A Shifting Esports Landscape

A Shifting Esports Landscape

Esports has been an active topic of discussion in gaming over the years as more publishers have attempted to grow and popularize their games through organized competitions. The market is expected to grow at 7% over the next few years resulting in a ~$6b market in 2028 (Statista), up from $3.8b today. However, the industry has not grown without its difficulties; FazeClan stock price is down 99% since its IPO in 2022 (Acquired by Gamesquare in October 2023 for $17m) and The League Championships Series, the biggest U.S. esports league, viewership decreased 13% last year while also being down 32% from COVID highs in 2021 (New York Times).

The recent economic downturn and focus on profitability has had a sobering effect on the esports industry, forcing it to re-evaluate a few of its economic models. Some franchises, like Overwatch, have been forced to shut down, costing these teams ~$400m after Blizzard paid them a termination fee (Screenrant), and others have made key strategic decisions to help bolster their bottom line. The most recent development comes from Riot Games who announced a shift away from managing their League of Legends esports tournaments in-house, and stating the following, “We’ve been evaluating our approach to third-party events. Done right, third-party tournaments could provide teams and pro players additional competitive opportunities as well as new revenue streams.”

The last time that a League of Legends international tournament featuring pro teams was organized by someone other than Riot was February 2017 (Jacob Wolf Report). This represents a large shift in the industry and highlights the fact that even the largest franchises may benefit from a more open-ecosystem that takes advantage of third-party tournament organizers (TOs). Among the reasons cited for the change were providing pro teams with alternative revenue streams and additional viewing opportunities for fans.

This shift from publishers using TOs is interesting given that the Savvy Games Group has made major investments in gaming, specifically in esports. In 2022 they acquired ESL and FACEIT, two of the most prominent TOs (Jacob Wolf Report). According to FACEIT’s CEO, the merger of these two companies creates a “more robust platform to better support the future of the whole competitive gaming ecosystem”. Since this acquisition, Savvy has continued to acquire esports companies attempting to legitimize the sport and support the ecosystem at a time where these businesses have struggled.

Varying Approaches To Esports Tournaments

This decision by Riot is not the first time a publisher has made the decision to move to third-party TOs. Games including Blizzard’s Overwatch, Valve’s Counter-Strike, and Nintendo’s Super Smash Brothers franchise have each evaluated this for their businesses.

Overwatch & League of Legends (In-House):

Similar to League of Legends, The Overwatch League (OWL), the professional esports league for Overwatch, was originally run in-house by Blizzard. However, recently it was rumored to be in talks with TOs to outsource the process. While OWL teams have recently voted to instead shut down the league entirely, it is likely that Overwatch will still have an esports presence through third-party tournaments. (The Esports Advocate).

Overwatch currently ranks 18th in viewership and 16th in total prize pool (one indicator of financial success of the franchise within esports) among the most popular esports games (Esports Charts). The prize pool is likely buoyed by Blizzard’s large marketing budget, but we believe that League of Legends is a better representation of an in-house approach. League of Legends, despite being 1st in viewership, was 9th in terms of prize pool. While there are many factors at play here, the disparity can be partly attributed to the fact that allowing TOs gives teams more freedom and more tournaments to participate in (something an in-house approach forgoes).

Counter-Strike & Dota  (Third-Party Only):

Valve, creator of Counter-Strike, has historically exclusively worked with TOs to coordinate competitions (both for their official esports league and individual tournaments) around the world. This approach removes logistical load from the company and creates more opportunities for larger prize pools; however, it sacrifices direct control over the brand and sponsors.

Counter-Strike recently released new guidelines for its third-party tournament organizers removing “Partnered Teams”, which are teams that pay TOs for a permanent spot to compete in the tournament (HLTV). Instead, Valve is working on creating an open circuit approach which will allow smaller and potentially higher quality but less established teams to participate in each tournament.

Valve is also the publisher of Dota, their League of Legends competitor. Dota has a long and complicated history around their approach to esports, but historically they have been known for having the largest prize pools in the industry (Forbes). Dota Pro Circuit (DPC), Dota’s professional league, was created in 2017 and Valve used TOs to help coordinate tournaments whose prize pools were bolstered by revenue generated from Dota’s battle pass. This was a way for fans of the game to help support the esports teams and grow the popularity of the game.

After recent changes to the battle pass, the total dollars flowing into the prize pool drastically decreased (Statista) and Valve shut down DPC, intending to hand over tournament organization entirely to TOs allowing for more innovation in the tournament scene. While this will eliminate the crowdsourced prize pools, some supporters think that this could be a positive for the ecosystem, and ensure higher quality events in the future (Forbes).

While there are many nuances to the third-party approach, including Counter-Strike’s open circuit and Dota’s crowdsourced prize pools, we believe this general approach is the most player and viewer friendly. As it stands today, Counter-Strike ranks 3rd in viewership and 4th in prize pool while Dota ranks 5th in viewership and 1st in prize pool (Esports Charts) speaking to the prestige of the games but also the innate benefits of the open third-party approach.

Super Smash Bros (Third-Party With Maximum Control):

Nintendo, who owns the Super Smash Bros franchise, is notorious for keeping maximum control over their IP and not being supportive of the esports scene. They recently shut down the Smash World Tournament (a third-party licensed tournament), a popular tournament, and has shut down others in the past, citing that “It’s also important that a partner adheres to brand and IP guidelines” (IGN).

While a grassroots effort has attempted to fill this gap and host smaller tournaments, Nintendo has recently revised the rules for unlicensed tournaments. Nintendo chose to minimize cash prizes, eliminate sponsorships and remove the ability to play Super Smash Bros Melee - effectively attempting to extinguish the grass-roots scene (esports.net).

Currently Super Smash Bros ranks 31st in viewership but 38th in total prize pool (Esports Charts). This disparity is likely to increase as fewer and fewer tournaments are held.

Solving For Long-Term Success

Each publisher will have to weigh the pros and cons of each approach for their specific franchise. For games that are less exposed to brand risk, owned by smaller publishers looking to offload logistics, or benefit from the visibility of their game in the esports scene, working with TOs will be beneficial. For games that are part of a larger ecosystem or operate in a portfolio of games, losing control over IP and sponsors could be an unacceptable risk, and paying TOs to manage the operation could forgo a large portion of the already thin profit in esports.

While the in-house approach may be achievable for the largest and most successful publishers, it likely does not align with the core competency of the business. Making games is a long and arduous process. We believe publishers should be focused on game creation and leave the burdens of event logistics and partnership deals to a tournament organizer.

The maximum control approach is also likely to stifle growth at the lowest levels, curbing excitement and enthusiasm from local fans that could translate into viewers, spenders, or even the next generation of esports talent.

Games that hope to have a long life in esports should lean towards an open ecosystem, including the use of TOs and the support of grassroots organizations.

Takeaway: The esports ecosystem is rapidly evolving and attempting to fit itself into a model that allows for long-term success and profitability. Many publishers that once managed their esports leagues in-house are considering the transition to external tournament organizers to help facilitate and manage logistics. We believe that the transition to a more open system, where TOs and grassroots tournaments increase visibility and player participation, is the best way to ensure more viewership, larger prize pools and the long-term health of the game in the esports ecosystem.