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Why mainstream brands are chasing the esports sponsorship “pot of gold”

Posted on 1 April 2019 by Nick Nocton

Why mainstream brands are chasing the esports sponsorship “pot of gold”

Two remarkable advertising events occurred last May at an esports tournament held at the Arena Birmingham. Firstly, the crowd began to chant a sponsor’s name, a rare and sweet moment for an advertiser in any sport. Secondly, the sponsor was the courier company DHL, more easily associated with parcel deliveries than Dota 2, a multi-player online battle arena (MOBA) video game.

DHL has moved into alien advertising territory by sponsoring the ESL One (Electronic Sports League) Dota 2 tournament, where this year teams will compete for a total prize pot of $300,000 (£233,000). The company is one of a growing pack of mainstream brands that have recently signed esports sponsorship deals, including Mercedes-Benz, Coca-Cola and McDonald’s. The prize they are chasing are young fans who are driving the explosive growth of esports, which in 2018 generated total worldwide revenue of about $900 million (£700 million) from all sources, according to Newzoo, an esports research firm.

“The younger demographic are increasingly hard to reach via television and other traditional advertising channels,” says Nick Nocton, a regulatory and commercial lawyer and Head of Mishcon de Reya’s esports group. “They typically consume their entertainment, including esports, through digital streaming channels such as YouTube and Twitch.”

Like the best video-game storylines, the move by mainstream brands into esports comes with an unexpected twist. It is not just the brands that will have to adapt to the esports market to reach this mass audience of young digital streamers. In turn, the rapidly maturing and cash-hungry esports industry will have to accommodate the demands of major global corporations, which will want reassurance that their advertising budget is being invested in a stable business. To understand why, one has to follow the money.

Until 2017, when the first big mainstream deals were signed, esports sponsorship was dominated by so-called “endemic” brands which had an obvious link with video games and their fans, such as the computer chip manufacturer Intel and the energy drink company Red Bull. In 2017, a global survey of 4,000 esports fans aged between 13 and 40 by Nielsen found that more than 70 per cent preferred sponsorship by endemic brands, indicating a significant entry hurdle for mainstream brands to overcome. The challenge is to adapt their brand message to the market, or risk being seen as corporate and antiquated. “Non-endemic brands like DHL and Mercedes will become endemic like Red Bull and Vodafone,” predicts Adam Whyte, CEO of Edge Esports, an industry marketing company. “They will reap the rewards of connecting with a younger consumer audience that will grow up interacting with their products and services.”  

It is already clear that the entry of mainstream brands is driving up the price of esports sponsorship deals and dramatically expanding what was until recently a niche advertising market. Newzoo, for instance, forecasts that total esports sponsorship revenue will quadruple between 2018 and 2021 to $1.4 billion (£1.1 billion). However, these advertisers will in turn expect more security for their investment, putting pressure on the esports industry to introduce tighter market regulation.

A particular risk for esports sponsors is that the video games developer owns the title and has the power to withdraw the product, leaving a sponsor with an esport that no longer exists. “Games publishers can stop the game, take away your ball and rip up the field of play,” says Charlie Beall, a partner at Seven League, a digital sports consultancy in London. “That makes an esports sponsor more like a venture capitalist or an angel investor backing a risky proposition with a high upside than a pension fund backing a slow and steady utility.”

It is a sign of the corresponding financial power of mainstream brands that some of the largest esports companies, such as the US publisher Activision Blizzard, have started to organise competitions on a franchise model, where an esport’s continuing existence is contractually guaranteed and there are strong regulations, for example about the number of teams and the transfer of players to competitors. “The recent influx of mainstream brands is partly the sector maturing, but it also reflects the stability offered by the franchise model, which helps all stakeholders invest for the long term,” says Beall.

In effect, the Blizzard Entertainment Overwatch League is packaging a high-growth but reliable product. “It’s a bit like how American football is run,” observes Nocton. “esports franchises are a deliberate decision to use a business model which is inherently stable and investable, and that in turn is familiar and reassuring to global mainstream brands.”

As the esports industry matures, it is waking up to the commercial potential of games and tournaments and re-structuring them accordingly, offering opportunities for brands to sponsor teams and top players, who may soon be millionaires.

It is possible that the rush of mainstream brands into esports sponsorship is set to slow. The industry journal Esports Observer reported that new “non-endemic” partnerships fell by 28 per cent in the fourth quarter of 2018 to 31 major deals, compared with 43 for the third quarter. Yet one trend is clear. The young men and women who follow esports are not going to be watching more television in future. For that reason alone, expect more mainstream brands to enter the exciting world of esports.

This article first appeared on FT.com.

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