Esports is by no means a new industry. It’s been around since the first gaming consoles became available in 1972. Since then, this industry has become a global powerhouse, with no signs of slowing down. In 2022, 530 million viewers followed esports on platforms like Twitch, and this is expected to soar to 577 million by 2024. By 2023, the projected market reach of esports is $4.5 billion.
In a nutshell, esports refers to professional video gaming watched by an in-person or virtual audience. However, its growing popularity and influence means it’s so much more than that.
The Global Impact of Esports
As of 2022, esports was recognized as an official sport by the International Olympic Committee. Several professional sports leagues are also joining the race, including the NBA, which has established an NBA2K league with 21 teams. In addition, more than a dozen US universities are rolling out undergraduate programs in esports and game studies.
These stats are indicative of the global reach of the industry, as well as a continuously expanding market opportunity.
This is why advertising and sponsorships in esports are an extremely lucrative business. At the same time, merchandise, ticket sales, and media rights open up a seemingly limitless revenue stream.
With all that being said, it’s no wonder the industry relies heavily on monetizing its audience. Naturally, this has led to a diverse financial landscape in the industry.
The Financial Landscape of Esports
In traditional sports markets, media rights are one of the largest income earners. However, as explained above, revenue streams for esports are diverse.
Despite most esports games and tournaments being streamed online, ticket sales to tournaments held in arenas are still a profitable income stream. Together with merchandise, ticket sales brought in over $100 million in 2022.
Media rights revenue, which secures the rights to show esports content on specific channels or platforms, was estimated at just under $208 million in 2022.
With investment opportunities across a range of different subsectors, including team ownership, event organization and game development, investors in esports are equally diverse. They include regular sports franchises and celebs, well-known brand marketers and the leagues themselves.
Despite this, the industry’s reliance on streaming and its resultant low per-fan spending mean that advertising and sponsorships in esports are without a doubt the main revenue generators.
The importance of advertising and sponsorships in esports
In 2022, sponsorships accounted for over 60% of esports revenue, bringing in $800 million from endemic and non-endemic sources. Respectively, these are businesses within the gaming industry, and those who are not, like lifestyle brands.
On the other hand, there’s advertising income. This is generated by targeting viewers, through ads shown in livestreams, or more traditional means like billboards and commercials. According to a report by Activision Blizzard, esports advertising is better at holding viewers attention than that of traditional sports.
Considering that the esports market is expected to be worth at least $4.39 billion by 2028, with several organizations listed on the NASDAQ and New York Stock Exchange, this is great news for advertisers and potential sponsors. After all, it indicates a growing investment opportunity.
The Unique Nature of Esports Advertising
There are a few key differences between traditional sports and esports when it comes to sponsorships. This is mainly a result of the unique challenges faced by esports.
For example, traditional sports have clearly defined owners, players and viewer demographics. In esports, many brands aren’t aware of who the various esports companies are, or their viewership statistics.
Moreover, esports’ reliance on technology poses an additional problem. While esports advertising is effective for retention, the prevalence of virtual private networks (VPNs) means that advertising is trickier, as geographic information can be skewed. Similarly, the use of ad blockers means that some viewers aren’t being targeted by marketing campaigns.
Still, the global reach of esports could allow advertisers to reach a wider audience than through traditional sports, for a fraction of the cost.
Reputation management is another crucial aspect of esports advertising. For example, the games streamed may feature violence or nudity. Advertisers whose brands are associated with such aspects could face backlash over their principles.
Factors to Consider in Esports Sponsorships
Like traditional sports sponsorships, there are different kinds of esports sponsorship. This includes sponsoring a specific league, team, or individual player. Choosing who or what to sponsor depends on market segmentation. But while this is rather straight-forward in traditional sports, esports market segmentation is more complicated. It is segmented by revenue model (media rights, advertising, sponsorship, merchandise, and tickets), streaming platform (like Twitch, YouTube, or coverage on sports channels like ESPN), as well as geography.
Correctly identifying your market segment can have several benefits. These include global brand exposure, recognition, and credibility. On the downside, potential negative brand transfer is a threat. As with advertising, the content of games could lead to sponsors being associated with violence or other bad behaviors.
Despite the risks, it’s possible to have a highly effective sponsorship campaign in esports.
Case Study: Red Bull and Street Fighter
In conjunction with the Street Fighter game series, energy drink Red Bull launched Kumite, a multi-day tournament held in locations across the world. The tournament pits international players against each other, with the winner receiving a cash prize.
This is one of the reasons Red Bull has become a heavyweight in the esports world. Another is for the company’s significant investment in the industry, through the creation of arenas and teams. In 2018, the brand constructed an esports studio – the Red Bull Gaming Sphere – in the United Kingdom. A second location was later opened in Stockholm. Earlier in 2023, plans were also announced to construct the largest studio to date in Denmark.
This partnership has been valuable for Red Bull. The brand has seen an increased market share among esports viewers. Moreover, its brand awareness has skyrocketed, with 87% of esports fans able to name Red Bull as a main sponsor in the industry.
But what does the importance of sponsorships mean for esports accounting?
Accounting Strategies for Advertising and Sponsorships in Esports
In the realm of esports accounting, there are several factors to consider.
As mentioned above, esports have various channels for revenue generation. Identifying where this revenue is being created, as well as the resources expended, is crucial.
Accurate financial reporting and planning in esports depend greatly on when and how to recognize income from sponsorships and advertising deals. To begin, it’s important to understand the differences between the two.
According to the IRS, advertising is any messaging or material that promotes a business, product or service through qualitative comparison language, using pricing information, or inducing viewers to conduct commerce.
Sponsorship refers to any payment for which the business has no expectation of return benefit, and doesn’t include a formal arrangement to provide a return.
Next, it’s vital to know when to recognize and report this income. This depends on when a sponsored event happens, and the specifics of the associated contract. For example, payments from sponsorship contracts that span several years should be recorded as deferred income. The reason? The revenue is recognized proportionately throughout the contract.
Then, it’s important to establish the valuation of the contribution. For instance, it may take the form of in-kind or exchange transactions.
Another thing to consider is managing multi-currency transactions, given the global reach of esports.
There are several challenges associated with forex transitions. These include:
- Costs of currency conversion and bank fees.
- Exchange rate fluctuations.
- Accounting adjustments and reconciliations.
- Risk management for potential security breaches.
- Regulatory compliance across different regions.
- Payment tracking.
For this reason, esports accounting faces specific considerations.
Challenges in Esports Accounting
The fluid nature of the esports industry (with changing games, platforms, and audiences) can result in a lack of standardization in accounting practices. This is particularly true when we consider the volatility of the market, based on changes in player popularity, game trends, and emerging technologies.
Accurate financial management therefore depends on features like real-time reporting, fraud detection, and regulatory compliance tools.
However, this means that a regulatory framework is essential.
The regulatory landscape of esports
Unfortunately, esports regulations vary across regions. To rectify this, attempts are being made to bring about regulatory uniformity.
Bodies such as the International Esports Federation (IESF) and the World Esports Association (WESA) have been established, along with independent regulatory bodies in countries like South Korea, Japan, and India. However, there are currently no internationally established laws regulating the industry.
This makes risk management within the industry a necessity.
Risk management in esports
For esports investors, protection against financial uncertainties is paramount, especially given the technological dependence of the industry.
For example, a recent study found that the gaming and esports industries are targeted in 37% of all global distributed denial of service (DDoS) attacks.
These attacks can be used for several purposes, including match-fixing, fraud and extortion of sponsors or viewers. This can have significant ramifications for investors, including tournaments being moved offline. Such a move could drastically diminish advertising potential and earnings.
As a safety measure, risk mitigation should include protection against DDoS attacks. This can be done in many ways, including:
- Upgrading hardware.
- Scaling up network bandwidth.
- Using a DDoS filter.
The risks associated with these attacks also impact esports accounting. However, ensuring that you follow best practices can mitigate this.
Best Practices for Esports Accounting
Staying updated on industry trends and accounting standards is paramount in esports accounting. CPAs who work in this industry can provide guidance in this regard. For example, accountants can assist you with revenue reporting, tax planning, and strategic cash flow management.
In addition, given the accounting complexities mentioned above, making use of software tailored for the esports industry is highly recommended. For example, QuickBooks or NetSuite software platforms allow for tailored accounting.
In addition to working with a CPA, we recommend collaborating with marketing and legal teams to ensure clarity in sponsorship contracts.
Like the industry itself, esports accounting practices are likely to continue to evolve. But what does this mean for the dynamics of advertising and sponsorships in esports?
The Future of Advertising and Sponsorships in Esports
Given that the global esports market is projected to grow exponentially to bring in several billion dollars, advertisers and sponsors will likely need to make adjustments. After all, with increased revenue, the industry will become more competitive.
This could lead to a change in advertising formats. Emerging technologies like augmented reality (AR) and virtual reality (VR) could become valuable assets in esports, particularly due to the industry’s reliance on technology. This could lead to a vast new income source, valued in the millions of dollars.
Blockchain technology could also be a game changer, through revolutionizing sponsorships by streamlining donations and fees. Blockchain could also lead to tokenization of digital assets for viewers and content creators. That’s exactly why it’s been predicted that the sale of in-game items associated with team IP or player likenesses will be the fastest-growing revenue stream in the next half-decade.
Despite this, these changes will require alterations in regulatory and legal frameworks. Consider, for example, the rise of esports betting. To ensure ethical betting, we can only hope the regulations managing esports will evolve as quickly as the industry itself.
Speak to one of our CPAs about esports investment by scheduling a discovery call.
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