FT Big Read: If you can’t beat them, join them: football and F1 team up with esports, featuring comments from Gfinity CEO John Clarke

First published in the Financial Times.

Across the road from the Chelsea Football Club’s stadium in west London, the Gfinity Arena is the UK’s first dedicated esports arena. With three separate stages and seats for 240
spectators, it specialises in holding competitions for the world’s most popular video games such as League of Legends.

In late October, the arena hosted a very different event — a digital Formula One race that
allows the drivers to rev their engines from home. With fans also prevented from attending
by the pandemic, the venue had been turned into a production studio that allowed 20
drivers to compete in a virtual Grand Prix that was broadcast live on Sky, the dominant
sports broadcaster in the UK.

Popular sports such as football or Formula One once looked on esports as a parallel world
— a niche form of entertainment that did not impinge on their own franchises. But they have watched anxiously as esports has grown rapidly into a formidable new force: one that is able to retain the attention of millennials and Generation Z — those born after 1995.

Now they are looking to get in on the act. F1, the global racing series owned by US
billionaire John Malone’s Liberty Media and the organiser of the event at the Gfinity Arena,
is among the established sports groups that are leading a charge into professional video
gaming. They are competing for the next wave of consumers, who increasingly look to
esports for their entertainment.

At stake are potentially billions of dollars in broadcasting and sponsorship, generated by a
growing global audience for competitive gaming. Roughly 443m people watched esports in
2019, a 12 per cent increase on 2018, according to data provider Newzoo, the large majority of whom are under the age of 35. Esports athletes’ exploits are streamed by
Amazon’s Twitch and Google’s YouTube, among other platforms, direct to consumers’
phones.

The pandemic has given traditional sports an even greater incentive to tap the potential of
esports. Not only has the absence of fans from stadiums damaged their business models
and left them searching for new revenue, but broadcasters such as Sky, which have been
deprived of many of the sporting events they usually rely on, have been eager for fresh
content.

“One of the biggest barriers to gaming going mainstream has been the reluctance of broadcasters to put it on air. Covid-19 and the lockdown blew this sentiment out of the water,” says John Clarke, chief executive of Gfinity. “If you are a sports rights holder, you have a choice. Embrace the gaming culture and find a way to play in it authentically, or
watch your audience get older and older.”

That message is echoed by some of the most powerful players in traditional sports. Andrea
Agnelli, president of the Italian football club Juventus and chair of the powerful European
Club Association, which represents the continent’s top clubs, warned last year that the
sport had to evolve in order to compete with video games such as Fortnite.

“If we are not progressive, we are simply protecting a system that is no longer there, a
system that is made of domestic games that will have little interest for our kids,” he said.

The International Olympic Committee has also established relationships with the esports
and gaming industries and has raised the prospect of esports becoming part of the games in
the future.

With many competitions temporarily brought to a halt by national lockdowns in March,
some traditional sports instead began to stage virtual tournaments.

F1 has held virtual Grands Prix featuring former drivers, including 2016 world champion
Nico Rosberg, and celebrities such as Liam Payne, a former member of the band One
Direction. The English Premier League, the richest domestic football competition in the
world, held an esports tournament in April, which was won by Diogo Jota, the real-life
striker who now plays for Liverpool. The National Basketball Association, the North
American league, hosted its own competition for real players.

Investment is also flooding into esports teams and leagues from wealthy former athletes.
Jakob Lund Kristensen, founder and chief commercial officer of Astralis, an esports team that floated on Nasdaq’s exchange for smaller companies in December 2019, disputes the perceived competition between sports and esports. Instead he sees a wider battle that also draws in video streaming companies such as Netflix and music platforms including Spotify.

“We’re all fighting for leisure time,” he says. “We went from having cooking shows to
MasterChef, we went from having dancing shows to Dancing With the Stars. Everything
pinnacles to something competitive.”

‘Investing in generational change’

David Beckham is among the group of sporting stars to have moved from the pitch to the business world. The former England and Manchester United footballer is a part-owner of
Inter Miami, the Major League Soccer team, having negotiated an option to buy a franchise for $25m when he joined LA Galaxy as a player in 2007.

He is also a 5 per cent shareholder in Guild Esports, a London-based start-up company that
floated on the London Stock Exchange in October, raising £20m to fund the recruitment of
professional gamers and teams.

“[Esports] is a sector I’ve been monitoring for a while,” he said in October. “We are
committed to nurturing and encouraging youth talent through our academy systems . . . and
we want to be the number one esports team in the business.”

Institutional investors also believe in the business. Soros Fund Management, the
investment company of billionaire philanthropist George Soros, bought a 3.6 per stake in
Guild.

Mr Beckham, is the face of the company. Under his “influencer” agreement, he will promote
Guild on social media and the company can use his name to build a global following in a
deal that could net the ex-player a minimum of £15.25m over five years.

“If you have the right pipeline of talent, that brings the tribal loyalty that you have within a
team,” said Mr Beckham, explaining his role in the venture.

The idea is that esports teams will build the same level of loyalty among viewers as
traditional sports clubs enjoy from their fans to attract revenues from sponsorship,
merchandising and broadcasting rights.

“This audience is an advertiser’s dream,” says Carleton Curtis, executive chairman of Guild.
“It is by far the most concentrated composition of Gen Z and millennials that most brands
these days are going after.”

Mr Beckham is far from the first former athlete to invest in esports. Michael Jordan, who
became a global brand thanks to his exploits leading the Chicago Bulls to six NBA
championships in the 1990s, has bought a stake in aXiomatic, which holds a variety of
esports investments, including games publishers, teams and coaching businesses.

Axiomatic’s backers also include Peter Guber, who co-owns the Los Angeles Dodgers
baseball team and the Golden State Warriors in basketball, and billionaire Ted Leonsis, who
owns the Washington Wizards, a rival NBA team, and the Capitals in the National Hockey
League.

The company was among investors, including private equity firm KKR, which in 2018
injected $1.25bn into Epic Games, the creator of Fortnite.

Still, revenues remain small compared to sport’s big leagues. Team Liquid’s revenues are in
the “double-digit millions”, according to Victor Goossens, co-chief executive of the esports gaming team, who moved to South Korea after finishing high school in 2002, slept on floors and lived on $300 a month to compete professionally in the StarCraft video game.

These days, Liquid is owned by aXiomatic. “To invest in esports. You need to be willing to look a little bit beyond just the fundamentals of a company,” Mr Goossens says. “To invest
in esports is to invest in generational change.”

‘Humans are fickle sometimes’

According to F1, the average age of its fans is 40. Only 14 per cent are under the age of 25,
with another 30 per cent coming from the 25-34 bracket. “The very core of why we’re
doing this [expanding into esports] is really about reaching out to a younger audience,”
says Julian Tan, head of esports at F1. “The reality is that the younger generation are
spending more time gaming.”

F1 is “very strategically positioned to exploit certain elements like the blurring of lines with reality”, Mr Tan adds, pointing out that a small number of esports gamers have transitioned into real racing. That cohort includes Igor Fraga, who has raced in esports and in Formula
3, one of the stepping stones towards an F1 career.

In October, Fifa, football’s world governing body, outlined plans for esports competitions with $4.4m in prize money up for grabs to “engage deeper with football’s next-generation”.
The Premier League has continued to arrange virtual tournaments.

However, some investors are wary about the rush to invest in esports teams, questioning
their ability to build loyalty.

Damir Becirovic of Index Ventures, the venture capital firm, says the real prize would be finding the next top game publisher and developer. In esports, unlike the real world, it is possible to own the game itself. “We want to back companies that have technology at the core [and] when we think about a team it’s really humans at the core,” he says. “Humans
are fickle sometimes.”

Established sports have built their intense followings over decades, proving the investment case in teams and leagues. By contrast, Fortnite, for example, was released just over three years ago.

“Will fans permanently transfer their allegiance and their dollars to the virtual teams [or the players who compete in these tournaments]?” asked Nick Train, co-founder of UK fund manager Lindsell Train, a major shareholder in Manchester United and Juventus, in a note to investors in August. “No.”

Industry experts believe there is only limited potential in promoting esport versions of
traditional sports.

According to Remer Rietkerk, head of esports at Newzoo, League of Legends, which is
published by Riot Games, along with Counter-Strike: Global Offensive and Dota 2 — both
the work of Seattle-based Valve — are the three most-watched live competitive esports on
YouTube and Twitch, with a combined 845m hours watched in 2019. Fifa 19 languished in
19th with just 8m hours, with Fifa 20 adding just another 3m. Those numbers exclude well over 1bn hours of views for non-competitive gaming.

“Fifa is a good game, many people play the game but no hardcore esports fan will tell you,
‘I’ve been watching Fifa for years’,” says Carlos Rodriguez, a former League of Legends
gamer and founder of the G2 Esports team, which counts McLaren F1 racing chief Zak
Brown as a shareholder.

“[Established sports teams] are used to buying LeBron James or Cristiano Ronaldo and automatically selling millions of jerseys,” he says. “They’re not used to having to relate to
the people.”

Mike Sepso, the esports veteran and co-creator of Major League Gaming, which is now
owned by gaming company Activision Blizzard, says that younger fans want different types
of content that is more digital and usable on mobile phones. The reliance of sport on
television broadcasting is “not going to satisfy the incoming demand . . . for more content,”
he adds.

Yet, says Doug Harmer, a partner at Oakwell Sports Advisory, it would be a mistake for
sports to forget the lessons of the pandemic and cut spending on digital gaming to cope
with the economic downturn. He says one of the advantages for traditional sports of
investing in digital gaming is that it allows organisations to collect data about their
audience that they can use to attract commercial partners.

“I can definitely see a long-term rationale for keeping up with esports initiatives and the
crossover [with] traditional sports . . . whether that actually happens now or not remains to
be seen,” says Mr Harmer.

One of the problems for potential investors in esports is that it is hard to quantify the size of the market. Some analysts warn that there is an element of hype in some of the statistics that are sometimes used by boosters — such as the claim that League of Legends viewership is bigger than the Super Bowl.

“That was the big, headline-grabbing stat but when you get down to it they were comparing
the average audience of the Super Bowl in the US versus total unique viewers of League of
Legends around the world,” says Nicole Pike, YouGov’s head of esports and gaming. “It’s
just apples to oranges completely.”

Newzoo estimates esports’s annual revenues globally at $1bn, but that does not include revenue made by platforms such as Amazon’s Twitch and Google’s YouTube from streaming esports. It is also hard to distinguish publishers’ gaming revenues from esports revenues, making it difficult to properly assess the industry’s size. Esports insiders say some gaming companies run their competitive gaming activities as a marketing cost to sell more titles.

Nicolo Laurent, chief executive of Riot Games, says that traditional sports have been too slow to see the potential in esports. He likens it to the so-called “innovator’s dilemma”, a
reference to the influential book by Clayton Christensen, who described the risk to incumbents from failing to recognise threats to their established products.

“The incumbent is a little bit arrogant towards the newcomer, the insurgent,” he says.
“When you realise the insurgent is actually doing something great, it’s too late.”

Copyright The Financial Times Limited 2020

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