For those who have never heard of eSports, it is the general term used for competitive video game playing. Players compete for days at large tournaments, and winners receive large cash prizes. From a player and participant standpoint, everything in eSports is accelerating in the right direction – more tournaments, more competitive teams and more investments than ever. This, in turn, is leading to more content for fans to consume, and they are hungry for it. The Intel Extreme Masters in Katowice, Poland is one of the longest running pro gaming circuits in the eSports world. The tournament hosted 173,000 fans in the flesh over the course of two weekends and global broadcasts reached over 46 million unique online viewers, up 35% from last year. It doesn’t stop there – social media reached 55 million fans through live streams, highlight clips and custom content. Clearly 2017 is off to another record smashing start, and we’re only three months into 2017. Playing video games competitively has become a massive movement. And where there’s competition, there’s gambling.
eSports betting is alive and well, led by the likes of Bet365, SkyBet, Betway, Pinnacle, Ladbrokes and Unikrn (specialized in eSports), with bearish estimates pegging proper grey market wagering at $555 million in 2016*. In five years, that figure is expected to grow 10 to 20-fold, driven by: event frequency and scale growth, product expansion with more types of bets across more events, and better data to facilitate it.
However, it is impossible to get an understanding about eSports betting without discussing the concept of ‘skin’ betting. This is where a lot of eSports bettors whet their appetite. A ‘skin’ is an in-game digital item that makes your in-game character/avatar look different. Below is a picture of 12 different skins that affect a player’s knife. As you can see, it simply creates an aesthetic difference in the character model, but players find it very valuable. At one point, the “Crimson Web” knife skin cost $1,800 to buy through a 3rd party. These skins have different rarity levels, some having a very small chance to be won, and can only be won in game through random chance. However, players can transfer these skins to one another, which creates an economy of buying and selling these skins online. They effectively become a currency, and ‘skin’ betting uses skins as casino chips for less-than-grey-market sites (white paper).
Counter Strike: Global Offensive knife skins. Crimson Web was valued at $1,800 dollars.
It is important to understand that the gambling products these websites offer to skin bettors go beyond match wagering. There are lottery-style jackpots, roulette, coin flips, raffles, rock-paper-scissors and blackjack and many other spinoffs. These games are facilitated through game publisher platforms like Valve and Steam. Skin betting has rapidly become part of the culture of the most popular games, and popularity for these games exploded because of ease, accessibility and seamless transactions. Anyone with skins can gamble, and there are few barriers to getting skins; you just need an account and credit card. Estimates suggest that this type of betting would far eclipse grey market wagering in 2016, with over $3.9 billion* in skin wager equivalents at the low-end. Of course the operating sites take a cut of the transactions, operate with no regulation and offer no transparency whatsoever.
However, the market imploded in summer 2016 when Valve, compelled by a class-action suit against them, issued cease-and-desist orders to the most popular skin-betting operators, citing that the API could not be used for commercial purposes. It was triggered by allegations of underage skin gambling and compounded by collusion and fraudulent activity on behalf of the operating sites in fixing game results for popularity. This shuttered many of the major sites and impacted the skin economy as a whole, dropping inflated item prices by up to 20-40%. While the practice has subsided, it was not completely done away with. Many sites have found loopholes to continue operation – run a Google search on CS:GO betting and you won’t have to go far to find it.
This burgeoning industry needs to be monitored by the lotteries. It has created a generation of millennials eager to play lottery games. So why are gaming operators sitting on the sidelines? Well there are hurdles that need to be overcome.
First, let’s get over the easy one – the stereotype of an average gamer. These are not kids in their parents’ basement. Research confirms that the majority of eSports fans are millennials or older with above average household incomes and many with children of their own. It’s more than gaming for them. It’s a lifestyle they grew up with and that transcends the game experience itself; the social dimension adds personal fulfillment and a sense of belonging to a community that enriches the experience. This translates to an audience that is extremely engaged in their pastime with almost half spending most of their free time around eSports.
This raises the next big hurdle – regulation. Fans are limited to grey-market or greyer-market operators when it comes to betting and they may be reluctant to partake as a result. There are few offerings from the most trusted and regulated sources. As Joss Wood from esportsbettingreport.com puts it, the demand for skin gambling and cash gambling is there. What is missing is a legal and regulatory framework. eSports barely passes the barometer for a sport, and even still, sport betting in North America is intensely restricted. In provinces and states with some form of legalized sports gambling available, the product (parlay bets) is unfamiliar and not well-suited to the market. Since most activity is centered on tournaments versus seasonal play, there are inherent limitations to this betting style. While significant progress is being made to legalize sports betting, this regulatory prerequisite has to be tackled before any legitimate contenders (i.e. state or provincial lottery operators) can even consider jumping in.
The last hurdle is tapping into the market. In absolute terms, eSports is a large market that generates significant wagering and is growing at a phenomenal pace. However, $555 million in wagering revenue at the global level translates to small potatoes for most jurisdictional operators. It would pale in comparison to other sports cards. But lottery and gaming as a whole needs to become more micro-targeted and niche-focused in order to reach and become relevant to the next generation of players. There needs to be a willingness to accept smaller revenue streams in the short-term to create long term players. The other alternative is to tackle it at a macro level with cross-jurisdictional products that create economies of scale, but that’s much easier said than done.
The audience and demand is there. They are of legal age. They are hungry for ways to deepen their interaction with their favorite sport. In the short term, most lotteries cannot create an immediate product for eSport fans who want to bet. However, one lottery has already found an interim solution by taking an association-based approach to market entry until inroads are made around regulation, oversight and legalization. The French government-owned lottery and online gambling operator, Française des Jeux (FDJ), will launch its own eSports tournament series, funding prize pools and facilitating events. In doing so, they create an association with the market, build relevance and establish credibility. When eSports betting is legalized, it puts them in a leading position to capitalize on a fan base that they have already nurtured a relationship with. This should be a major consideration for lottery jurisdictions around the world that see eSports as an opportunity, but one that’s not quite ready for commercialization.
It is also imperative that jurisdictions consider digital assets, like skins, as forms of currency. The UK, one of the more progressive jurisdictions, has had the foresight to do this. They have begun recognizing virtual commodities as a viable gambling currency and have built a legal framework to regulate it. By doing this, they have created regulations to prevent illegal vendors from circumventing the law.
If the amount of interest, conversation, and investment the industry has seen in the last year alone is any indication of how it will evolve, it’s safe to say that eSports products are in our future.
If you’re interested in industry happenings, check out esportbettingreport.com for the latest news. Mindshare.com and especially NewZoo.com are also worth a visit; they are two market intelligence firms that study the market trends, with NewZoo specializing in the eSports industry.