Resolving conflicts of interest holds key to more revenue

Individual sponsorships and revenue sharing among all stakeholders hold potential.

By Tobias Seck

From a long-term perspective, making money and being profitable are equally if not more important than winning for esports organizations, views for tournament organizers, and users for game developers. The gravity of achieving profitability has been significantly catalyzed by the esports ecosystem’s ongoing growth spurt, which is fueled by large sums of venture capital and the expectations linked to it.

 

However, profitable esports companies — excluding game developers and publishers — are only an occasional exception. This is related to factors such as recent large investments (franchising fees, building facilities, establishing new brands, and expanding into new markets), the adverse economic effects of the COVID-19 pandemic, and available revenue streams not yet covering monetization needs. Consequently, esports companies will have to expand present revenue streams and explore new ones.

Most of the revenue streams replicating sports business models such as team and event sponsorship, merchandising, memberships, training and scouting camps, player trades, and gear sales offer straightforward expansion opportunities. Additionally, esports companies are exploring new revenue opportunities through mergers and acquisitions, and operating adjacent businesses, such as gameplay experience technology, media assets and event services.

Two potential key revenue streams are yet to be fully unlocked due to economic conflicts of interest: individual sponsorships, and revenue sharing across entire value-added chains.

In sports, individual sponsorships, such as Nike’s $1 billion (minimum) lifetime endorsement deal with LeBron James or Uniqlo’s $300 million deal with Roger Federer, are usually the main source of income for top athletes. For most esports players, salaries and winnings make up much of their income. The principal reason for the lack of individual sponsorship deals involving esports players can be found in the structure of contracts between players and teams, which usually severely restrict a player’s ability to monetize his or her personal brand, image and likeness.

It is foreseeable, however, that players and their management will push for more control over personal brand, image and likeness rights to enable individual sponsorship deals as the growth rate of player salaries over the last decade is likely unsustainable.

This paradigm shift in how players cash in their brand is tied to structural changes in player representation. Many players are represented by the organization they are competing for or agents/agencies with ties to esports organizations. Conflicts of interest are ubiquitous while negotiating player contracts, often resulting in the restriction of their ability to monetize their brand in favor of the organizations’ opportunities to use players’ brands to attract sponsors.

Exclusive media rights deals, especially tied to pay-per-view models, is another area of conflict. While tournament and league organizers directly benefit from pay-per-view revenue streams, such an approach limits the exposure of teams competing and the game played. Although teams might potentially benefit from a revenue-sharing mechanism, the limited reach of their competitive play will impede long-term brand building.

Alternatively, entire value-added chain revenue streams that benefit all stakeholders present a resolution of financial conflicts of interest that could drive the core ecosystem toward economic sustainability. An example of such a revenue stream is the monetization of league, tournament, team and player brands through in-game content, which is shared between all stakeholders.

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