Esports and digital media insight

As with traditional sports, the esports industry is centred around its competitors just as the media is centred around its content creators. As such, the value of an esports team or associated media businesses is directly linked to its ability to engage and retain the most skilled people. We discuss how companies in this sector can seek to ensure that such value is retained in an enforceable and proportionate manner while also considering the future challenges to esports, for example if the practice evolves to incorporate a system of player registration as in the football industry and other sporting sectors.

When considering how to establish your business or structure it for the future, you need to factor in your plans, both nationally and globally, and also your capital expenditure (capex) requirements. Rigorous steps should be taken to work through capex projections to see if they are a true reflection of the business needs. There are a number of possible sources of funding to meet these capex needs, including friends and family, third party angel or venture capital investment, or another round of seed funding, each of which present slightly different opportunities.

There are various steps that can be taken to make a business potentially more attractive to investment and the commitment of key talent. For investors, SEIS (Seed Enterprise Investment Scheme) and EIS (Enterprise Investment Scheme) can be key components in making an investment more appealing. For key talent, the use of EMIs and other tax-efficient share options could be utilised. The key is to be able to identify what you need and what you can offer.

The esports and gaming sector is not solely focused on playing games and competing in competitions. Many companies in this space also operate simultaneously as competition organisers, content creators and broadcasters.

Video content that captures an esports event is valuable copyright work. For example, the live streaming platform, Twitch, recently signed an exclusive rights deal worth around $90 miilion with Blizzard Entertainment for the right to broadcaster the Overwatch League; this demonstrates the high commercial value of this IP. It is necessary to ensure firstly that the business does, in fact, validly own the content it purports to, but also that it is able to exploit that work commercially (either directly or through granting broadcast rights), while also protecting it against any potential infringement from unlicensed third parties.

Following the 2020 budget, we will look at how IP-rich entities can preserve value in a tax efficient manner. Understanding how your gross position converts into your net position is essential in understanding what cash you have left to re-invest into the business and to pay out to the stakeholders (including yourself).

It is easy to overlook tax when building a business. As Facebook founder Mark Zuckerberg famously said, ‘move fast and break things’ is often the mantra of these innovative new businesses. However, the restructuring of IP assets can create cashflow issues when gains are crystallised, and the best form of protection is to be armed with the information you need from the start (or at least an early stage).

An area potentially not uppermost in the mind when planning an event and thinking about tickets, players and sponsors is the actual logistics of the venue. This means licensing (to operate the event), logistics (power, utilities, etc), security, and the constant complexity of having the correct types of insurance. In a digital world there remains a need to understand the real estate complexities and the logistics of large-scale events. As Fyre Festival, the fraudulent luxury music event, demonstrated in 2017, content without the tangibles is a PR fiasco.

A primary source of cashflow for many businesses is bank credit. This is particularly attractive when interest rates are low. But how do you address the need for cash against being a newcomer to the market or an IP-rich but fixed-asset, low-value business? Understanding what the banks want and need will help you take steps to ensure their doors are open to you.

Operators such as Twitch and Youtube Gaming are engaged primarily in the streaming and broadcasting of esports events and competitions. When investing in a business with a focus on streaming or broadcasting, it is important to determine (i) exactly what streaming and broadcast rights the company holds, (ii) how long it holds them for, and (iii) whether they are granted on an exclusive basis. It cannot be taken for granted that such rights will be adequately protected and, if the rights-holder is free to license the rights to another, larger broadcast provider, this could diminish the value of your licence. If, when it comes to broadcasting rights, the idea of falling foul of major international broadcasters or losing control of your content makes you feel twitchy, we are on hand to address these key issues when you are showing the world what you can do.

The esports industry often relies on funding from sponsors in exchange for marketing opportunities. Such opportunities are often with established brands offering goods or services that relate to esports and gaming. For example, dating application Tinder has recently entered a sponsorship arrangement with esports and gaming company Immortals, to sponsor its Made in Brazil (MIBR) Counter Strike team. As such, the bargaining power of smaller operators might be reduced, potentially leading to unfavourable commercial terms, especially considering that the operations may depend on the sponsor’s funding. It is vital to understand what you are signing up for and how you can get out if things are not working out as you expect. 

There is always the question of what is the next level. And where do you go when you believe you have reached the ceiling? Much like in-game purchases, you always have the option to introduce a new variable to upgrade, even if it comes at a cost. There is much excitement about private equity and the big numbers involved, but there are also a number of operators listed in the UK, Canada and the US that demonstrate that an IPO is a viable route to investment. In considering what works best for you, it is important to weigh up what each option means for you and your business, whether it is the internal scrutiny of private equity or the public scrutiny of the ‘markets’.