem on a consistent basis33. 

Meanwhile, Electronic Arts recently made headlines34 over a conflict regarding revenue sharing with esports organizations participating in competitive Apex Legends. After weak sales of team banners (in-game cosmetics less prominent than skins), EA and Respawn reportedly grew skeptical of the value that teams were bringing to the table and declined a proposal by teams for uncapped revshare on skins. In response, one unnamed team executive reportedly said the following:

“So [EA and Respawn are] like, OK, if we make $100 million from this bundle and we’re giving $20 million to the teams, we don’t feel like the teams are going to bring $20 million in sales… From a P&L standpoint, sure, maybe that’s the case. But that’s the problem with them … other developers would say, ‘Maybe the teams are not going to push the sales 20% more than what it would have been, but you know, these teams invest in our ecosystem, they do free marketing for us with them being in an esports programme…’”

Every ecosystem is different and this unnamed executive doesn’t speak for every organization… but talk about out of touch. The cold reality is that publishers care very much about the P&L.

While there can be temporary experimental phases and some indulgence by publishers trying to build generational IP or more absorbed with running a games storefront, there is no long-term sustainable future where publishers are handing out money to third parties without regard for ROI. 

A brighter future for esports requires changing incentives to create a dynamic where third parties don’t feel like they’re desperately scrabbling for crumbs that fall from the table of iron-fisted publishers and game publishers don’t feel like they’re working with mercenaries whose main value add is employing players and leveraging world-class IP that they didn’t build. 

The urgency around figuring out how to do this has sharpened in recent years as gaming content creators have exploded in popularity, with many capable of consistently drawing audiences that handily eclipse esports broadcasts. 

The tug-of-war for resources between different departments responsible for different strategic approaches within game publishers (e.g. creators, paid marketing, esports) is virtually never discussed publicly, but is both common and a powerful signal that if esports has an ambitious future beyond grassroots, it will need to generate a value proposition that’s more defensible/unique than simple marketing for the underlying game, because that lane will always be crowded and competitive.

Yes, in-game revshare is a glittering lure, and should absolutely be part of the business equation. Particularly in ecosystems which are defined by their grassroots or not run with the expectation of becoming a profit center for publishers, revshare on esports-specific cosmetics or bundles can be enough to sustain an entire ecosystem. 

However, for ecosystems with ambitions to (1) scale beyond grassroots and (2) be materially more sustainable and independent than typical marketing programs, in-game revenue sharing can’t be the primary load-bearing pillar of revenue. Otherwise, esports will simply be locked into a brutal race-to-the bottom competition for marketing dollars with creators, paid marketing channels, and every other marketing lever at a game publisher’s disposal35. 

In that paradigm, when other channels (e.g. working with content creators or paid marketing) can demonstrate higher return on investment than esports, why would a rational publisher not prioritize the higher-performing channels– particularly if they don’t require revshare? How stable can the esports industry expect to be if its primary financial lifeline can change dramatically based on factors totally out of its control?

The key to esports sustainability beyond the grassroots level must be growing esports-specific revenue, because that approach aligns the long-term incentives of all major stakeholders and generates value which is straightforward to attribute to the esports product specifically. 

Innovation around fandom and the product experience of consuming competitive content generates value distinct from what creators and other marketing avenues can offer, and in my view is the more defensible path to a sustainable, scalable future. 

CONCLUSION

I appreciate you for making it this far!

Let’s quickly recap the major challenges of esports:

• Companion Products

  • Esports are companion (rather than standalone) products which are built on top of incredibly lucrative and difficult-to-build entertainment products: 10,000 hour games. An esport built on top of a game for which there is no organic competitive interest or isn’t popular/fun to play/fun to watch is historically doomed to failure.

• Limited Upside and Leverage for Third Parties

  • This companion product dynamic heavily limits leverage for third parties building on top of these games, and also makes esports a lower priority than the core game for publishers. That doesn’t mean publishers don’t value esports, but that esports are never at the top of the priority list.

  • Whereas revenue is split 2 ways in most traditional sports (labor and ownership) it splits at least 3 ways in esports: publishers/teams/players, limiting upside for third parties.

• Limited Value Over Replacement Marketing

  • While esports generate marketing value for games, measuring that value is extremely fuzzy. Moreover, there are many other ways that publishers can market their products, several of which readily outperform esports on cost, scale, or even both. The fact that key data-driven publishers of 10,000 hour games like Epic and Valve have been shifting resources away from esports in recent years is a revealed preference that internal data probably does not obviously suggest esports is secretly a major money maker.

• Ephemeral Popularity

  • Video games rise and fall rapidly, which means that trying to blitzscale an esports ecosystem shortly after launch (rather than building gradually on top of grassroots momentum) is extremely dangerous, as Overwatch League investors have learned. Building up a traditional sport is a long term game, building up an esport is the vast majority of the time a short-term one. There are outlier esports that have long-term longevity, but accurately identifying them early has been inconsistent to say the least.

What does it all mean?

Basically, any esports ecosystem looking to overcome these challenges will need to:

1. Build on top of a generational 10,000 hour game

2. Cultivate revenue streams specific to the competitive ecosystem to make it clear that the ecosystem isn’t just a loss-leading marketing program but rather a self-sufficient product

3. Convince publishers to allow third parties to share in the upside of a successful esport with reasonable predictability

4. Bet that the game lasts long enough to recoup their investment

Many of the biggest bettors on esports over the past decade did not account for these challenges or have a well-crafted strategy for how to work around them.

Is it possible to overcome them?

I believe yes– but very few esports ecosystems can (or should) be fueled to expand beyond straightforward marketing programs for underlying games. 

As for the outliers…

Click here for Part II