Olswang on eSports: opportunities for the gambling sector

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

As explored in the first instalment of the Olswang on eSports series, the eSports industry has undergone rapid expansion in recent years and, with such growth set to continue, the commercial world has begun to take notice of what was once deemed little more than a subculture. In this article we delve deeper into the opportunities that eSports offers to the gambling sector and analyse some of the obstacles that operators face in monetising the vast following that eSports has accumulated to date.

The eSports gambling market

Gambling on eSports is currently primarily limited to sports betting and fantasy offerings. The former is similar to traditional sportsbook betting, with users betting on live matches. As evidenced by Sky Betting & Gaming’s entry into the market in October of this year (through its partnership with Betgenius), mainstream operators are starting to enter the market. The likes of Betway, William Hill and Paddy Power have also started to offer bets on eSports. Despite this uptake, however, the potential of the market has yet to be fully realised.

Dedicated eSports betting services also exist. Seattle-based Unikrn, for instance, launched a platform (the Unikrn Arena) in September. This allows users in certain jurisdictions to place cash bets (such as the United Kingdom and Australia), whilst in the US customers are limited to placing free bets in return for “Unikoins” (a virtual currency that can be used to enter prize draws on the Unikrn Marketplace for a variety of gaming products).

Fantasy eSports meanwhile are similar to daily fantasy sports services. Rather than drafting typical athletes into a fantasy team, however, customers select professional gamers, before entering their fantasy team into competitions for the chance to win cash prizes. As with sports betting, traditional daily fantasy sports operators, such as DraftKings, have started to incorporate eSports into their offerings, whilst dedicated fantasy eSports sites have also emerged. In relation to the latter, Vulcun is the largest, having paid out more than $7 million so far this year. The company has seen rapid investment, raising $12 million despite only launching in January 2015, and this is just one example of the entrepreneurial appetite for dedicated eSports gambling. Unikrn has also seen similar investment, raising $10 million since it was founded in November 2014. This funding illustrates the potentially lucrative nature of the cross-over between eSports and gambling, and the fact that this is starting to be realised by investors.

The potential for eSports gambling

As with predictions for the growth of eSports as an industry, expectations for eSports gambling are impressive. Research firm Eilers Research estimate that the market is already substantial with 590,000 real-money fantasy eSports customers, 1.72 million eSportsbooks customers, and 3.2 million players placing wagers with in-game items via informal betting markets in 2015 alone. Eilers’ base case for eSports betting growth, meanwhile, sees 19.4 million individuals wagering $23.5 billlion on eSports by 2020, generating $1.8 billion in revenue. Whilst such predictions may at first glance seem somewhat optimistic, expectations of major growth are echoed by experienced operators already delving into the eSports market. Betway, for instance, have stated that eSports already regularly features in their daily top ten sports for turnover, and with the launch of their dedicated eSports portal they clearly see further growth here.

What are such high expectations founded on?

Firstly – as explored further in the first instalment of Olswang on eSports - if the growth potential for eSports as a whole is assumed to be viable, it is little wonder that great potential is seen in eSports gambling. With the number of events and spectators expected to continue to grow, the market is very much seen as one that is thriving. The large online viewership, in particular, could be fundamental to the success of online gambling offerings in this space.

Secondly, the eSports fan demographic is seen as one that holds much promise. Fans tend to be young - with 56% in 2014 between the ages of 21 and 35 according to ESPN – employed, and not necessarily part of the existing pool of gamblers. In this sense an opportunity exists to attract a brand new, potentially lucrative, customer base rather than poaching existing customers from competitors.

Finally, the nature of the product lends itself well to the application of gambling. Quasi-betting is already wide-spread amongst gamers through ‘lounges’ (such as dota2lounge.com), with players betting in-game products on the outcome of matches. Such sites are already incredibly popular amongst eSports fans suggesting that they may well be amenable to more traditional gambling options too. Furthermore, it suggests that virtual currencies (such as bitcoin) may also find a ready market: with eSports fans likely to be more tech-savvy than the average person, it isn’t a giant leap to predict that they may be more comfortable with crypto-currencies.

Failed potential?

Whilst the above paints an incredibly promising picture, eSports betting is not without its cynics. A report from playable media and games market research company Superdata found that the sector hasn’t grown to the extent expected, with betting on eSports accounting for only 7% of the overall eSports market. At the close of 2015 Superdata estimate that the market is worth $747 million, with betting and fantasy sites accounting for $55.8 million of this. It is claimed that this more modest than expected share is primarily due to eSports fans continuing to wager virtual gaming content instead of cash.

As mentioned above, however, such a trend may well prove to help eSports gambling to flourish as the use of virtual currencies could prove popular. The use of such currencies, however, is not without its own problems. Although the Gambling Commission have clarified that bitcoins, for instance, will be deemed ‘monies worth’, and hence any websites offering gambling with bitcoin to customers in Great Britain will come under its remit, the regulatory landscape is unclear in other jurisdictions. In the US in particular this appears to be a grey area, and any operator looking to capitalise on the potential application of crypto-currencies should tread carefully.

Irrespective of predictions for growth, it therefore becomes clear that there are certain hurdles to the application of gambling to eSports, to which we now turn.

Challenges to attracting customers

Operators must attempt to capture the eSports demographic with the right approach. As explored above, although the market is by no means saturated, gambling is not new to eSports. Established players in the market already exist and operators looking to capture a segment of the industry will need to find ways to offer something distinctive.

eSports fans are also markedly different to traditional sports fans and operators should reflect this in their approach to the market. Operators should build up teams of eSports experts internally and differentiate their brands as necessary to appeal to the demographic. It is perhaps all too easy for operators to not only view eSports fans as traditional spectators, but also to group each eSport together. Failing to distinguish between the various games on offer could prove costly: from Call of Duty to League of Legends, each game is distinct and gambling models will apply differently to each.

Issues with integrity

As with traditional sports, the introduction of gambling is seen by many to have incentivised match fixing, and eSports, despite its relative youth, has already been the subject of numerous scandals. Last year, for example, a match fixing ring was discovered in the CS:GO CEVO Professional Season 5, and as recently as last month arrests were made in South Korea of a dozen individuals involved in fixing StarCraft 2 matches earlier in the year.

By their very nature, eSports are perhaps more vulnerable to such risks than traditional sports for various reasons. With so much of a player’s performance riding on mental, rather than physical performance, a poor showing can derive from a whole manner of reasons, making cheats difficult to spot. Furthermore, their often one-on-one nature makes the orchestration of fixing much more straightforward. Meanwhile, whilst there is a worldwide governing body – the International eSports Federation – many leagues, such as Major League Gaming, operate independently from this and, coupled with the sheer number of leagues that exist, policing match fixing has proved difficult.

A lack of governance may well have given eSports the flexibility to enable its staggering growth, but it could also prove its downfall. Ultimately match fixing is a threat not only to eSports betting but to the industry as a whole, as if its integrity is called into question and spectators believe matches are being fixed, the sport’s crucial viewership could dry up. Calls have been made for greater governance, however, by various bodies, such as ESL (the eSports league and promoter). ESL has also partnered with Sportradar, a sports data and integrity firm, to help deploy its fraud detection system to uncover corruption in betting. Despite such efforts, however, the integrity of the sport has certainly been tested and similar action should be more widespread to tackle the issues at hand.

Regulatory obstacles

From a regulatory point of view, eSports gambling is likely to be subject to the same restrictions as gambling on traditional live sports events. In some jurisdictions, such as the US where the Unlawful Internet Gambling Enforcement Act 2006 would apply, this means gambling on eSports is currently prohibited. Many of the key players in the market, such as Unikrn, have expressed optimism that the US market will soon open up however, providing a further boon to the growth of eSports gambling. In Asia, which leads the world in terms of the popularity of eSports, the legality of online gambling is in many cases grey, because the relevant laws predate the internet. This uncertainty of regulation will apply to eSports betting in exactly the same way as it applies to existing sports betting. In those countries where online gambling is expressly prohibited, such as Singapore, we see no reason for eSports betting to fall outside of the relevant prohibitions.

In Great Britain, meanwhile, it can be assumed that the Gambling Commission’s licensing regime will apply as to gambling on traditional sports. The Commission does not, however, currently offer any eSports specific guidance, illustrating the still relatively young nature of the industry. It is also worth mentioning here that, under the Gambling Act 2005, the very act of participating in eSports – playing videogames competitively for prizes - could itself be deemed ‘gaming’. This is yet another illustration of the multi-faceted nature of the complexities that gambling law can pose.

With the ever increasing prominence of eSports in mainstream culture and progressively common forays into eSports by well-known gambling operators, regulators worldwide are likely to start to pay closer attention. Assuming they are able to navigate the existing obstacles to entry, operators looking to share in the growth of eSports whilst still playing by the rules should watch this space for further developments.

In the next Olswang on eSports article we will focus on Asia, the place where the "eSports superfan" originated.