The last twelve months have been a breakout year for esports, as the mainstream media, brands and traditional sports entered in significant ways. Traditional sports teams have invested tens of millions of dollars into esports teams with the hope of professionalizing them (and in certain cases to put up capital to join League of Legends Championship Series or the Overwatch League by Blizzard). Endemic and non-endemic brands from Razer to Pringles to T-Mobile have poured millions of sponsorships dollars into esports as the industry continues on its rapid ramp up in popularity.
All of this has played out as some of the owners of the IP, the game developers themselves, take further ownership up and down the esports stack. While a welcome move by many, for some startups, it spells a material change in the ecosystem that will fundamentally rewrite the rules of the game. The question we need to ask ourselves as investors is whether game publishers will continue to be benign and supportive of the startups building on their IP. Frankly, I believe game developers will begin to capture and control more of the value chain as the esports ecosystem continues to grow and mature.
In this article, I will attempt to explore how the increased influence of game publishers on the esports value chain can affect 1) Teams/Leagues, 2) Content startups and 3) Other platforms such as Coaching and Analytics that rely on open APIs.
In order to analyze the value chain, we need to understand publishers’ motivations. Many of them treat esports as a marketing tool. Those who do are happy to allow ancillary ecosystems to grow as a way to bolster profit of their primary concern, the game itself. However, when publisher mentalities shift toward consideration of esports as a revenue generator – exactly what League and Blizzard have done – they take logical steps toward ownership of the entire chain. Up-and-coming developers, in particular, have experienced the rise of esports and the wider competitive gaming market are incorporating esports into their business plans.
Valve’s attitude toward Counter-Strike for many years was a boon for esports organizations who built their businesses around lax control. But as many teams who used to participate in League are finding out, when the publisher takes control, you can lose an entire business line. And the tournament providers are finding themselves squeezed as well.
With pro sports money being invested into esports teams, a new management mentality is entering the field. As the IEM example above illustrates, it is likely that the top tournaments (the one requiring significant buy-ins: League of Legends Championship Series, Counter Strike and Overwatch League) will become the de-facto top leagues for their respective titles. As the leagues adhere to their various strict guidelines for seasons, transfers and team rules, it will be increasingly more difficult for third-party organizers to attract top teams and talent for their own tournaments.
The new managers have a better understanding of how to build a long-standing franchise by picking the right partners and ensuring the longevity of their players who are, in the end, their most valuable assets. With increasing competition, team owners will need to take better care of their players, ensuring both ongoing training and recovery period, which will see the top teams drastically cut the number of tournaments they’d attend.
However, the professionalization of teams hasn’t shielded all of the teams from the whims of the publishers. As the latest LCS selection has shown, even some of the longest standing teams haven’t been granted the access to participate in the tournament while some relative newcomers were granted a spot. Riot didn’t explain the reasons for their decision. But it is their league and they’re free to make such decisions. It is possible that they will accept more teams as the league grows, but will it be a black box again?
There are startups in the ecosystem who have raised capital on the premise of utilizing the publishers’ IP and data for free and indefinitely. This is naive at best. Consider the power dynamics at play and what might happen if publishers become more active and begin to enforce their rights more, which even Valve is starting to do. Today, most of the value that is being created in esports is driven off of the developers’ IP and/or APIs which they are not being compensated for. What happens when developers cut off access to their IP and APIs just as your business starts to take off?
Lots of startup pitches come by my desk and I frequently see them wanting to build products that simply leverage publishers APIs or take screenshots of gameplay and stats to build proprietary data and products off of it to resell to players or viewers of the game. These startups are a single DCMA notice away from being shut down. Furthermore, developers who claim to be your friends today may cut you off from the hose tomorrow as they seek to go up the chain. Look at Twitter in 2012. Building your business on the back of someone else’s data is a risky bet for an investor. Instead, startups need to consider what value they can provide that cannot be easily replicated by a developer and make those developers their customers rather than attempt to capture value from the developer’s customers.
The content and consumer-centric parts of the esports market have attracted a substantial amount of investment (I’m not talking about investing into new game studios because that is a completely different beast). For example, content aggregation sites with highlight reels or point features around tipping and gifting.
Here, again, are problems. First, there’s the issue of IP that I raised above. Second, there is the issue of monetization. As many of the mainstream digital media properties are finding out now, monetizing content through ads or sponsored content is extremely difficult for the general public with companies such as Business Insider, Vox, Vice and Buzzfeed all struggling to build an ad-supported business. Making things worse, the majority of esports audiences have an extremely high adoption of ad blockers making the traditional ad-supported model a non-starter in the industry and the utility of yet another highlight platform is minimal. We’ve seen this with Mobcrush already. Some of the other features around tipping, selling tickets or gifting necessitate huge volume to make it a viable business and face existential threats from existing platforms which can simply add it as yet another feature.
Coaching + Data Platforms
Finally we have the coaching platform businesses. While there are some similarities to the performance coaching market for traditional sports, how often do the fundamentals of basketball, soccer and football change? In video games, new game play meta, levels, characters etc change constantly. You can build a steady coaching repertoire for real sports, but the pace at which games change and the need to stay in the game up to the latest development means that the quality of the coaches declines the more engaged a player is on the platform. While coaches might be good for beginners and intermediate players, they will never get the top coaching talent which can easily go off the platform or be recruited by top teams.
There are two schools of thought on the coaching side: automated and human driven. The marketplace for human based coaching faces a lot of the performance issues raised above and faces an uphill battle in building a sustainable platform business as the fees generated are insufficient to attract and retain coaches and players. From a unit economic standpoint, the customer acquisition costs continue to climb with more platforms entering the space while retention and long term value of each coach and customer are still largely unknown. Between the many coaching platforms, a majority of the capital is being spent on acquiring and retaining the customers; once VC capital is shut off, the customers will likely leave.
A number of data platforms have recently sprung up to take advantage of the enormous data being produced by the various tournaments and teams. To date, those startups have relied on free (and sometimes paid!) access to that data through open APIs, taking data in which they don’t have ownership and productizing it. As the Twitter example above has shown, such an approach can have devastating effects. At any point, the large publishers can either shut off the access, sell exclusive access to a rival, or enter the business themselves. The extent to which this will affect startups will vary on the publishers’ openness and fees.
So what’s the best way to make money in this space? Just like in every gold rush, it’s about selling the picks and axes. As I mentioned earlier here and here, the focus should be on the developers, not on the content and public, at least for now. The biggest opportunity lies in selling tools to said developers and other infrastructure providers. You may wonder, why don’t publishers just develop their own tools if they’re going to control more of the value chain? Because for many it is not their core competency (just look at the growth of game engines) and tools don’t take away from their value chain. Instead, publishers use third party tools because they see them as additive; they allow the publishers to more rapidly create games and grow the ecosystem which translates to more money in their pockets. It’s a symbiotic relationship.
I believe that the greatest investment opportunity in esports continues to be in companies that are focusing on B2B models targeting publishers, developers and brands by creating software that makes their lives easier and enables the developers to capture more of the value being created by esports. By creating products that are game agnostic and additive to the ecosystem, the startups will be seen as valuable partners in growing the ecosystem.
In the end a game developer cannot make an “esport;” only the community, finding the content engaging to watch, can decide. Enabling developers to build that community is the highest value creation possible today.
Disclaimer: Rubicon Venture Capital is an investor in Maestro and Unikrn.