Executive Summary – 3rd Annual Esports Survey

By Jonathan L. Israel, Julie A. McGinnis. Bobby Sharma, Michael J. Wall, and Kevin R. Schulz, of Foley

At the end of March – amid the first wave of COVID-19-related shutdown orders – an esports record was broken when 1.3 million broadcast television viewers tuned in to watch professional NASCAR drivers compete in a virtual race on FOX and FS1.

To the broader market, it was a clear signal that life under the coronavirus might be accelerating the industry’s expansion. Earlier that month, Verizon observed a 75% increase in video game internet traffic during peak hours and, in the second quarter, when live traditional sports were in lockdown, Twitch reported a 56% viewership rise year-over-year.

As the pandemic wears on, the 3rd Annual Esports Survey, conducted by Foley & Lardner LLP and others, draws on responses from hundreds of executives to explore perceptions on the current state of esports and what lies ahead at a crucial moment in its evolution.

Though still a young and growing industry – and one dwarfed by the $159 billion video gaming industry within which it sits – esports is expected to generate revenues of $950.3 million globally in 2020. While this may be less than the industry’s pre-pandemic forecast, it represents only a 1% decline from 2019, underscoring the strength of esports even in the face of widespread economic turmoil. In fact, the majority of our survey respondents (73%) expect the pandemic to generate greater investment and deal activity in esports in the near-term. But while the industry has managed to thrive in a year that has wrought havoc in so many other areas, even esports isn’t immune to the impact of COVID-19. This year’s survey saw a decrease in the level of esports investment expected from private equity and venture capital firms (40% expect increased investment from this group, down from 47% in 2019). And the inability to hold live large-scale events was the top factor cited among respondents who expect decreased investment in esports in the near-term.

The pandemic and related economic issues aren’t the only areas affecting the industry’s evolution. Take gambling, for example. Even amid the pandemic, legalized sports (including esports) betting in the United States has brought certain states sorely needed revenue. With more and more dollars on the line, however, survey respondents expressed concerns about high-profile match-fixing cases and a lack of adequate tools to detect fraud and cheating.

Legal risks also abound, with cybersecurity, intellectual property, licensing, and labor and employment matters among the top areas of concern identified in the survey. The latter has become increasingly prevalent of late, as popular players dispute contract terms with esports teams, organizations, and streaming platforms, and as #MeToo continues to send wake-up calls throughout the male-dominated industry. 

Finally, this year’s survey suggests heightened tension around the small number of game developers who exert significant control over the industry. At the same time, respondents are more conflicted than ever when it comes to the need for, or practicality of, a single, overarching esports governing body – suggesting, perhaps, that as the industry grows, it’s also fragmenting and developing increasingly complex and varied business models. 

Looking at the prior three years of survey data at a high level, it’s clear that executives involved in esports are becoming increasingly comfortable that the industry is on a strong footing, as well as more sophisticated about navigating the obstacles facing esports. While there are still challenges ahead, respondents are optimistic that COVID-19 has not derailed – and may actually accelerate – the industry’s growth prospects.

COVID-19 has been a boon for esports – but it’s not all smooth sailing.

Nearly three-quarters of respondents (73%) believe the pandemic will lead to more investment and deal activity over the next six months (Q4 2020 and Q1 2021).

More than half cite the drivers of this trend as being continued social distancing boosting engagement with video games and esports (61%), the growth of online streaming platforms (61%), and the increased movement of big brands into esports sponsorships (52%). 

This type of bullish sentiment may be expected for an industry that was already largely virtual. But responses from the 21% of respondents who believe investment in esports will decrease over this six-month period as a result of COVID-19 illustrate that the industry is not immune to the pandemic. 

For instance, a significant number of respondents in this group cited challenges stemming from the inability to hold large in-person events (77%), continued declines in spending on advertising and sponsorships (65%), and a hesitancy to invest in esports teams due to continued esports market uncertainty (46%). The latter factor coincides with the 31% who also noted the difficulty of sourcing capital beyond internal raises with existing investors. 

Meanwhile, frozen marketing budgets may contribute to the fact that while advertising and sponsorships ranked as the top area expected to drive revenue growth for the third straight year, the percentage of respondents selecting it as the most promising area actually decreased from 51% in 2019 to 41%. On the bright side, most respondents expect new technology developments will lead to more sophisticated advertising in esports over the next year, be it enhanced data analytics (67%), integration of ads within games and streaming platforms (64%), or advanced behavioral analytics that enable advertisers to better target their ads (63%). 

In-game purchases and revenue once again took the second-ranked spot among areas expected to drive revenue growth, followed by media rights.  

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