How Esports Can Survive When the Sponsorship Bubble Bursts

Over the past year, esports has exploded into the public eye. ESPN started a full-time wing dedicated to it and hosted Heroes of the Dorm on ESPN2. Turner Broadcasting produced a Counter-Strike: Global Offensive (CS:GO) league. Big Four accounting firms like PricewaterhouseCoopers and Deloitte are even distributing reports on the competitive gaming industry.

Naturally, that awareness has led to a ton of growth. The industry is expected to approach $2 billion in revenue and viewership in excess of 250 million annually. But amidst the flurry of statistics about millions of dollars and an audience whose growth makes it on pace to rival the NFL's by 2017, one particularly critical number has been floated by SuperData: 77 percent of all revenue within esports is indirect, meaning sponsorships and advertising.

The raw value of that $578 million advertising spend is impressive: SuperData pins it at only 28 percent less than the NBA for the same period (2015). The problem lies in the proportions. It represents an enormously disproportionate amount of the cash flow in esports, and a serious liability to the long-term viability of the entire scene. Put very bluntly, esports cannot sustain the trajectory that it is currently enjoying without transitioning to a model where fans carry some portion of the costs.

Consider some context. The NBA makes some $2.6 billion from their television contracts, and another billion in merchandise. Those numbers don't include ticket sales, which represent another $1.5 billion easily. While the whims of advertisers represent life or death for esports, for the NBA it's a measly 15 percent or so of its income.

It goes without saying that it's unfair to make direct comparisons between traditional sports leagues with regional franchises and the emerging world of esports, which has eschewed everything from television to the concept of geographically constricted players or teams. But the root cause has merit. Sponsorships are a key part of the mix for any sport, or indeed any form of entertainment. The problem area in esports is, fundamentally, the lack of infrastructure necessary to secure the core revenue source that almost all other sports enjoy: the sale of broadcasting rights.

Much of esports operates on the assumption—incorrectly—that sponsorship and advertising revenues can simply supplant broadcasting rights as a source of income, citing their principle similarity. In reality, advertising dollars represent a measly six percent of revenue for major cable companies. The vast majority of their revenue is subscriber fees, with program channels representing the lion's share thereof. While SuperData projects esports will crest with $1.9 billion in revenue in 2018, that presumes, with the current revenue split holding, that sponsors will inject an astonishing $1.5 billion of that, doubling the amount of money esports is receiving in sponsorship in just three years. (For reference, sponsorship spend in its entirety grows globally at a rate of about four percent.)

So why does this pose a problem? Shouldn't the considerable upward trend of the past five years and status quo of the esports market assuage these concerns?

Imagine you're the owner of a small business. After years of grueling effort to carve out a niche for yourself, you finally find some success—and suddenly, the phone starts ringing. You have an offer from a major corporation to invest heavily in your idea, and that money would afford you the ability to produce a better product. Who could say no?

It's only when that investor starts demanding changes that things look grim. Maybe they expect your new product to launch before it's ready. Maybe they tell you they don't want "that person" on your staff, because of something they did off the clock. Maybe a brand tells you, an esports league organizer, that they don't want any controversy or bad press, so they are pulling out their funding—or refusing funding in the first place. What do you do when the loss of that money would threaten your entire business?

The above example might seem exaggerated and, to a point, it is. What needs to be communicated, however, is that while it should be attractive for a company to want to sponsor a game, a league, or an organization, that sponsorship money shouldn't dictate whether the entity is able to operate or go bankrupt. Right now, the potential is rampant for esports to become beholden to their respective sponsors at a level that is deleterious to the overall health and continued success of the industry. That's what happens when 77 percent of the revenue isn't being made but injected.

Understand that this is a longer-term issue. In the immediate future, the level of influence from sponsors and third parties on esports will likely be minimized by the rush of brands racing to get involved, intoxicated by dollar figures and key demographics on PowerPoint presentations in dark rooms across the world. But the pace will inevitably slow, and when it does, what happens next?

For clarity's sake, it's worth noting that the companies and people leading the charge in esports are very much aware of this problem. League of Legends team Immortals co-owner Gregory Milken has said he believes that, ultimately, "Fans will pay for this stuff." That direct revenue is critical to a sustainable ecosystem for players and teams, as well as the developers, production groups, and other staff. Esports' decidedly younger demographic—PricewaterhouseCoopers pins it at almost 70 percent being between 18 and 34 years of age—will likely become less resistant to paying to access quality broadcasts as they mature, given how disposable income tends to be lowest in the 18-30 age range.

There are other encouraging developments. For starters, esports have cracked the world of broadcast television, where licensing deals will ultimately have the most impact. Turner's ELeague posted respectable numbers in its first few weeks. While they're not massive, they are sufficient to demonstrate demand to another broadcaster that might want to purchase rights to a particular league or game.

There are also a growing number of competitors to Twitch, which became something of the de facto home for all game streaming and esports broadcasts, especially after their nearly billion dollar acquisition by Amazon almost two years ago. As more players enter the space, including Google, Facebook, and others, it may well behoove those companies to actively court various developers and tournament organizers, paying to secure exclusivity and paving the way for a relationship in which online streaming services become the buyers of licensing deals.

There's also the far-off possibility of more on-the-ground revenue. While esports today are more akin to an international tournament, bringing together the absolute best players from all over the world to compete against each other, natural growth over time should make more local teams and national leagues viable and competitive. That's how traditional sports make a heavy portion of their money, with the majority of ticket and merchandise sales being very much local, and the broadcast audience being at most maybe multinational (but within the same time zones or continent).

What does all of this mean, bottom line? Esports is entering a complex but critical five-to-ten-year window in which it will need to formalize its infrastructure and whittle down its dependence on third-party advertising budgets. Competitive video games may be booming cultural phenomenon, but it's hard to write your own destiny inside someone else's pocket.

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