Part II: The Convergence of Two Worlds

Chinese: 中文, Japanese: 日本語

By Jonathan Pan

Illustrations by Paul Reinwand & Graphics by Nancy Lam

Yahoo recently won the rights to exclusively broadcast the NFL’s first streaming-only game — between the Buffalo Bills and the Jacksonville Jaguars — on October 25 in London. One week later, the online video game League of Legends will host its 2015 World Championship in Berlin.

For the first time ever, there will be an opportunity to compare global streaming metrics between one of the most successful sports in the world and one of the most successful eSports in the world. Those numbers could radically alter the future of sports, TV, and digital advertising because eSports represents more than just competitive video game competitions. It represents digital stars, streaming rights, the global scaling of digital content, niche and mainstream content creators and how they monetize their content.

In many ways, traditional sports are becoming more like eSports — global and digital, while eSports is becoming more like traditional sports — local and live. There are challenges that both sports and eSports will have to overcome to achieve those outcomes.

Sports Leagues

Paving the way for streaming media rights

Leagues are at the center of sports and the money flows through them. As one of the most financially successful sports league in the world, the NFL serves as a good representative of the sports ecosystem.

Source: A.T. Kearney

The league makes money in three ways:

Media rights: 54.4%

Sponsorships: 10.3%

Local revenue (ticket sales, merchandise, etc.): 35.3%

All figures are estimates for 2014. Total revenue: $11.2 billion (source). Sponsorship revenue: $1.15 billion (source). National revenue: $7.24 billion (derived from source). Local revenue: total revenue — national revenue = $3.96 billion.

Media rights are not increasing in the near future as the NFL’s broadcasting contracts have all been recently renewed. CBS, Fox, and NBC’s contracts expire in 2022. ESPN’s contract expires in 2021; DirectTV in 2023. While sponsorship revenue continues to increase, there are only a few sponsorship categories left untapped. As a reference point for local revenue, the Green Bay Packer’s local revenue increased 9% last year ($12.9 million). While impressive, that growth rate isn’t high enough to reach the $25 billion in annual revenue that the NFL Commissioner wants by 2027. The NFL needs to increase revenue by more than one billion per year and the two most likely sources of revenue growth are international and digital.

There are already some digital deals with Yahoo and Twitter. On the international front, the NFL has been hosting the International Series in London since 2007. In 2015, three regular season games will be played there. The trend of growing internationally and digitally can be seen in other sports as well.

In 2014, the NBA Global Games appeared in Brazil, China, Germany, and Turkey. A regular season game will be played in London next year. On the digital front, the NBA’s five-year digital partnership with Tencent became effective July 1, 2015. American sports are taking a cue from Hollywood and video games: sell American-made content internationally, especially in China.

Fast and Furious 7 was very successful domestically, earning $351 million in box office sales. It was even more successful internationally, earning $1.16 billion, of which $391 million was from China alone. It’s impossible to ignore the Chinese in films, games, or sports. Increasingly, they want to be a part of the distribution. A recent example is Alibaba’s partnership with Mission: Impossible — Rogue Nation.

In video games, Tencent’s Games business owns stakes in companies such as Epic Games (maker of Unreal Engine), Riot Games (maker of League of Legends), and Activision Blizzard (Call of Duty). Call of Duty was the best-selling console game of 2014 and Tencent partnered with Activision to launch a modified version in China.

As American sports seek to grow internationally and digitally, the key challenge is to convince networks and advertisers that streaming audiences are valuable. The numbers of the NFL’s first streaming-only game will likely be impressive and no one is better at selling new forms of media rights than the NFL. Ironically, it will be sports that will increase streaming media rights valuation for eSports. Until that happens, eSports is moving towards generating more local revenue though live events.

eSports Teams

The need for multi-year sponsorships

There are two models for eSports: the central league model, which resembles major American professional team sports such as the NFL, the NBA, and MLB, and the decentralized tournament model, which resembles PGA Tours and NASCAR Series.

Example: League of Legends

Example: Dota 2, CS:GO, Hearthstone

The main benefit of a central league is more control: protections for players, established rules, and the enforcement of those rules. The main benefit of the decentralized tournament model is shifting the costs of the “regular season” and qualifying tournaments to third-party tournament organizers like Major League Gaming or Electronic Sports League. The center of both models are teams and it is critical that the money flows through them. Teams make money in the following ways:

Prize winnings

Merchandise

Transfer fees

Sponsorships

Prize winnings have become very impressive. Bloomberg published a piece about Sumail Hassan, a sixteen-year old Pakistani teen, who plays the game Dota 2 for the team Evil Geniuses. One week later, Sumail and his team won the 2015 International, the world championship game for Dota 2. The team of five won $6,630,109. ESPN’s SportsCenter covered the event.

Merchandise sales are an ancillary revenue source but not a game changer. Transfer fees could be substantial, according to this article, but it isn’t a steady source of revenue as most teams are in the business of winning competitions rather than developing and trading players due to the low average career length of eSports players.

The final source of revenue, sponsorships, represents the largest share of a team’s revenue. eSports sponsorships are typically within the range of $3,000 — $30,000 per month. Multiple sponsorships add up quickly, but it can also presents cash flow problems due to staggered start and end dates. eSports team owners have multiple teams that compete in multiple seasons all around the world. There is a high level of cash flow required to pay for all of that. One solution to cash flow issues is a multi-year sponsorship from a single title sponsor.

What brand will be the first single title sponsor for eSports?

Multi-year sponsorships pose a risk for single title sponsors because of the rising prices and the lack of proof that eSports sponsorships work. The cost of being a single title sponsor for the best eSports organizations exceeds $2 million per year. For that amount of money on a multi-year basis, sponsors can get traditional stars.

This is where eSports can learn from sports. With the amount of money involved with sports sponsorships, sponsors understandably want proof of value. There are many consulting firms and sports market research firms ready to provide that service. As an example, McKinsey & Company, a consultancy, suggests these five metrics for scoring sports sponsorships:

Cost per reach Unaided awareness per reach Sales/margin per dollar spent Long-term brand attributes Indirect benefits

Coke, as the most iconic brand in eSports, should partner with McKinsey or a sports market research firm and publish their return on investment on sponsorships. This would pave the way for many other brands to test the waters with eSports.

Cliff Paul

In the meantime, there are simple ways for brands to analyze the effectiveness of eSports campaigns.

In part one of this series, I covered how sports sponsorships work and compared State Farm’s Born to Assist campaign with NBA stars with HTC’s campaign using eSports stars.

How effective were these campaigns digitally? To find out, I analyzed the most recent 3,200 tweets ending August 9, 2015 of three accounts:

@cliffpaul: the account for Chris Paul’s fictional twin brother who stars in the ad campaign

@htcesports: created when their eSports sponsorship started

@cokeesports: created when their eSports sponsorship started, included as a comparison

Using percent of tweets retweeted and favorited as a measure of digital engagement, eSports sponsorships have the potential to rival sports sponsorships in digital engagement. Note: State Farm’s campaign is primarily for TV versus HTC and Coke which are primarily digital.

Metrics like long-term brand attributes and indirect benefits are always going to be murky. Counting how many people attended an event and measuring their engagement through actions is not. Live events is a concrete way of demonstrating return on investment.

Last October, Major League Gaming secured a 14,000 square feet arena for eSports events. Last weekend, the Dota 2 International was played at KeyArena in Seattle. Next weekend, League of Legend’s North American Summer Finals will be played at Madison Square Garden in New York City; the European Summer Finals will be played at Hovet Arena in Stockholm.

Similar to the “cord-nevers” (“kids who have never and will never subscribe to cable television”), there are kids who never got into sports for whatever reason — the “sports-nevers.” For this demographic, their first live competitive event usually is an eSports event. The VICE documentary on eSports offers a glimpse of just how intense eSports fans are. eSports events are increasing in production quality every year and eventually will be on par with sporting events.

Sports 2.0

Merging the best parts of sports and eSports

The core appeal of sports is its fulfillment of the human need for competition. eSports does the same thing. These two businesses are beginning to look a lot like each other and in some ways, can even help each other. If streaming-only sports games becomes a thing, eSports will certainly benefit. As more “sports-nevers” discover the appeal of live competitions through eSports, they may become fans of traditional sports as well.

Sports 2.0 is going to merge the best parts of sports with the best parts of eSports.