The excitement around esports is growing. But where is the profit?

After more than three hours of tense, back-and-forth battles — projected on a giant jumbo screen in San Francisco’s Chase Center — it felt like victory was on the horizon as the sold-out crowd hammered together inflated lightning rods and shouted with excitement.

The Korean e-sports team DRX led the game characters into the base camp of the opponent T1 team, smashed the Sapphire Nexus, and won the League of Legends World Championship this year.

Fans cheered their assent, fireworks went off, winners embraced and losers sobbed into their keyboards. Executives from League of Legends publisher Riot Games presented DRX with a Mercedes-sponsored diamond ring celebrating the pinnacle of professional video gaming.

It’s the elaborate extravaganza that they promised traditional sports investors back in the mid-2010s when they first pitched them putting money into the fast-growing esports industry. race.

“I remember seeing a team come out and the fans were frantically asking for autographs. I thought, ‘Oh my god, this is just like our experience,'” Ted Leon, who owns the NBA’s Washington Wizards and NHL’s Washington Capitals Said Sith’s son Zak Leon Sith. The young Mr. Leonsis invested in an e-sports team in 2016.

But while the industry has grown and attracted younger consumers that traditional sports owners are desperate to attract, the money hasn’t followed suit. Some sports owners’ short-term outlook for the industry after discovering that the ways to make money in traditional sports — such as building fan bases in specific cities and striking lucrative deals with TV networks — doesn’t always apply to esports feel disappointed.

Most aren’t yet profitable or seeing a return on their investment, and the game publishers that control North America’s largest competitive leagues, like Riot and Activision Blizzard, are running these leagues at a loss or just starting to break even.

While major esports events sell out in buildings like the Chase Center and draw tens of millions of viewers in China, tickets cost less than traditional sports, and far fewer Americans watch esports than the 12.4 million watching the 2022 NBA The American finals or NFL 2021 regular season average 17 million, a difference that means less interest from advertisers.

Crucially, leagues like the NBA and NFL make billions of dollars a year through broadcast deals with television networks, while many esports are streamed live for free on sites like YouTube and Twitch. Some early revenue projections include expected broadcast deals with Twitch and YouTube that have been less profitable and consistent than expected.

Of course, esports investors aren’t counting on the industry to replace traditional sports in just a few years. But some are still disappointed by the early return.

“They told us with certainty that these leagues were going to fly, and we all drank the Kool-Aid,” said Ben Spointe, CEO of Misfits Gaming, an esports organization whose backers include Owner of the NBA. The Orlando Magic and the NFL’s Cleveland Browns. “The reality is that growth is not happening as fast as we’d like.”

There are other challenges. Most of the League of Legends games in North America are held at the Riot Arena in Los Angeles, where there are many teams. This deprives esports teams of the opportunity to make money by hosting tournaments or build fan bases in specific regions.

Activision aims to change that with leagues based on its first-person shooters Overwatch and Call of Duty. Both play home and away games, with teams spread across the country, like traditional sports teams. Activision charged investors $20 million to join the Overwatch League.

But the league was just building momentum when the Covid-19 pandemic forced it to cancel in-person events. It has struggled to gain traction ever since. Activision, which allows teams to defer the cost of joining the league, is now helping teams cover their costs, paying each of the league’s 20 teams about $1 million this year, according to a person with knowledge of the league’s finances.

“Even with the realignment brought on by the pandemic, we still had full arenas and record viewership,” said Activision spokesman Joe Christinat, adding that there was a lot of excitement about the new There is an “overwhelming enthusiasm” for the Overwatch and Call of Duty games. “Our fans want these leagues and we remain committed to them.”

Investors also realize that game publishers’ incentives don’t necessarily align with their own. As long as publishers can generate interest in their profitable video games, they can afford to run esports leagues at a loss, so they sometimes prioritize growth over revenue. For example, Riot may be hesitant to sign a contract to stream League of Legends exclusively on YouTube or Twitch because that would prevent viewers in China from tuning in, both services are blocked.

These conflicting goals have sometimes led to tense negotiations.

“It’s a push and pull,” said Kirk Lacob, son of Joe Lacob, who owns the Golden State Warriors. “I’ve had lengthy discussions with various members of Riot over the years.” In addition to his role as executive vice president of basketball operations, Mr. Young. Lacob oversees the Warriors’ esports team.

Kirk Lacob’s views are common among sports ownership groups that buy or invest in esports teams, a list that includes the Los Angeles Rams’ Stan Kroenke, the New England Patriots’ Robert Kraft and the New York Yankees Team’s Hal Steinbrenner. Former gamer, Mr. Lacob spotted the highly competitive gaming scene in recent years and was drawn to the prospect of attracting a young and growing audience. He remains bullish on the industry — but hopes to start seeing some results.

“I really believe that where there are eyeballs, where there is usage, there is revenue,” he said.

Gaming executives called for patience. Esports, popular for decades in Asia but still nascent in North America, should be considered a high-growth start-up rather than a full-fledged industry, they said. U.S. viewers have watched an estimated 217 million hours of esports content this year, up from 147 million hours in 2018, according to data firm Stream Hatchet. “We often say we’re still in the leather helmet era of the NFL,” said Naz Aletaha, global head of League of Legends esports at Riot.

Many investors in the space still believe that esports will eventually become a dominant and profitable industry. But in the short term, some people are “very frustrated,” said John Needham, Riot’s president of esports, adding that Riot has worked hard to convince investors to embrace a different monetization model.

While sponsorships still account for the majority of revenue, a cornerstone of Riot’s strategy involves microtransactions: selling entertaining League of Legends players in-game items for their characters themed around real-world esports events like the World Championship.

It sounds like a niche revenue stream, but the early numbers are eye-popping. When Riot hosts the 2022 Championship for another esport, Valorant, it raked in $40 million from microtransactions alone. Half of that goes to the league’s teams through a revenue-sharing agreement.

“That’s where we’re going to break the broadcast revenue model, because it scales,” said Mr. Needham said.

Right now, in many esports organizations, the costly effort of building competitive teams is only the catalyst for real revenue-generating business. Well-known groups such as FaZe Clan and 100 Thieves have transitioned into more general lifestyle brands, offering apparel and live entertainment to viewers. FaZe Clan, which went public this year, is seen as a bellwether in the industry, but is losing money and cutting costs as its share price plummets.

Felix LaHaye, chief executive of games marketing agency United Esports, likened competitive play by esports organizations to a car company sending out a Formula 1 team – an expensive undertaking for attention and prestige .

“It creates value elsewhere in their ecosystem,” Mr. Rahi said. “It pays to have a loss leader in terms of creating branded products, and then you end up selling normal products to people.”

Even Team Liquid, considered one of the more tournament-focused esports organizations, has made a lot of money elsewhere and now has nine separate revenue streams, including owning an esports encyclopedia website, CEO Mark Viktor. Ra said of Axiomatic Gaming, the ownership group behind Team Liquid.

“It was a natural evolution,” said Mr. Vera said. “Everyone has to take a step back and look at what’s really working for us here.”

Team Liquid, which brought in more than $38 million in revenue last year, is yet to turn a profit, but Mr. Vela, whose owner group includes the Leonsis father-son duo, said e-sports remain attractive because they attract a rare type of young, affluent audience. .

gentlemen. Spoont is also optimistic about the long term, but he’s not willing to wait. In July, he sold his European League of Legends team to a Spanish esports group for an estimated $35 million. He said he’s focusing Misfits on content creation, in part because competitive esports may be another decade away from reaching its potential.

“As an industry, we’re trying to do what the NBA has accomplished in 50 years, but we’re trying to do it in five years,” he said, referring to the lucrative business that many NBA teams don’t have right away. “As it turns out, that didn’t happen.”

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