Incentives of Esports Pt. 2: Paths to Profits
so... who's paying for this?
This is Part II of “Incentives of Esports.” Part I outlined the incentives of major stakeholders in the industry and laid out why the esports industry differs in fundamental ways from both gaming and traditional sports, framing up the myriad of structural challenges that have led the industry to recent struggles.
Candidly, Part II is 5,000+ word insider baseball-y take on the future of the esports industry with a pretty lengthy detour into TikTok monetization and Formula 1. If that still sounds like fun, though, you’re absolutely my type of person.
Intro
“Predicting failure is easy. It's not worth 280 characters to make such a prediction and certainly not worth writing a whole opinion piece. If you want to do something difficult, then figure out what it takes for something to succeed. That's what the builders must do.” — Steven Sinofsky
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:
Broadening the Base
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.
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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.
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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.
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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.
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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.
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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