Gaming has continued to steadily grow, whether financially (insert TAM or CAGR from your market research shop of choice, industry consolidation) or culturally (HBO’s The Last of US, Gen Z, Five Nights at Freddy’s movie, etc). A lot of nuance exists under the surface, such as mobile being a dominant majority of the global gaming experience. E-sports emerged as an off-shoot of gaming, as another way to grow consumer engagement, audience awareness, and ideally a revenue driver. As this NY Times piece details, e-eports have pulled back as the assumptions that underpinned investment from companies and individuals did not hold up.
Riot Games, as one of the most influential players in the gaming space, whether from its IP (League of Legends, Valorant) or very successful forray into multimedia with Arcane, is uniquely positioned to offer insights about e-sports and gaming.
E-sports
“Riot generally does not use esports as a way to acquire new game players. Esports aren't an effective way to do so because in order to really enjoy the competition, a viewer needs to have a foundational knowledge of the game.”
This perspective chips away at the assumed mass appeal of e-sports, as there is an elevated barrier of entry that effectively segments your audience while not growing the size.
“Gaming influencers and streamers are much better at describing the fundamentals of a game, one reason why we are increasingly opening up our broadcasts for co-streaming.”
A common theme in the gaming space is the relationship the content owner has with content creators, with Riot on one end of the spectrum (ie the many streamers who co-stream e-sports events) and Nintendo on the other. Riot’s perspective is familiar to how the NBA adopted the condensed highlights YouTube channels made instead of fighting against it.
“We don’t go broad with our games, we go deep in service of our players to earn their loyalty and fandom.”
The gaming sector has undergone a long streak of consolidation: Take Two/Zynga, Microsoft/Activision Blizzard/Zenimax*, Embracer/XYZ, in part to deepen one’s IP library. The continued prevalence of live service games like League of Legends, Fortnite, and more like World of Warcraft reinforces this position.
“In 2017, Riot began a formal partnership model with teams similar, in some aspects, to franchising in traditional sports… In order to pay the ~$10M entry fee, professional teams had to raise significant capital from investors. At the time there was a lot of hype around esports which helped teams acquire cash at very favorable (high) valuations.”
The joke that loose venture capital dollars subsidized ride sharing and food delivery is arguably somewhat applicable here, sans the VCs.
“Over the past few years, Riot has implemented minimum guarantees on the 50% revenue share to give teams more revenue predictability, accelerated payments owed to teams, deferred and spread out cash payments that teams owe to Riot, and opened up new revenue opportunities.”
This policy change is reminiscent of the challenge user generated content platforms like YouTube and TikTok as to how dollars flow through the ecosystem. Riot being able to do (subsidize) this is indicative of who accrues the most value from gaming.
It’s also a reminder that most/all parties need to have workable economics. YouTube would not be the platform it is if not for Adsense making it a viable model or at least aspiration for enough content creators. The idiosyncracy to e-sports is how the content creator is simultaneously the developer/publisher and the gamer which complicates the model.
“Essentially, we want teams to use their capital on their pro players, marketing, facilities, content, community, and building their business rather than paying Riot.”
Hinting at how the middle man (the e-sports organization) is necessary.
“Riot Games’ esports have successfully demonstrated how efficiently it can reach this young demographic and built a scaled sponsorship business. Riot takes a unique approach to the sponsorship business by not only looking for revenues but trying to work with brands where we can collaborate and deliver something cool for our players (e.g. Louis Vuitton League of Legends skins).”
The Louis Vuitton collaboration stood out given the idiosyncratic details of luxury brand advertising.
“One big hole in the esports business model compared to traditional sports is broadcast licensing revenues…Esports are broadcast non-exclusively on Western streaming platforms. The business problem with this model in Western markets is, due to a lack of competition and weak revenues from advertising, streaming platforms such as Twitch and YouTube don’t pay for premium content like esports.” Trying to fill the gap left by no media deals is a challenge, and is a condundrum given the clash between monetization and audience access. Also, note on the clarifying “Western streaming platforms”, hinting at global differences.
“For VALORANT, we learned from LoL Esports and deliberately constrained the number of professional teams competing in our VALORANT International Leagues (30), making it easier to develop and integrate team-specific esports game content.”
A closed league has its advantages, but it implies a finite number of teams. Given the global scale of games vs traditional sports leagues (ie one League of Legends league (the one sanctioned by Riot) vs each country having its own football league) means that where you focus on building that audience is an active consideration.
“Having the ability to sell esports digital goods and services directly to viewers will provide a scalable revenue source that should fill the hole left by the lack of broadcast licenses. This is one of the big areas where we think we will disrupt the business of sports – digital revenues sourced directly from viewers through our broadcasts. We see lots of opportunities to develop new products and services our fans will love that will enhance their experience watching esports and offer them new ways to express their fandom.”
Riot Games’ is behind some of the most successful e-sports leagues, and its focus on making the economics work for the e-sports org and where you can monetize (in-game purchases vs media rights) is indicative of what works and doesn’t.