Introduction
When an unprecedented COVID-19 pandemic struck the world in 2020, the global financial system faced a severe strain on resources. Industries like sports and entertainment in particular were met with difficult economic downturns due to operational challenges, and health and safety concerns. However, despite the severe struggle, there was one industry that performed beyond expectations: esports. Electronic Sports, better known as esports, is a broad term for competitive video games, where tournaments are played between professional teams in organized leagues.
As people were forced to turn away from traditional sports and entertainment during the pandemic, the relatively new industry of esports continued to grow. In an international survey conducted by the Center for Esports Medicine, over 75% of self-identified gamers reported spending more time gaming during the pandemic, with a particular increased interest in esports tournaments. Esports match viewership grew by more than 38 million throughout 2020, driven by the industry’s global audience, an active and passionate community, and generous sponsorships and investors.
Despite this, the post-pandemic world reveals a different story regarding the future of esports. Although viewership continues to grow, organizations are not generating the same profits as they once did, and funds from sponsorships and investors are drying up. The aspects that initially allowed esports’ business model to succeed - such as the restriction of in-person events, which led to increased streaming revenue and the number of non-traditional sponsors capitalizing on the marketing opportunity - have now become the hurdles that the industry must overcome for its long-term success. This article will examine the necessary changes in the esports industry’s unsustainable business model, focusing on leveraging international funding and integrating with sports betting platforms as potential avenues to secure a sustainable revenue stream in an evolving market.
An Overvaluation of the Industry
Driven by grand expectations and rapid market growth of the gaming industry during the pandemic, the esports industry mainly attracted investment from venture capital firms. The industry generated approximately $1.1 billion in revenue in 2021 from sources such as advertising, merchandising, franchise fees, ticket sales and media rights. Additionally, deal activity and funding for the esports industry peaked in 2021, with 823 deals made in the year. However, the recent economically-contracting environment forced a harsh reevaluation of the industry’s growth prospects. While deal activity has continued into 2024, total fund levels have fallen to pre-pandemic levels, signaling a potential shift in investor sentiment.
Another investor with growing interest in the industry is the Saudi Arabian Public Investment Fund (PIF). This interest mainly stems from wanting to improve the country’s image, and aid Saudi Arabia's broader Vision 2030 initiative, which seeks to reduce the kingdom's dependence on oil revenues and cultivate a more diverse and dynamic economy. In recent years, Saudi Arabia has actively invested in traditional sports like Formula 1, Golf, and Soccer. These sports tend to have many longtime sponsors and never have a shortage of funding, therefore it’s difficult for Saudi Arabia to exercise significant control of these sports with their investments. However, looking at esports, the country is focused on becoming a dominant force in the field, with the PIF investing $1 billion in 2020 to own 2% of Reliance Industries, a company that owns one of India’s largest esports organizations, Reliance Games. Moreover in 2022, the PIF created the Savvy Gaming Group (SGG) to invest 1.5 billion into owning various gaming platforms (ESL, FaceIt) and invest in gaming
companies like Electronic Arts, Activision Blizzard, and Nintendo.
Unsustainable Financial Practices
While venture capital funding surged, with record highs in deals and funds raised, the industry struggled to convert this investment into consistent and reliable revenue streams, exposing financial issues. This is characterized by unreliable sponsorship deals, the average viewer’s limited spending power, and unsustainable spending on player salaries and tournament costs. Over the years there have been creative methods to source new streams of revenue, however, it’s clear that none have proven successful in the long term.
Embracing Saudi Arabian Funding
Embracing funding from Saudi Arabia represents a pivotal opportunity for the esports industry amidst its current economic challenges and need for stability. The Esports World Cup (EWC), backed by substantial Saudi investment, exemplifies this potential with its record-breaking prize pool exceeding $60 million and global participation from top esports organizations. While concerns about Saudi Arabia's human rights record and motives for investing in esports persist, the financial infusion from entities like the Public Investment Fund could significantly bolster the industry's resilience and expansion. By forging partnerships and hosting large-scale events like the EWC, Saudi Arabia aims to position itself as a leading hub for esports, attracting international attention and fostering economic diversification. While ethical considerations are paramount and require careful navigation, the strategic benefits of embracing Saudi Arabian funding include enhanced global exposure, increased participation from top-tier teams, and the establishment of sustainable revenue streams necessary for the industry's long-term viability and growth.
Integrating Sports Betting
According to Statista, the largest market segment in the esports market is Esports Betting, with a market volume of US$2.5bn in 2024. Full integration of sports betting into esports represents a strategic move to diversify revenue streams and capitalize on the growing popularity of competitive gaming.
Riot Games, for example, has shown interest in potentially allowing betting brands to partner with teams within its Valorant esports ecosystem, despite current restrictions outlined in its competitive rulebook.
Esports Technologies, an online gambling platform, wants to bring esports gambling to a wider audience. The company filed a comprehensive patent provision on June 23, 2021, that will allow betting on gaming competitions and live-streaming sports entertainment events.
This shift could unlock significant financial opportunities for esports teams, who are facing financial pressures from a tightening venture capital market and profitability challenges. Sports betting platforms offer a new avenue for fans to engage with esports beyond traditional viewership, fostering deeper connections and increasing viewership through heightened interest in match outcomes. By embracing responsible and regulated betting practices, esports can not only enhance fan engagement but also bolster financial stability, mirroring the successful integration of sports betting in traditional sports, which has driven substantial increases in viewership and revenue. As esports continues to evolve, leveraging sports betting could prove pivotal in sustaining growth and expanding its global footprint.
Ethical Considerations
In looking at these two business strategies, ethical concerns will inevitably arise. Firstly, in leveraging international funding from Saudi Arabia, and relying on their funding for the industry's growth, there is an unavoidable issue of sportswashing, where investments in sports are used to divert attention from controversial actions or policies. Many fans of the industry argue that by associating events with the country, Saudi Arabia may be seeking to wash its image internationally while deflecting scrutiny. On the other hand, it is difficult to stop a country from doing this, as well as stop organizations that are in dire need of funding from partnering with the country. However, giving these ethical conundrums considerable thought is necessary. For sectors that require funding, financial collaborations with these kinds of organizations might seem inevitable, but it's crucial to be vigilant and respect moral principles. Industries can reduce the possibility of unintentionally supporting actions that go against their beliefs or the interests of their stakeholders by withholding full transparency about these partnerships. This proactive strategy not only protects against unethical behaviour but also encourages integrity and accountability.
Secondly, rules and regulations will need to be put in place for betting sites. With the majority of viewership coming from the youth, there is a heightened responsibility to ensure that betting practices are conducted ethically and responsibly. These regulations should encompass age restrictions, strict monitoring of gambling advertisements during esports broadcasts, and transparency in odds and payouts.
Conclusion
As the esports industry matures, addressing profitability challenges becomes essential for its sustainable growth. By navigating issues of overvaluation, financial sustainability, and evolving market dynamics with strategic solutions—such as leveraging international funding, emulating traditional sports standards, and exploring betting integration—esports can pave the way toward a prosperous and resilient future. With a revamped strategy, esports stands to solidify its position as a leading force in the global sports and entertainment landscape.
