The Underestimated Volatility of eSports

Imagine for a second that it’s 2016 and you’re the owner of an NBA team. Imagine still that you’re in an alternate reality and Steph Curry is not only considering leaving Golden State after his record-breaking year, he wants to join your team. You negotiate a contract and though you had to trade your firstborn child, you got Steph Curry in the wake of his absolute domination of the NBA!

steph
Whatever you paid, you probably underpaid. Image from fivethirtyeight.

You reformulate your team, draw up new plays, order merchandise, and create a rousing marketing campaign – all built around the team’s new superstar.

Just before the season starts, you get an e-mail. It’s a summary of rule changes the league will be enacting in an effort to “rebalance the game”. There’s a lot to sift through, but one key change hits you like a punch to the gut: 3-point shots will now be only worth 2.5 points. Your star player, the keystone around which you reshaped your entire franchise, just lost a big chunk of his value.

While the NBA suddenly changing the point structure of basketball is almost as unlikely as our crazy hypothetical, a comparable situation could very easily occur in eSports. Indeed, it already has on multiple occasions.

A New Player Has Entered the Game

For the uninitiated, eSports is the industry built around competitive matches between professionals playing videogames such as Overwatch, League of Legends, and Counter-Strike. eSports has ballooned in the last decade, transforming from a Starcraft-crazed subculture in Korea into a worldwide phenomenon expected to bring in $1.5B annually by 2020. Hosting and broadcasting these events to a passionate, well-documented demographic is very appealing to advertisers, and this characteristic has helped make eSports the fastest-growing segment of the broader videogame industry.

ohanian c9
Ohanian sporting a Cloud9 t-shirt at the French Open.

Consequently, eSports has generated some surprising interest. Aside from traditional VCs, eSports investors include traditional pro sports players (Joe Montana, Shaq, the aforementioned Steph Curry), team owners (Robert Kraft, Jerry Jones), entire NBA franchises, and even entertainers (Jennifer Lopez, Steve Aoki). Reddit co-founder Alexis Ohanian summarized the prevailing sentiment among these investors when he said: “Growing up, I wanted to own an NFL team. Now, the obvious move is to invest in an eSports franchise.”

The Game(s) Have Changed

As both a startup nerd and a regular nerd, I hope eSports continues its blistering growth and I expect it will. Videogames have always been a favorite pastime of mine, and I lost it when I saw an Overwatch broadcast on TBS. But there is a stark difference between traditional sports and eSports that needs to be well-understood by investors: competitive videogames are incredibly dynamic. It’s one of the huge reasons that I don’t play them anymore – I simply can’t keep up, and being behind on an update means dragging my team down (and enduring the toxic ridicule many of these games are known for). I’ll take my single-player RPG, thank you very much.

This is where the comparison to traditional sports breaks down, and any investor relying on an understanding of traditional models is overestimating their advantage.

From their first alpha release to worldwide tournaments and beyond, these games are constantly patched and updated. Sometimes changes are intended to create a more perfect, “balanced” game. Other times they are simply meant to shake things up and keep the game fresh for the amateurs.

This highlights a fundamental tension that developers of competitive games deal with: creating a fair and reliable showcase for professional players’ dexterity and decision-making while appealing to the casual players that make up the lion’s share of their revenue. Over-indexing on the former compromises the average user’s experience in favor of what’s essentially a marketing opportunity. Leaning too much into the latter risks alienating professionals, providing an opportunity to competitors that can appeal to the celebrity e-athletes that wield massive influence over their followers.

Cross-Platform Play

One solution that has been deployed with some success is to “freeze” a game at an earlier patch before a competition, with the players running a legacy version of the game hosted on a separate server. Streaming headaches aside, this is hardly a perfect solution. Like traditional sports, tournaments are often the culmination of annual league play, and it would be challenging to freeze the game for an entire season while casual players’ experience continued to evolve.

Platforms like Twitch make it effortless for spectators to switch between events, games, and individual streamers, and the audience is more likely to do so if regular-season play and tournaments are held on “out-dated” versions of a game.

The reason that eSports are so engaging is that the audience members actually play the game. A report by Mindshare North America found that audience members watch not only to root for their favorites, but because they want to improve their own skills. There’s far less to learn from watching professionals play an obsolete version of the game. Mindshare also found nearly two-thirds of spectators watched games they themselves play. You see where I’m going with this.

Since no-patch leagues aren’t much of a solution, the volatility of eSports is likely to continue even as publishers and organizers get savvier about the timing of patch deployments.

Don’t Hate the Player (or the Game)

To be clear, I’m not telling anyone to stop investing in eSports – I love videogames and am eager to watch the industry grow. But in the spirit of moving things onward and upward, here are some quick takes on where I see real opportunity:

The excitement of sports, whether physical or digital, comes from those dramatic down-to-the-wire moments where every last bit of effort determines the outcome. In these moments, a 10% (or even 1%) change to a rule could have drastic consequences for the game and the franchises involved.

This presents an opportunity for entrepreneurs to synthesize data, forecast patch updates and advise teams on how to mitigate risk. That same dataset could be used to analyze players’ techniques and habits to optimize team composition and devise competitive strategies ahead of those changes. The data is there – these games literally boil down to ones and zeroes. Billy Beane would have a field day with League of Legends (no pun intended).

Investors, do what you do best and diversify. Targeted above-platform investments are essentially sports betting on a game without knowing what the rules will be. Putting all your eggs on one player, one team, or even one league is unnecessarily risky. Make a variety of investments to whatever extent possible. Many “team” brands are already doing this and are actually an assembly of teams competing across top eSports games.

Institutional investors will find returns that stack up better with the venture model in the platforms and technologies that enable these competitions: audience analytics, betting infrastructure, advertising platforms, and streaming support / optimization. These technologies will form the bedrock of the eSports temple, regardless of the idols worshipped above-ground.

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