Navigating the Tides: Strategies to Ensure Sustainable Revenue Streams in Esports

26 April 2024 | Research Article

Introduction

Esports has transcended its niche beginnings to become a global phenomenon. Despite its growth, a recent PwC survey highlights a critical issue: 81.3% of esports teams are uncertain about their ability to develop stable revenue generation strategies. This instability poses the largest threat to the long-term growth of these teams.Traditional revenue models from the broader sports industry often do not translate directly into the esports sector, leading to significant financial uncertainties. This discrepancy underscores the urgent need for esports organizations to innovate and tailor their monetization strategies specifically for their unique market dynamics.In this article, we address crucial concerns that are foundational to understanding and resolving these financial challenges:

Sponsorships drive the Esports industry but causes instability in recurring revenue streams

As shown in the chart above, sponsorships and advertising account for the bulk of revenue for eSports.

According to Patrik Sättermon, Fnatic’s Chief Gaming Officer, “It is estimated that around 95% of the money generated by our eSports teams comes directly from sponsorship deals.

The novelty of eSports has attracted many well-known sponsors; however, teams have struggled to make sponsorships a sustainable source of revenue.
eSports teams with a significant amount of recurring revenue ( subscriptions, etc.) are less risky than teams that have less consistent revenue sources (sponsorships, prize money, merchandise sales). The less risky an entity, the greater the value of that entity.

Uncovering the Roots: The Instability of Sponsorship-Dependent Revenue in Esports

The infographic portrays a comparison of the sponsorship dynamic between esports teams and sponsoring companies, focusing on dependence and negotiation power as the core elements.

Esports Teams:

  • High Dependence: They rely heavily on sponsorship, with more than three-quarters of their revenue coming from such deals. This high level of dependence makes sponsorship crucial for their survival and growth.
  • Low Negotiation Power: Despite having many potential sponsors, the critical reliance on sponsorship revenue weakens esports teams' negotiation power, as they cannot afford to lose their main income source.

Sponsors:

  • Low-Medium Dependence: Sponsors have a diverse portfolio, with the esports sponsorship being only one part of their marketing mix. This diversity allows them to be less reliant on any single esports partnership.
  • High Negotiation Power: Their lower dependence on partnerships with esports teams and the specific requirements they have for sponsorship opportunities place sponsors in a stronger negotiating position.

The infographic thus highlights a significant imbalance: esports teams need sponsorships more critically than sponsors need any particular team. The implication is that, to stabilize sponsorship revenue, esports teams need to build sustainable leverage. This can involve cultivating a strong, dedicated fan base and achieving competitive success to enhance their appeal to sponsors, thus improving their negotiation power.

Strategies for ensuring stable revenue streams

Aim

Major Revenue: Control
The major revenue for an esports team comes from sponsorships, tournament winnings, and broadcasting rights. The goal of "Control" here means the team should manage these key income sources effectively, maintaining strong relationships with sponsors, consistently performing well in tournaments, and securing lucrative broadcasting deals. Stable fans equal stable sponsorships, which in turn equal stable revenues.

Minor Revenue: Expand
Minor revenue streams include merchandise sales, fan memberships, small-scale local competitions, and online content creation. The goal of "Expand" indicates the need to grow these areas, which could involve broadening merchandise lines, increasing fan engagement initiatives, or creating more content for online platforms. Money comes from fan purchases. Stable fan base helps make more predictable marketing investments.

Strategy

Control: Fan Engagement + Capability Optimization:
This strategy involves increasing engagement with the fanbase, possibly through social media, community events, and exclusive content, thereby boosting loyalty and spending. Capability optimization could refer to improving team performance with better training facilities, coaching, analytics, and player development to ensure success in tournaments, which underpins major revenue. Winning games by optimizing capabilities attracts attention. Effective fan management strategies convert attracted people into loyal fans. These loyal fans, in return, amplify the visibility of the club and influence the bottom line of the sponsor. HP sponsors a wide range of Esports teams and leagues to sell its OMEN Line of Gaming PC’s to the fan base. It constantly evaluates the fan engagement matrix of the teams it sponsors.

Expand: Revenue Diversification

Diversification in esports could involve exploring new revenue models like partnerships for co-branded products, expanding into emerging markets, leveraging players' personal brands, or exploring innovative content monetization strategies. This helps in tapping into new revenue streams and reducing the financial impact of a poor tournament season or the loss of a major sponsor. Stable fan base helps make more predictable marketing investments. Companies like Kboom.gg have taken a step to stabilize fan management.

Overall Objective

More Predictable Revenue:
The combined effect of controlling major revenue streams and expanding and diversifying the minor ones aims to provide the esports team with a more predictable and stable income. This is crucial in an industry where tournament winnings can be variable and sponsor interest can fluctuate. A predictable revenue stream ensures the team can plan for the long term, invest in player and infrastructure development, and maintain financial health even in the face of competitive uncertainties.This comprehensive framework encompasses the interconnectedness of fan engagement, sponsorships, and revenue streams, providing a roadmap for esports teams to secure their financial future and thrive in the competitive landscape.

Conclusion

In conclusion, the esports industry faces significant revenue stability challenges due to heavy reliance on sponsorships. To overcome this, teams must diversify their revenue sources, enhance fan engagement, and optimize team performance. Building a stable fan base and achieving competitive success are key to strengthening negotiation power and securing more predictable financial outcomes. By adopting these strategies, esports teams can ensure long-term stability and growth in a competitive market. We will delve into all these aspects in greater detail in our upcoming articles.

Reference Sources: Newzoo, Pwc Sports Survey, BCG Esports Report, Verified News