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The Excitement Around E-Sports Is Growing. But Where Are the Profits?

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It had been greater than three hours of tense, back-and-forth combat — projected across the large Jumbotron at San Francisco’s Chase Center — when the sellout crowd, thumping together inflatable thundersticks and yelling with excitement, sensed victory was at hand.

A South Korean e-sports team, DRX, guided their video game characters into the house base of the rival T1 squad and smashed its Nexus, a blue gemstone, to pieces, clinching this yr’s League of Legends world championship.

Fans roared their approval, fireworks flared, the winners embraced, and the losers sobbed into their keyboards. Executives from Riot Games, the League of Legends publisher, presented DRX with diamond rings sponsored by Mercedes, celebrating the top of the skilled video game scene.

It was a superbly choreographed event, the sort of spectacle gaming publishers had promised investors from the standard sports world after they first pitched them on putting their money into the rapidly growing e-sports industry within the mid-2010s.

“I remember seeing a team come out and the fans were going crazy and asking for autographs. I assumed, ‘Oh my gosh, that is identical to our experience,’” said Zach Leonsis, the son of Ted Leonsis, who owns the N.B.A.’s Washington Wizards and the N.H.L.’s Washington Capitals. The younger Mr. Leonsis invested in an e-sports team in 2016.

But despite the industry’s growth and appeal to the young consumers traditional sports owners are eager to attract, the cash has not followed. Some sports owners have soured on the industry’s short-term prospects after discovering that the methods that earn cash in traditional sports — like constructing fan bases in specific cities and striking lucrative deals with television networks — don’t all the time apply in e-sports.

Most haven’t yet turned a profit or seen a return on their investments, and the gaming publishers that control the most important competitive leagues in North America, like Riot and Activision Blizzard, are operating those leagues at a loss or simply starting to interrupt even.

Though major e-sports events sell out buildings just like the Chase Center and attract tens of tens of millions of viewers in China, tickets cost lower than for traditional sports games, and much fewer Americans are watching e-sports than the 12.4 million who watched the 2022 N.B.A. finals or the 17 million the N.F.L. averaged for 2021 regular season games, a difference meaning less interest from advertisers.

Most critically, leagues just like the N.B.A. and N.F.L. earn billions of dollars annually through broadcast deals with television networks, while many e-sports are streamed free of charge on sites like YouTube and Twitch. Some early revenue projections included anticipated broadcasting deals with Twitch and YouTube that were less lucrative and consistent than expected.

After all, e-sports investors didn’t expect the industry to supplant traditional sports in only a number of years. But some have still been underwhelmed by early returns.

“They definitely pitched us that the expansion of those leagues can be meteoric, and all of us drank the Kool-Aid,” said Ben Spoont, the chief executive of an e-sports organization called Misfits Gaming, whose backers include the owners of the N.B.A.’s Orlando Magic and the N.F.L.’s Cleveland Browns. “What has happened is that growth has not materialized as fast as we had hoped.”

There are other challenges. Most League of Legends competitions in North America happen at Riot’s arena in Los Angeles, where many teams are based. That deprives e-sports teams of a likelihood to earn cash hosting games or to construct a fan base in a particular region.

Activision aimed to vary that with leagues based on Overwatch and Call of Duty, its first-person shooter games. Each would hold home and away matches, with teams positioned across the country like traditional sports teams. Activision charged investors $20 million to hitch the Overwatch League.

However the league was just constructing momentum when the Covid-19 pandemic forced it to cancel in-person events. Since then, it has struggled to achieve traction. Activision allowed teams to defer fees to be within the league, and is now helping teams cover their costs, paying each of the league’s 20 teams about $1 million this yr, in keeping with an individual with knowledge of the league’s funds.

“Even with the recalibration brought on by the pandemic, we’ve had full arenas and record viewership,” said Joe Christinat, an Activision spokesman, adding that there was “overwhelming enthusiasm” for the brand new Overwatch and Call of Duty games. “Our fans want these leagues, and we remain committed to them.”

Investors have also realized that game publishers’ incentives should not necessarily aligned with their very own. Publishers can afford to operate money-losing e-sports leagues so long as they drive interest of their profitable video games, so they often prioritize growth over revenue. Riot, as an illustration, might hesitate to sign a contract to broadcast League of Legends exclusively on YouTube or Twitch because it could preclude viewers in China, where each services are blocked, from tuning in.

Those sorts of conflicting goals have at times led to tense negotiations.

“It’s a push and pull,” said Kirk Lacob, the son of Joe Lacob, who owns the Golden State Warriors. “I’ve had long discussions with various members at Riot over time.” Along with serving as executive vice chairman of basketball operations, the younger Mr. Lacob oversees the Warriors’ e-sports teams.

Kirk Lacob’s viewpoint is common among the many sports ownership groups which have bought or invested in e-sports teams, an inventory that features Stan Kroenke of the Los Angeles Rams, Robert Kraft of the Recent England Patriots and Hal Steinbrenner of the Recent York Yankees. A former gamer, Mr. Lacob discovered the competitive gaming scene lately and was enthralled by the prospect of reaching a young and growing audience. He stays bullish on the industry — but would really like to start out seeing some results.

“I actually imagine that where there are eyeballs, where there’s usage, there’s eventually revenue,” he said.

Gaming executives urge patience. They are saying e-sports, popular for a long time in Asia, are still nascent in North America, and ought to be considered more as a high-growth start-up than a completely mature business. U.S. viewers watched an estimated 217 million hours of e-sports content this yr, in keeping with the info firm Stream Hatchet, up from 147 million in 2018. “We frequently say that we’re still within the leather helmet days of the N.F.L.,” said Naz Aletaha, Riot’s global head of League of Legends e-sports.

Many investors within the space still imagine e-sports will eventually develop into a dominant, profitable industry. But within the short-term, some are “very frustrated,” said John Needham, Riot’s president of e-sports, adding that Riot has worked to persuade investors to embrace a unique monetization model.

Though sponsorships still make up a majority of revenue, a cornerstone of Riot’s strategy involves microtransactions: selling recreational League of Legends players in-game items for his or her characters which are themed around real-world e-sports events just like the world championship.

It seems like a distinct segment revenue source, but early numbers have been eye popping. When Riot hosted its 2022 championship event for Valorant, one other e-sport, it made $40 million from microtransactions alone. Half of that went to the league’s teams through a revenue-sharing agreement.

“That is where we’re going to disrupt the printed revenue formula, because that scales,” Mr. Needham said.

For now, the costly endeavor of fielding competitive teams is solely a catalyst for the actual revenue-generating operations at many e-sports organizations. Distinguished teams like FaZe Clan and 100 Thieves have morphed into more general lifestyle brands that provide viewers apparel and livestreaming entertainment. FaZe Clan, which went public this yr in what was seen as a bellwether for the industry, is losing money and cutting costs as shares of its stock plummet.

Felix LaHaye, the chief executive of United Esports, a gaming marketing agency, compared competitive play for e-sports organizations to a automobile company fielding a Formula One racing team — an expensive undertaking that attracts eyeballs and prestige.

“It creates value elsewhere of their ecosystem,” Mr. LaHaye said. “It’s value it to have a loss leader by way of a product that creates the brand, and you then find yourself selling normal products to people.”

Even Team Liquid, considered one in all the more competition-focused e-sports organizations, has made much of its money elsewhere and now has nine separate sources of revenue, including owning an e-sports encyclopedia website, said Mark Vela, the chief executive of Axiomatic Gaming, Team Liquid’s ownership group.

“It’s a natural evolution,” Mr. Vela said. “Everyone’s having to take a step back, and seeing what’s really working for us here.”

Team Liquid, which took in greater than $38 million in revenue last yr, just isn’t yet profitable, but Mr. Vela, whose ownership group includes the Leonsis father-son duo, said e-sports remain alluring due to the rare style of young, affluent viewer they attract.

Mr. Spoont can also be optimistic long run, but he just isn’t willing to attend. In July, he sold his European League of Legends team to a Spanish e-sports group for about $35 million. He said he was pivoting Misfits to concentrate on content creation, partly since it might be one other decade before competitive e-sports reach their potential.

“We were trying to perform as an industry what took the N.B.A. 50 years, but we were attempting to do it inside a five-year time period,” he said, referring to the numerous N.B.A. teams that weren’t immediately lucrative businesses. “Seems that it doesn’t occur.”

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