A look to the future: US esports betting
Opinion piece and primer on the emerging market of esports betting and its path ahead in the US...
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If you’re just starting to build within the traditional sports betting space to capitalize on the US opportunity, there’s a lot of catching up to do. Objectively, the optimal time to have gotten into the space was leading up to or shortly after the PASPA repeal in May 2018, affording enterprising entrepreneurs the time needed to refine their product and to have it functioning like a well-oiled machine for the current proliferation of state launches. We’ve already started to witness a handful of exits for the companies that had this foresight (e.g., The Action Network, BetQL, VSiN). That said, there is a subset within sports betting that is rapidly gaining momentum, presenting another frontier for entrepreneurs to revolutionize - the US betting opportunity within esports.
Working at an early-stage sports betting company affords me the unique opportunity to meet other founders and to see new projects being spawned in the space. I can say that the emergence of esports betting products over the past six months has been palpable, spanning from odds infrastructure to games of skill such as player-vs-player betting. This development shouldn’t come as a surprise as the aging up of Gen Z and the realization of esports betting’s commercial appeal sets the stage for a seismic shift in sports property preference over the next decade. Let’s explore these two driving factors as well as industry risks before breaking down the different types of esports betting categories, the innovations being made in each respective category and the companies leading the charge.
Gen Z’s love for gaming starts at the grassroots level. With 87% of Gen Z playing video games at least weekly, gaming is the favorite media and entertainment activity amongst the generation, trumping other activities such as watching TV at home, listening to music, browsing the internet and engaging on social platforms1. This is largely due to the fact that gaming experiences have become the de facto venue for social interactivity and culture for digital natives.
It’s no accident that many digital campfires are either games or platforms that began as gathering places for gamers. Gaming has spilled over into the broader culture in recent years. Today, “gaming” is not just for “gamers” — it represents a new paradigm for interacting online.
- Where Brands Are Reaching Gen Z, Harvard Business Review
Further seeding is occurring within our core educational institutions as companies like PlayVS establish official scholastic esports leagues. Students across the country can now play on their high school’s varsity esports team (e.g., League of Legends) and have it officially recognized on their transcript, reaching beyond traditional sports to create an all-inclusive environment that breaks barriers. By the time Gen Zers are ready to fly the coop and explore the world on their own, gaming has played a foundational role in their development. The next logical step is betting on games when age appropriate. In a recent piece, I explained how well the activity of betting resonates within Gen Z, who crave and value interactive experiences above all else. Betting for Gen Z is less about ROI and more about the gamification of events in which they’re having fun competing and interacting with each other. As it relates to betting on esports, one could say it’s the gamification of a game. How meta. This results in a pool of prospective esports bettors that will grow exponentially over the next decade.
Headlines around esports betting have started to become more frequent over the past year, indicating the recognition of the activity’s sizable addressable market and commercial appeal. Here’s a look at some notable headlines just from the past two weeks:
A 2019 patent filing by Sony Entertainment was published last month, confirming that the company is planning for a move into some form of gambling on gaming or esports. The patent is broad in scope, but could for instance allow players to place real money bets, either on themselves or other players, while playing or watching on their PlayStation. It also contains provisions for betting with cryptocurrency or in-game items
The Call of Duty League (CDL) and Overwatch League will now allow betting sponsors, allowing for more lucrative sponsorship opportunities. CDL franchise London Royal Ravens has already acted on the new opening, securing a sponsorship with esports and sports betting operator Midnite
The confluence of betting legalization in the US and the massive addressable market for gaming paves the way for a new layer of social interactivity for digital natives and a new monetization lever for sportsbook operators, franchised leagues and publishers. For context, the gaming and esports market size in the US is forecasted to exceed $40B and $1B, respectively, by 20252. Drilling down further, $3B in total esports wagers are expected to be placed in the US by 20253. In terms of audience size, 66M people in the US watched esports in 2020, a 69% increase from 2019. Most notably, adults aged 18-25 (i.e., Gen Z) spend more time watching video game and esports content than traditional sports content4.
While it’s clear that there will be strong native interest for esports betting in the years to come, new frontiers always come with new risks and problems to solve for both startups and operators. Some of the most pertinent issues include integrity incidents, legislation language in the US and affiliate and operator strategy as it relates to shifting consumer preferences.
Integrity
Trust and transparency are the foundational pillars that the esports betting ecosystem needs but doesn’t yet have. Integrity scandals have rocked the esports industry, including a recent high-profile case in which seven CS:GO pros in the Australian Mountain Dew League were banned for betting on their own games and fixing matches. In 2016, the Esports Integrity Commission (ESIC) was formed to be the recognized guardian of esports integrity and to take responsibility for all forms of cheating. While the creation of a global regulatory body was a step in the right direction, the ESIC still identified 117 suspicious betting cases in the first 11 months of 2020, up from 46 cases reported in 2019 (+154% YoY)5. Global leaders in data provision, such as Sportradar, have also extended their integrity services to include esports, offering services such as detection of match fixing, collusion and other activities related to illegal, underage and irresponsible betting. As the esports industry continues to grow, consolidation across leagues will help to standardize events and to reign in the rogue incidents that we’re seeing across today’s fragmented landscape.
Legalization
Due to the aforementioned integrity issues, only 11 states (of the 28 states where sports betting is legal) permit esports events; 4 of those 11 (CO, NJ, NV, OR) come with restrictions. However, 6 states are currently considering legislation that would explicitly permit esports betting. New Jersey is one of those 6 states whose legislation proposes to expand legal betting to include esports events as eligible sporting events. Currently, the events must be approved by the New Jersey regulator on an event-by-event basis. If overturned, New Jersey could serve as a pilot for how to regulate esports betting going forward. If that pilot were to be successful, it would undoubtedly provide added confidence and serve as precedence to lawmakers in other states.
Operator & Affiliate Integration Strategy
As mentioned earlier, there is a growing, categorical shift in consumer preferences in which Gen Z is consuming more esports content than traditional sports content. Additionally, 64% of esports bettors bet exclusively on esports and have no interest in betting on traditional sports, according to a study by LOOT.BET.
While esports betting represents a significant opportunity to drive incremental gross gaming revenue, the shift away from traditional sports fandom is an aspect that operators will need to prepare for. Here are a few considerations:
How can operators prepare for the potential lack of interest in traditional sports markets and lack of cross promotion opportunities across sports over time?
In order to keep up with the expectations of digital natives, will operators introduce enhanced live viewing features used in esports betting platforms to traditional sports betting platforms? More on this later…
How do operators implement effective affiliate marketing practices for esports given the decentralized nature of the industry (e.g., individual content creators vs. traditional publisher model)
Do traditional operators have enough endemic knowledge to offer creative and diverse offerings to ultimately drive demand? Can strategic acquisitions fill this gap? More on this later…
How do operators handle integrity-related events (e.g., cheating)
With a better understanding of the high-level themes underlying esports betting in the US, let’s analyze the esports betting industry landscape and highlight the key categories and companies within it.
🎮 Sportsbook Operators & Infrastructure
Operators
In the US, traditional operators offer esports markets, albeit in a very restricted manner, in states where both sports betting and esports betting are legalized. For example, BetMGM, DraftKings and William Hill all offer markets across titles such as League of Legends, CS:GO, Call of Duty and Overwatch. However, in Europe and Australia, where esports betting regulations are more relaxed, there are several upstart endemic operators that offer a comprehensive selection of esports betting markets. These endemic operators are starting to compete for esports betting market share with traditional operators such as Betway and Bet365. However, they contrast with traditional operators in that endemic operators don’t want esports to be just another tab in a sportsbook’s offering, stressing that esports fans are differentiated from traditional sports fans. Instead, endemic operators focus on creating a fully immersive, gamer-centric experience inclusive of features that esports viewers expect in a live viewing experience. These features include in-game betting content, social elements, multiple camera angles and video layouts and dynamic statistics.
While most of these endemic operators are still young and lack the wallet depth to compete with industry giants in the long term, they do offer a very attractive proposition to traditional operators going forward as betting audiences shift. The audience for esports has different UX expectations, uses different media channels and demands authenticity. These challenges are aspects that endemic operators can help traditional operators mitigate, both in Europe and the US, through partnership or acquisition.
Endemic operators: Unikrn, Rivalry, Luckbox, Midnite, Winners.bet
Data/Odds Providers
Data is the lifeblood of any successful betting platform. Moreover, the digital nature of esports makes it possible for data analytics to infuse itself to the very core of the industry which traditional sports do not allow. This gives operators and B2B suppliers access to a constant flow of rich data delivered through reliable APIs, allowing for progressive features and interactive experiences.
While data giants within traditional sports, such as Sportradar and Genius Sports, are standing up esports services of their own, a handful of endemic data providers are leveraging their founding team’s intimate knowledge of the industry and AI to create extremely competitive (or complementary, e.g., Sportradar/Bayes) products that offer in-game odds, new markets, premium uptime, embeddable overlays, data exchanges and more. These products not only help sportsbooks expand markets and increase revenue, but also help media platforms and teams boost engagement and analytics.
Endemic data & odds providers: GRID, Pandascore, Oddin, Bayes, Sportsflare
🆚 Accessible Betting Experiences (Games of Skill)
Given that esports betting is considered a game of chance, its availability is limited to the states that have legalized betting. As discussed earlier, this pool is cut down further by lack of legislation that permits esports betting. This has resulted in companies spinning up more accessible betting experiences that qualify as games of skill to meet the interim demand. For reference, games of skill require a physical or mental ability and a learned capacity to carry out a result while games of chance are strongly influenced by random chance or uncertainty. Esports games of skill include experiences such as player-vs-player, player-vs-self and fantasy games, and these formats are currently legal in 41 states.
Player-vs-player (PvP) games & infrastructure
There’s always been a massive market of casual yet competitive gamers, paving the way for companies to build platforms and infrastructure (e.g., SDKs) for players to compete in an easy way. As covered in my piece player-vs-player wagering for gamers, PvP experiences present an additional engagement layer for gamers that fuses interactivity and competition via one-on-one matches. Products that function as social and/or interactivity layers across games are best poised for success in a world where gaming is becoming the new social network. Moreover, similar to the fantasy and betting relationship in traditional sports, PvP betting can eventually become an effective top-of-funnel tool for esports betting as it gains adoption in the US.
PvP platforms: Players’ Lounge, Unikrn, 1v1me, PLLAY
PvP infrastructure: Ryu Games, Betti Games
Player-vs-self (PvS) games & infrastructure
The gaming market is 40x the size of the esports market in the US. Globally, that multiple balloons to 100x. Hence, player-vs-self markets have the potential to attract a significantly larger player base to platforms. Player-vs-self offerings allow players to bet on their own performance and to earn money while playing their favorite titles. For example, a Fortnite player could bet on outcomes such as winning a game, getting the most kills or placing in the top 10. This format forgoes the private lobbies and match disputes that often plague PvP games. Additionally, PvS games are more accessible, serving betting markets in underserved titles and mitigating counterparty liquidity issues for given skill levels. Players can always place a bet, they simply just have to play.
PvS platforms: Unikrn (UMode)
PvS infrastructure: Sportsflare
Fantasy games
Fantasy games allow players to compete against each other by structuring a team or selecting individual players that earn points based on their IRL performance. Contests are typically conducted daily, weekly or over the course of a season. DraftKings and FanDuel are famously known for breaking into the sports gaming world with their daily fantasy sports (DFS) format. In traditional sports betting, fantasy companies offer a compelling top-of-funnel layer to operators by educating and engaging prospective bettors and eventually cross-selling them into sportsbook activities. The same model can be applicable for operators that offer esports betting as it gains adoption in the US. More recently, we’ve seen major publishers partner with next-gen fantasy companies who provide engaging in-game experiences that cultivate competitive communities for certain titles (e.g., Riot/BallStreet).
Fantasy esports providers: BallStreet, Esports One Fantasy, Sleeper, ThriveFantasy, PrizePicks, Betcha, DraftBuff
Final Thoughts
There are certainly a lot of hurdles to navigate in order for esports betting to reach mass appeal in the US. This will come with the aging up of digital natives, the improvement of integrity within esports and the resulting expansion of legalization across states. Most industry analysts don’t expect the landscape to change too much over the next five years, but instead see the inflection point occurring within the next decade. For entrepreneurs and operators looking to build the next big thing in the space, pay attention to esports betting developments in Europe and Australia and to esports games of skill traction in the US. It's not a question of if esports betting will reach critical mass, but when.
https://www2.deloitte.com/us/en/insights/industry/technology/digital-media-trends-consumption-habits-survey/summary.html
https://www.statista.com/outlook/dmo/digital-media/video-games/united-states#:~:text=Revenue%20is%20expected%20to%20show,to%20hit%2084.2%25%20by%202025; https://www.arizton.com/market-reports/global-esports-market; https://ahoygaming.co.uk/blog/esports-statistics/
https://g-mnews.com/promising-future-for-esports-betting/
https://activate.com/outlook/2021/
Eilers & Krejcik U.S. Esports Betting Monitor – 2H20