How Money Flows in Esports: Revenue Streams & Investing

So, you've decided to invest in esports. Maybe you're a high-net worth individual, or perhaps just interested in getting into the exciting and profitable world of competitive video gaming. The good news for you is that there's never been a better time to be an esports investor.

The esports industry has grown tremendously over the last few years. Major consumer brands such as Coca-Cola, Red Bull and Intel have entered into sponsorship deals with professional teams, players and leagues. In addition to these marketing partners, many owners of traditional sports franchises have come together to launch new esports organizations in cities around the world.

In November 2016 the Kraft Group announced their plans to launch a Boston-based Overwatch League team, and Comcast Spectator is set to do the same in Philadelphia. The Immortals (a successful esports organization in its own right) and Memphis Grizzlies (who purchased a majority share in the Immortals' parent company this year) launched Los Angeles' first major esports franchise, aptly titled the Los Angeles Valiant.

Given these developments it's no surprise that Forbes has estimated that "esports revenues will grow from $463 million in 2016 to more than $1.49 billion by 2020." This growth is good news for esports investors interested in getting involved with the space, but you don't want to invest blindly. The purpose of this article is to provide a brief overview of esports' infrastructure and highlight key strategies that investors should consider.

First, let's look at what "esports" actually means. Esports (short for electronic sports) has become the de facto term used to describe competitive video gaming as a spectator sport. While certain games like Hearthstone and StarCraft II can be played exclusively as a one-on-one game, most esports games are team-based. The structure of these teams varies depending on the game being played, but they typically include at least five players (some games like League of Legends even require their teams to field substitutes if one or more starting player is unavailable).

The biggest esports games in the world include League of Legends, Dota 2, Counter-Strike: Global Offensive , StarCraft II, Hearthstone and Overwatch. These games have a few things in common: they all have thriving professional leagues and large prize pools. But beyond that there is significant variation in terms of their player bases, viewership numbers and economic models. In the sections below I'll discuss the esports infrastructure of each game and offer some insight into which strategies will work best for investors.

League Of Legends And The Tencent Empire

In League of Legends, "esports" refers to the competitive professional scene surrounding Riot Games' multiplayer online battle arena (MOBA) video game. Unlike other popular esports titles such as StarCraft II, League of Legends is designed to be played as a five-versus-five game. This means that professional teams are much smaller compared to their counterparts in other games, but at the same time they make for more compelling investments because the success of any given team has direct correlations with viewership numbers and revenue generation.

League of Legends' professional scene began in 2012 when Riot Games launched the League of Legends Championship Series (LCS). This league is similar to traditional North American professional sports leagues like MLB or the NBA in that its teams are franchised, and it operates under a relegation model. The LCS features ten teams in North America, nine teams in Europe, with plans for expansion into South Korea and China. In order to get a franchise slot in the LCS, owners must pay an initial fee of $10 million with a revenue sharing plan that gives Riot Games 50% of all league-related revenue while each participating team keeps the other half. This means that for a team to break even on their investment they need to achieve fan support (in the form of viewership) comparable to that of other sports leagues.

At its most basic level, League of Legends is an e-sport with an interesting business model. As someone who's followed the North American LCS since its inception in 2012, I can tell you that it has had its ups and downs. The first half of 2013 was marred by a relative lack of advertising and the so-called "Riot tax" where teams often had to give Riot 50% of their winnings because they didn't reach certain milestones. For example, if an LCS team was relegated at the end of one season then it would lose its franchise slot in the league. On the other hand, the second half of 2013 was characterized by more effective marketing, increased viewership numbers and larger fan bases.

These growing pains are hardly surprising, but they are an important reminder that even though esports is a spectator sport in its infancy it is also very much in line with traditional sports when it comes to achieving sustainable growth. This isn't just talk. In January 2015 the parent company of the New England Patriots (under arch-villain-in-chief Robert Kraft) became a founding member in a $13 million funding round for Team Liquid LLC with other investors including former NBA player Magic Johnson.

In terms of current investment opportunities in League of Legends, it's important to note that all ten teams in the North American League of Legends Championship Series have a spot that they can sell to new owners. In other words, there are currently ten teams worth looking at from an investment perspective which leaves room for upside if Riot decides to expand the league's reach next year.

In terms of monetization opportunities related specifically to League of Legends, the franchise model is a good example of a model that can work in the long-term. Riot Games can bring in revenue by selling its League of Legends Championship Series franchise slots for millions of dollars, which it then uses to fund the high production costs associated with producing games out of their Los Angeles studio.

For context, last year's League of Legends World Championships is a record-breaking $2.34 million with the winning team receiving a whopping 60% of this total prize pool. Even though Riot Games owns and operates LCS, it also has revenue lines that go directly to the teams participating in the league through two methods: sponsorship sales and merchandise sales.

For reference, Team SoloMid (TSM) is the only team in North America that has its own apparel brand (which it calls "Team SoloMid") through a licensing deal with HotShot. This deal helps TSM's bottom line because of the initial license fee as well as the revenue share on all sales moving forward. By comparison, the value of this deal is so much more than what teams in traditional sports can earn. For example, the Dallas Cowboys only get $8 million per year from its apparel deal with Nike despite selling millions of dollars in merchandise each year.

For smaller organizations that aren't quite popular enough to have their own apparel brands, they can still generate revenue through selling team and player-based sponsorships. Here too Riot Games has provided guidance to its teams by selling regional sponsorship packages within League of Legends such as the North American LCS (NALCS) and European Challenger Series (EUCS).

The last way that esports organizations can monetize their League of Legends operations is through merchandising sales which includes everything from team jerseys, mouse pads and even plush toys. This is similar to what organizations in traditional sports do through branded sporting goods sales however the difference here is that these esports teams are also monetizing their fanbases on a more direct basis thanks to newer technologies like virtual gifting which allows fans to purchase items from an esports team's web site directly as a means of supporting their favorite team.

Theoretically, the more fans spend on gifting items to their favorite teams, the higher their favorite teams' potential revenues could be because there is no middleman involved with these sorts of transactions. Although this sort of ecommerce isn't directly tied into virtual currencies like Riot Points at the moment, the amount of money that esports teams could generate through virtual gifting is really only limited by their fanbases.

The possibilities for this sort of revenue line is nearly endless and the same goes for team sponsorships as well as merchandising sales. In short, virtual currencies are likely to play an important role here because they provide the mechanisms needed for esports teams to interact with their fanbases in a manner that simply wasn't possible without Riot Games' League of Legends and how it monetizes its competitive scene.

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