A shift in the esports revenue distribution model away from prioritising sponsorship to focus more on in-game digital purchases is set to become the new norm, industry experts have predicted.
Esports has largely attempted to replicate the business model of the traditional sports industry, sharing centralised revenues with teams, but the economic downturn that has hurt the sponsorship sector has forced the need for change.
Leading game developer and publisher Riot Games this month announced plans to create a League of Legends’ Global Revenue Pool (GRP), which will collect revenue from digital content and allocate it to franchised teams based on several factors, including their competitive performances and their level of fandom.
As well as earnings from the GRP, teams will also receive a fixed stipend from Riot. The changes come at the expense of moving away from sponsorship revenue sharing, albeit Riot said it would still contribute 50 per cent of other direct revenues — such as sponsorships and media rights — once it “recovers its annual investment in LoL Esports.”
Riot said it took inspiration from the business model of another of its titles, Valorant, where partner teams receive a share of in-game item sales, which amounted to $33m (€30.7m) in total in 2023.
The sale of team logo stickers as well as player autograph stickers in rival firm Valve’s Counter Strike, meanwhile, has proven hugely successful.
Rather than competing for the same limited pool of sponsorship money, the new model creates aligned financial incentives between stakeholders.
While Riot’s move is seen by some in the esports industry as pioneering, Alex Inglot, commissioner of the ESL Pro League, a leading global Counter Strike League, believes it is an acknowledgment that the game developers and publishers need to reward and nurture the team organisations that compete in their titles.
Speaking ahead of his appearance on an esports panel at the SportAccord summit in Birmingham, Inglot told SportBusiness: “Riot has realised that the traditional sport-style buckets of revenue such as sponsorship and broadcast are not where everyone thought they would be or indeed needed them to be to prop up the whole ecosystem.
“Twitch and YouTube deals have shrunk, while the current macro economy means sponsorship income is also being rigorously re-evaluated. Pair that with costs that have remained stable, and the maths comes under huge pressure. Riot has realised that an urgent re-think was needed.”
John Needham, president of esports at Riot, has claimed the changes to LoL’s business model will result in “better financial upside and more consistent revenue for teams, putting LoL Esports on a path to long-term sustainability”.
He continued: “We’re excited about the GRP. We believe it rewards teams for their partnership with the league while incentivising them to be competitive and grow fandom and engagement for the sport. Most importantly, it puts us in a position to win together.”
And it’s likely to be a model rival publishers and game developers adopt.
Inglot said: “There’s an acceptance now in the industry that if you want teams to continue to support and invest in your games, you need to give them a better revenue share.
“Indeed, it was this recognition that was one of the cornerstones of the Louvre Agreement, struck up in the Counter Strike scene back in 2020. But that agreement didn’t cover in-game items as the publisher was not a party. Today’s teams and players need, and indeed deserve, a healthy chunk of in-game item revenues.
“It is worth remembering that teams used to only be in one or two games and so they really had nowhere else to go and had to agree to offered revenue models. Now these teams have got a) bigger and b) are much more diversified. They’re in multiple games, some of them are in 11,12, 13 different titles, so they can easily compare and contrast business models and say ‘actually, this game doesn’t work for us and our investors anymore. The maths doesn’t work. The revenues are too low and we’re going to exit this game’s ecosystem’.
“So, whereas in previous years, the likes of Riot might have said, ‘this is our deal, take it or leave it’. Now teams are not averse to responding, ‘ok, I guess we’ll leave it’.”
Inglot will speak on the value of esports and gaming for rights-holders, alongside Paul Foster (president of the Global Esports Federation), Alban Dechelotte (CEO of G2) and Alice Dearing (a gamer and Olympic open water swimmer), at the SportAccord World Sport & Business Summit 2024 held in Birmingham, UK from April 7-11.