Data & Dimensions | Ep. 21 (Video) - Can Esports Break into Prime Time?

View Full Transcript

Neil Barbour   00:00:00

Welcome to Data & Dimensions, a podcast at the intersection of entertainment, industry and interactivity. I'm Neil Barbour, an analyst with S&P Global Market Intelligence, Kagan. And with me today is fellow analyst Richard Berndes. Richard, thanks for coming on the program.

Richard Berndes   00:00:14

It's great to be with you, Neil.

Neil Barbour   00:00:17

So we collaborated on a report recently around esports. Richard is very entrenched in the sports world. I'm knee-deep in video games, so it seemed like a natural fit for us to come together and size up this market. What we found is that esports is driving around $2 billion annually in sponsorships, partnerships, ticketing and merchandise. And after the post-pandemic trough, it appears to be on a steady growth path, enough for something close to a revenue doubling by 2030, 2031. So Richard, why don't you sort of kick us off here? What's going on after the difficult post-pandemic period? Yes, what's going on with esports?

Richard Berndes   00:00:53

I mean, esports has been sort of bubbling away for probably like 10, 15 years, and it's slowly got itself into the psyche of people. There's documentaries on Netflix about esports, about various teams. So it's in the conversation, the wider conversation. I think it's sort of key to define really what esports is. It's not streaming that you see on YouTube. It's organized professional gaming, organized by teams. It's not what people would see, like a YouTuber streaming. Esports is professional organized gaming with professional teams. So I think it's important to sort of define exactly what it is. But yes, to your point of the post-pandemic boom, I see esports going through a period of stability and rebalancing. There was obviously still some big boom prize money a few years back. But I think what esports and esports teams are looking for now is a sort of area of predictability, building the revenue and developing the sport so that it becomes ingrained in people's psyche. I mean, in the last couple of years, we've had the Esports World Cup being established. And that's given a focal point globally around what esports is; it's creating a world champion. But I think it's the people, like the players and the teams, people are engaged in the sport. And I think what we're trying to sort of see for esports is a move away from that reliance on sponsorship and sort of prize money and trying to establish itself in the same way as traditional sports operate.

Neil Barbour   00:02:25

Yes, right. So when you say esports isn't really streaming, it's not the talking-heads, personality-driven guys that sort of pop on and play games regularly. Yes. But it is streamed. Like, that has been one of the major—I don't want to say revenue streams—but it's been one of the major surface contact points, let's say, for the average consumer to get involved. They sort of turn on Twitch or YouTube and they watch a big tournament pop off. But to your point, when they're watching esports, it's not just one guy. It's usually a team. They train together. They're an official organization. And a lot of the ways they're making money right now is through those partnerships and sponsorships. So wearing things on the kit...

Richard Berndes   00:03:13

I think a lot of people from outside the world might be looking at esports and saying, it's like my son watches DanTDM or Lachlan streaming; I think, well, that's esports. That's not esports. I think that's the key definition I was trying to pin down rather badly.

Neil Barbour   00:03:34

No, that was great, 100%. And I think to your point, though, there's a certain ceiling on that approach of: we have a bunch of teams and they sort of compete in provincial or international tournaments occasionally. But the missing piece there is really—and I think you were sort of leaning into this—a big media rights underpinning like the NFL has. That would be the dream, obviously, or that the EPL has, or even the NHL, where the games are streamed regularly on TV. There's a guaranteed amount of money that they can make to keep the platform afloat. And there just simply isn't really anything like that right now.

Richard Berndes   00:04:23

No, there are certain, I suppose you'd call them, sort of tentpole events every year, like I've mentioned the Esports World Cup. The International is another one; the League of Legends World Championship is another one. So there are these big events in the esports world, but they're not as well known as the NFL or the World Cup or the Olympics. I think that's the difference, but they are the big events. But for me, for esports to become established in the same way as other traditional sports, it's about creating that sort of brand awareness and development, which can be monetized effectively, which I don't think it really is at the moment. It's very much reliant on certain things, which other sports have, but the backbone of their value comes from media rights.

Neil Barbour   00:05:09

Yes. I think we've taken a few stabs at why maybe esports hasn't been able to bridge to a big media rights contract. But I don't know, maybe why don't we throw back and forth a few hypotheses. My big one is -- I'll start, it's just like it's difficult. I think they haven't really nailed down what a consumer present -- a mass media consumer presentation might look like. Some of the reasons why it's so big on Twitch and YouTube is that it sort of appeals to the converted often, like people who are watching it are deeply entrenched in that game or that scene already. So they know what's going on. But if you just put it on ESPN, which they have occasionally over the years, it can be very difficult to follow the action.

Richard Berndes   00:05:53

I think that's—I mean, I think you're hitting the nail on the head. I mean, what traditional sports have is action. They have field goals. They have touchdowns. They have a six in cricket, a goal in soccer, a fantastic slam dunk in the NBA. And I think what esports has still to crack is the way it can be presented in a polished, sort of smooth way that people who don't know anything about esports can sort of buy into it and say, yes, I get that, because probably all they see is a couple of guys or girls—or seniors, because there is a senior esports team—sort of tapping a keyboard and a big screen above them. So I think one of the big battles for esports is: how does it create a polished product that can be shown on linear, streaming TV that's presentable and brings people in?

Neil Barbour   00:06:46

Right. Yes. Some of that, I think—and you kind of tipped to this—is that there's a shared language of sports among cultures. So, like, if you grew up with soccer or football, you know the rules just by osmosis, or you know the nomenclature and the general flow of the game. Because a lot of these esports are playing games that are—some of them are 10, 15 years old, but that's about the oldest. Like, I guess League of Legends would be an older one, or CS:GO—Counter-Strike has a long lineage. But it's not like people have gone from cradle to grave with one of these esports yet. So it's possible that as one of these, or many of these games, become a constant in the rotation, that the shared language becomes more widespread. But that's really a generational story. That's not something that's going to happen...

Richard Berndes   00:07:47

Yes. I think it's -- I mean for -- I guess, everyone sort of under 30, they're entrenched in video games. Anyone over 30, it's not -- it wasn't part of that -- I mean, they probably -- there were some, obviously, but it's...

Neil Barbour   00:08:01

Maybe not competitive games like it is...

Richard Berndes   00:08:03

But I think now every kid growing up is a gamer, whereas that probably wasn't the case sort of 20, 30 years ago. So I think that's -- it's like having a brand-new sport developing itself, and it needs a way to establish itself and communicate itself and put it out there in the same way as any new sport.

Neil Barbour   00:08:22

I'm sure there are some people who have been playing Quake or Doom multiplayer since 1996. They are screaming at their radios right now, or their phones as they listen to this, and they're saying, well, there has been a long lineage. And I think the other part of that is that Quake is not played professionally anymore. Other games have come and replaced it. And so you sort of hit the reset button. I think there's a little less of that going on now. Like I said, Counter-Strike came into the ecosystem in 2005, 2010, sometime around that level. And then it has stayed kind of constant. People have kept playing Counter-Strike in a way they didn't keep playing Quake. So it's possible that those games sort of become a bigger part of the business.

Richard Berndes   00:08:59

As I say, and to your point, you sort of put that very, very well. I mean, these games could be an entry point into esports because if you play American football, it's probably quite hard to move to another sport like, say, cricket or rugby because they're entirely different sports. Whereas if you play something like Doom or Quake, you do understand the computer gaming environment. So it's probably easy to sort of understand it and build those relationships. And that could be a way for the esports industry to try and market itself, to sort of relate esports as we understand it to that older audience and bring them in. So that could be a way for them.

Neil Barbour   00:09:43

Yes, that's such a good point. Like you would have done this in quake. Do you remember doing this in Quake? It's the same way in Call of Duty, except you have to -- there's this other layer on.

Richard Berndes   00:09:51

Absolutely because there's a lot of games between first-person shooters. And there's a lot of games within that because it's the same basic strategy you're moving around a game or a screen trying to shoot someone. So there is that sort of continuity.

Neil Barbour   00:10:06

It could be something to grow on.

Richard Berndes   00:10:07

Right.

Neil Barbour   00:10:08

Yes. So we talk a lot about prize pools in the report and how that's a signal that the industry is moving in a certain direction. We sort of indicate that, obviously, as prize pools get bigger, that reflects that the sport is getting bigger. It attracts more teams, more competition, more money, more eyeballs. Sort of walk through that a bit for us.

Richard Berndes   00:10:29

Yes. I mean, as you said, some of the prize pools you mentioned in esports are massive. The Esports World Cup, for example, has a prize pool of $70 million. The International had a $40 million prize pool, and the Fortnite World Cup had a $30 million prize pool. And that is not an insignificant amount of money. And that attracts attention. It brings a global scale to the sport. It grabs the headlines. It helps distinguish that there are some really big events there. And also, more importantly, it gives you a world champion. There is an Esports World Cup. And that in itself has a cachet. If you are a world champion, that says something about you. It puts you on a sort of level with other sports. I mean, I guess with the prize pool, what it doesn't really tell you is the sort of overall health of the other teams, because if people are relying on these five or six big events to drive revenue, and there are so many teams, that money only goes so far. So what you probably could say is, what it comes back to for me is trying to establish, rather than having five or six big tournaments, a regular league thing. I mean, just to give you some numbers, in the Premier League, for example, the average prize money for competing in one season in the Premier League for one team is £146 million.

Neil Barbour   00:11:54

Is that right?

Richard Berndes   00:11:56

And say, for example, like someone who wins the Premier League, just the Premier League payouts would be GBP 175 million. That's just for competing and winning. On top of that, you get sponsorships, prize money and obviously, revenue from playing in the European competitions like the Champions League. So that gives you a sort of a difference of the scale of like an organized sport versus esports. So it does come back to me to sort of like how does it sort of raise the game and professionalize and have like a regular league tournament that can be produced, directed, put on sort of wider screens and monetize effectively...

Neil Barbour   00:12:35

Because right now, it's a real -- yes, sorry to interrupt, it's a real winner-take-all kind of formula where you see the same 3 or 4 teams and they sort of rise to the top of these same 5 or 6 tournaments. I think that's a really well said point. And if you look at I think the other dynamic underlying our prize pool data set is that if you look at these really big single event tournaments, they are kind of in the pandemic era. I think the biggest one we have is, what is it, $40 million for Dota 2 at the International 2021. Yes, that's when all eyes were really on that sport. Some major -- some physical sports that take place in the physical space were not going on. So a lot more -- a lot of eyeballs have transitioned over to esports. And so these prize pools were getting higher to sort of reflect that attention. The individual event prize pools have not scaled past that. That's still sort of the high watermark, as I suggested. But what has happened is that the Esports World Cup has kind of come into the mix in a bigger way. And now they're sort of saying across all of our events, we have $75 million to share. Now there are a lot of events -- but it does reflect that it is coalescing around fewer events. I don't think I'm out too far out on the ledge by saying that, but the events that are there are much bigger. So it's sort of a double-edged sort of like you're saying, if we -- if you would really want to grow the sport, you would want a regular schedule and a table and home and away games and something that keeps eyes on the product all the time instead of these big marquee events, sort of like we have the Super Bowl every year and nothing else. So that's kind of the weird trap that they've built for themselves. It's definitely growing. And this is -- these big events are good for the industry, but also may prevent the sport from growing in more organic ways.

Richard Berndes   00:14:29

Yes. I think you're absolutely right. You could be putting the cart before the horse because you're putting these big, high-ticket, high-end world championship events out there, but there's not the bread and butter underneath it, where all these teams are playing every week. They're getting better and better. They're becoming champions and they're sort of playing, and there's sort of an ongoing league situation. All you're having is a world championship—the world champion of this—without having the sort of day-to-day building to that being the crescendo of the season or the event.

Neil Barbour   00:15:01

Allowing consumers to follow the storylines underneath the week-to-week movements.

Richard Berndes   00:15:07

Yes. And that's what other sports do. You have a league, which keeps going throughout the week. And then you have every 4 years, you'd have a World Cup or you'd have a Champions League or these sort of things. So it's just -- for me, it's just -- and that's where sort of the value and the grit comes from. It's like having that sort of day-to-day stuff as well as these world events. So it's constantly in people's mind. There's constantly every week, there's an esports sort of championship happening somewhere, and then you can follow the teams.

Neil Barbour   00:15:39

So let's double-click on some of these teams. Team Spirit and Liquid, 2 very different examples of prize money success. What do their results tell us about the different ways the esports organization can succeed?

Richard Berndes   00:15:51

As you said, they're probably the—I mean, if you look at the last five years in terms of earnings, they are, without a doubt, the most successful teams around. I think Team Spirit earned something like $35 million and Team Liquid $22 million, $23 million. What's interesting is how these teams operate. Team Spirit competes in very few events. They concentrate on what they're really good at, whereas Team Liquid has lots of teams playing in lots of events. Just to give you some sort of idea there, Team Liquid—it looks like it has participated in over 1,000 tournaments, whereas Team Spirit participated in 167. So it gives you some sort of scale because they have more teams, whereas Team Spirit concentrates very much on, I think, Dota as one of their big events, and they won The International with the $40 million prize pool we talked about anyway. So it just—to me, it sort of seems like they're big organizations, but one concentrates on what they're really good at and the other one has lots of teams. So if they're not doing so well in, say, League of Legends, they're doing well in Dota, or it could be EA FC. They've got lots of teams, so they're ticking over all the time with lots of different things. And I mean, sort of the upside of that is, obviously, that Team Liquid is not putting all its eggs in one basket. Team Spirit is very much into Dota. So where that could fall foul, for example, is if they lose their best players; their whole team is sunk because they put all their eggs into one basket, whereas Team Liquid has more of a broader base. So if they lose some players, they've still got other competitions they're good at.

Neil Barbour   00:17:31

Team Liquid has a different team for Dota and a different team for Counter-Strike, right? It's not the same five guys that play that, right? Yes. Before we went down this—we really got deep into this—that hadn't occurred to me, that a Team Liquid or a team wouldn't field a team for every event. I just imagined that if you were a big operating team, you would show up everywhere. I thought that was such an interesting little wrinkle in this report.

Richard Berndes   00:17:57

Yes. No, as I say, it's a different approach. I mean, other teams do this in other sports. For example, Paris Saint-Germain has a soccer team, but they also have a basketball team and they also have an esports team. So they, as an organization, have different things. So it's a different way of approaching things.

Neil Barbour   00:18:19

More of a European model, or I guess our colleges do that. Our universities in the U.S. also field different teams, yes. So there's a corollary there.

Richard Berndes   00:18:27

There is. I guess that's the danger is if you're relying on one particular team to drive this revenue, like, for example, Spirit, Dota 2 seems to be their strongest suit. -- is if that falls away, where does it leave the team? That's -- but obviously, if they're the best of that, they're going to have the best players. So it all depends. It's just -- it's a risk to be mitigated, I guess.

Neil Barbour   00:18:51

Yes. Let's talk a little bit about sponsorships, brand partnerships. Like we said before, carrying a lot of the weight at esports. They sign up for commercials or product placements, things like that. They wear it on the kit, I think we said before. So what sort of brands are in this market? And why do you think they're being attracted to this?

Richard Berndes   00:19:14

I think the key thing—and this is what I think the goal of esports is—is the audience. The audience is young, it's tech-savvy. They're digitally inquisitive and they digitally understand that. So it's unique—it's not unique, but it's an audience that's in such great—I mean, if you think about how many people watch esports, this is purity of audience. And this comes back also to the media rights, because the way media rights operates in the traditional world is you have reported gold-standard TV data that says there are this many people watching this NFL game or this soccer match, and you're reaching this many people, and it's this sort of valuable audience. It could be sort of ABC1 men or 16-to-34 men, which are very, very valuable in the TV trading market. And this is what esports is. It has a very valuable audience that brands can't find anywhere else. And sponsors aren't stupid. They're not going to be sponsoring these things if there wasn't something there. But to give you some idea, in terms of the drink market, you're looking at people like Red Bull, Monster, Nescafé. In the banking world, it's Visa, Mastercard. Food: McDonald's, Burger King. On the digital side, it's Huya, Napster, Warner Bros. Cars: Porsche, BMW, Audi, Mercedes. And in the fashion world, it's Oakley sunglasses, Ralph Lauren and Louis Vuitton. And these are some global brands, and these guys are not stupid. They're not putting their money on these teams if they don't think there's something there. And it's that young, tech-savvy audience that they want to speak to that you won't find on traditional media platforms. And that's the goal.

Neil Barbour   00:20:55

That's what I was going to say, yes. These guys are locked in—not all of them, but a lot of them are locked in on these games. They take them very seriously. They don't watch regular TV. They don't listen to regular podcasts. They're sort of outside of this bubble. So if you want to find them, this is where they're at. And so, yes, these large brands have huge media-spend budgets anyway. So you would imagine that they would be anywhere and everywhere. And this is probably, in the full stack, a pretty cost-effective way to meet this market. So they would totally want to be there. The one pushback I would make here is that these are—when I was covering the metaverse a couple of years ago, and I still cover the metaverse occasionally—this is a lot of the same people. The people with the huge ad spend have a lot of creative agencies working around and sort of picking at different speculative or emerging advertising opportunities. The metaverse didn't really pan out in a big way, at least it didn't yet. There's always another day. But it did in the sense that Roblox is still a really compelling way to reach the audiences that you're talking about. It's probably younger than the esports audience, but it's another audience that you're not necessarily going to find in traditional media. And a lot of advertising agencies and advertisers and brands found a lot of purchase in that market.

Richard Berndes   00:22:22

Yes. That's -- I think that's absolutely true. I mean there is -- they've got money to spend, so they're looking around and looking for these opportunities. But to me, it's still -- from the outside looking in, you think like if esports, it's going to be sort of like this tech gaming sort of stuff is what's going to be around it. But to me, it's still a real surprise to think of a brand like Louis Vuitton is sponsoring esports.

Neil Barbour   00:22:46

And it doesn't seem like these are -- and again, I don't have the numbers in front of me, they're like one-off projects or something or short-term commitments. It seems like some of these brand partnerships are long term or very -- so yes, they're seeing -- they must be seeing some sort of return there.

Richard Berndes   00:23:03

But I guess, again, looking for -- if you want to kick the can down the road, in 5 or 10 years' time, if they're not seeing the returns, they're going to walk away. So that's why esports has to organize itself, polish its act and present some solid data to say, this is what you're getting for your money. This is your return on investment. You are reaching 5 million people around the world and this type of people and that you can then balance that and sort of do some sort of media audit compared to a TV campaign, you can say, well, actually, this is really good value for your money because I'm reaching an audience that I can't get anywhere else and they're really hard to reach. And this is how I can talk to them.

Neil Barbour   00:23:40

All right. So let's sort of bring this thing home here. We talk a lot about, in the report, a steady growth trajectory. We're seeing a lot of green shoots. We're seeing a lot of solid commitments and just a general steady growth path, but that's not going to get it done. They really do need an elbow growth path—not just a wave, but like, bam, and go up—if they want to survive over the long term. It could always be a niche interest. I don't want to—there are those markets that sort of are small but important. But what development indicators should we be watching to judge whether esports is about to hit that elbow-curve inflection point?

Richard Berndes   00:24:23

I think, number one, if you take it back, the amount of people -- I mean, you probably know better than I, but the amount of people who identify as gamers in the world is huge. I mean...

Neil Barbour   00:24:34

Huge.

Richard Berndes   00:24:35

Is it 10%, 15% of the global population who would say they're gamers? Now, how do you turn that into esports? So you've already got a big global audience you could potentially turn into esports fans. So that, to me, is a positive. But I think, going right the way back, we know esports audiences are a valuable audience. They're young, tech-savvy, digitally engaged, hard to reach elsewhere. So that's positive. I think if you look at how media rights deals, which prop up most sports around the world, work, it's very much saying, right, we are delivering this big lump of audience, which is valuable, that only watches live sport. Because live sport, you can't stack it like you can, say, stack a series of Downton Abbey, for example, or something like that. You have to watch it there live. And that's what's unique about any live sport, like the Super Bowl or the Olympics: you have to watch it live. And esports should be aiming to create that unique live opportunity of something special that's not going to be repeated. If they can build that, again, prove what their audience is and why it's valuable and how it compares to other sports advertising—not just sports media, other mediums—then that will be a massive step forward. And then they can create the leagues to support that. And then you could say esports has arrived. For me, it's identifying the audience, backing it up with hard data, proving it from a return-on-investment point of view.

Neil Barbour   00:26:05

I think that's perfectly said. No notes. And on that, I think we'll end it. Thanks, Richard. Thanks so much for coming on the program.

Richard Berndes   00:26:10

Great. Thanks for having us, Neil. Bye.