Multiple operating models
As e-sports is in a relatively nascent stage of development, there are several possible operating models that stakeholders can use for successful commercialization. On one end of the spectrum, game studios can organize e-sports tournaments entirely in-house and fund tournament prizes. This gives the game studios greater control over the use of their game and how the tournament is run.
On the other end of the spectrum, a start-up or even an association or society can partner with game studios and sponsors while focusing on the event management aspect of e-sports tournaments. This allows the organizer to develop expertise in managing tournaments, which can be applied across multiple e-sports. This flexibility is seen in the growing number of e-sports associations around the world and collaborations between some of these associations to tap into each other’s strengths. It is important for e-sports stakeholders to identify the model best suited to their objectives.
New business models
A new and increasingly popular business model deployed in e-sports is the use of loot boxes. As described in our previous client alert (April 17, 2020) on loot box warnings, loot boxes can be redeemed for random virtual items to be used in a computer game. These include power-ups and special equipment for e-sports athletes to use in competition. The element of chance injects unpredictability and excitement for e-sports fans. Outside of e-sports competitions, loot boxes are attractive to gamers because of the ability to gain an in-game advantage. Loot box sales have become a lucrative revenue stream alongside game title and hardware sales.
Loot boxes rely heavily on the element of chance; however, the line between gaming and gambling is a fine one. Therefore, developers need to be mindful of gambling regulations or risk loot boxes being in conflict with such regulations and becoming defunct. For example, Singapore is preparing to introduce a class license regime for “mystery boxes,” while other jurisdictions have already imposed regulations for loot boxes. E-sports organizers should ensure that they comply with local gambling regulations on loot boxes as well as other restrictions like advertising. Compliance with regulations is critical to securing long-term support from investors and sponsors.
Those who manage to successfully deploy new business models while staying compliant with regulations are poised to reap financial gains. However, noncompliance may result in substantial fines in certain territories. Even in the absence of legal restrictions, there is a growing movement to disassociate sports and gambling as seen in the Premier League’s upcoming restrictions on gambling advertising; thus, it will be interesting to see if the same will happen with e-sports.
Flexible competition formats and distribution
E-sports can adopt novel competition formats because the amateur–professional divide can be smaller than in conventional sports. This allows for mixed competition between amateurs and professionals that would be unheard of in conventional sports like Formula 1 and tennis.
Distribution of e-sports tournament streams is more flexible than for conventional sports. The barriers to entry are lower with the proliferation of free-streaming platforms, allowing anyone to broadcast their tournaments and everyone to view these broadcasts. Some streaming platforms provide a two-pronged boost to e-sports tournaments, boosting viewership with free viewing options while contributing to tournament revenue with paid viewing options that boast premium features. E-sports stakeholders should decide their distribution strategy based on the type of e-sports competition and distribution they intend to deliver. In addition, e-sports athletes are well placed to build online followings that could represent a source of work post-retirement.
Conclusion
E-sports has a variety of commercialization tools, and stakeholders should embrace these in their e-sports strategies in order to find their pot of gold.
Our recognized entertainment and media lawyers are experienced and highly familiar with the sector’s latest developments. If you wish to discuss any aspects of this alert, please reach out to our team or to your usual Reed Smith contact.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2023-138
