The Excitement Around E-Sports Is Growing. But Where Are the Profits?

It had been more than three hours of tense, back-and-forth combat — projected across the massive Jumbotron at San Francisco’s Chase Center — when the sellout crowd, thumping together inflatable thundersticksThe victory was within reach, and they yelled in excitement.

A South Korean e-sports team, DRX, guided their video game characters into the home base of the rival T1 squad and smashed its Nexus, a blue gemstone, to pieces, clinching this year’s League of Legends world championship.

Fans cheered and applauded, fireworks lit up, the winners hugged each other, while the losers fell to their keyboards. Riot Games publisher presented DRX with diamond rings sponsored Mercedes by Mercedes to celebrate the pinnacle of professional video games.

It was flawlessly choreographed, exactly what gaming publishers promised when they first pitched investors from the traditional sport world to invest in the rapidly growing esports industry in mid-2010s.

“I remember seeing a team come out and the fans were going crazy and asking for autographs. I thought, ‘Oh my gosh, this is just like our experience,’” said Zach Leonsis, the son of Ted Leonsis, who owns the N.B.A.’s Washington Wizards and the N.H.L.’s Washington Capitals. In 2016, Mr. Leonsis, the younger of the two, invested in an esports team.

But despite the industry’s growth and appeal to the young consumers traditional sports owners are desperate to attract, the money has not followed. Some sports owners have soured on the industry’s short-term prospects after discovering that the methods that make money in traditional sports — like building fan bases in specific cities and striking lucrative deals with television networks — don’t always apply in e-sports.

Many have yet to turn a profit or see a return on their investment. The gaming publishers that own the largest competitive leagues in North America like Riot or Activision Blizzard are either operating at a loss, or beginning to break even.

Even though major esports events sell out buildings such as the Chase Center and draw tens to millions of viewers from China, tickets are much cheaper than traditional sports games. In fact, far fewer Americans are viewing e-sports than those who watched the 2022 N.B.A. (12.4 million). finals, or the 17 million N.F.L. averaged for 2021 regular seasons games, which is a significant difference that could mean less interest from advertisers.

Leagues such as the N.B.A. are crucial. N.F.L. The N.F.L. and broadcast deals with television networks earn billions of dollars annually, while many esports are free to stream on sites like YouTube or Twitch. Early revenue projections included expected broadcasting deals with Twitch or YouTube, which were less lucrative and more consistent than anticipated.

E-sports investors didn’t expect the industry would supplant traditional sports within a few years. However, many have been disappointed with early returns.

“They certainly pitched us that the growth of these leagues would be meteoric, and we all drank the Kool-Aid,” said Ben Spoont, the chief executive of an e-sports organization called Misfits Gaming, whose backers include the owners of the N.B.A.’s Orlando Magic and the N.F.L.’s Cleveland Browns. “What has happened is that growth has not materialized as fast as we had hoped.”

There are many other challenges. Most League of Legends competitions in North America take place at Riot’s arena in Los Angeles, where many teams are based. E-sports teams are unable to make money hosting games and to build fan bases in particular regions.

Activision wanted to change this with leagues that were based on Overwatch or Call of Duty, the first-person shooter games. Each would host home and away matches with teams in the same locations as traditional sports teams. Activision charged $20 Million to investors for the Overwatch League.

The league was still building momentum, when the Covid-19 pandemic forced them to cancel all in-person events. It has not seen much success since then. Activision allowed teams to defer fees to be in the league, and is now helping teams cover their costs, paying each of the league’s 20 teams about $1 million this year, according to a person with knowledge of the league’s finances.

“Even with the recalibration brought on by the pandemic, we’ve had full arenas and record viewership,” said Joe Christinat, an Activision spokesman, adding that there was “overwhelming enthusiasm” for the new Overwatch and Call of Duty games. “Our fans want these leagues, and we remain committed to them.”

Investors have also realized that game publishers’ incentives are not necessarily aligned with their own. Publishers can still afford to run money-losing esports leagues provided they continue to drive interest in their games. In other words, they often prioritize revenue over growth. Riot might be reluctant to sign a deal to broadcast League of Legends only on YouTube or Twitch, as it would prevent viewers from China, which both services are blocked in China.

These conflicting goals can sometimes lead to tension in negotiations.

“It’s a push and pull,” said Kirk Lacob, the son of Joe Lacob, who owns the Golden State Warriors. “I’ve had long discussions with various members at Riot over the years.” In addition to serving as executive vice president of basketball operations, the younger Mr. Lacob oversees the Warriors’ e-sports teams.

Kirk Lacob’s point of view is common among the sports ownership groups that have bought or invested in e-sports teams, a list that includes Stan Kroenke of the Los Angeles Rams, Robert Kraft of the New England Patriots and Hal Steinbrenner of the New York Yankees. Lacob was once a gamer and discovered competitive gaming recently and was excited about the opportunity to reach a younger audience. He remains bullish on the industry — but would like to start seeing some results.

“I really believe that where there are eyeballs, where there’s usage, there’s eventually revenue,” he said.

Gaming executives urge patience. According to them, e-sports have been popular in Asia for decades and are still in their infancy in North America. They should be considered more of a high-growth start up than a mature business. According to data firm Stream Hatchet in the United States, 217 million hours worth of e-sports content was viewed by Americans this year. This is an increase from 147 million viewers in 2018. “We often say that we’re still in the leather helmet days of the N.F.L.,” said Naz Aletaha, Riot’s global head of League of Legends e-sports.

Many investors believe that esports will become a major, lucrative industry. But in the short-term, some are “very frustrated,” said John Needham, Riot’s president of e-sports, adding that Riot has worked to convince investors to embrace a different monetization model.

Though sponsorships still make up a majority of revenue, a cornerstone of Riot’s strategy involves microtransactions: selling recreational League of Legends players in-game items for their characters that are themed around real-world e-sports events like the world championship.

While it may sound like a niche income source, early numbers have been impressive. Riot, which hosted the 2022 Valorant championship event, made $40 million just from microtransactions. Half of that went to the league’s teams through a revenue-sharing agreement.

“This is where we’re going to disrupt the broadcast revenue formula, because that scales,” Mr. Needham said.

The costly task of fielding competitive teams is just a catalyst to the actual revenue-generating operations at many esports organizations. FaZe Clan has been a prominent team, as have 100 Thieves. morphed into more general lifestyle brandsThese companies offer live streaming entertainment and apparel to viewers. FaZe Clan went public in this year’s “amazing” move. bellwether for the industryAs shares of its stock plunge,, is experiencing losses and cutting costs.

Felix LaHaye, the chief executive of United Esports, a gaming marketing agency, compared competitive play for e-sports organizations to a car company fielding a Formula One racing team — an expensive undertaking that draws eyeballs and prestige.

“It creates value elsewhere in their ecosystem,” Mr. LaHaye said. “It’s worth it to have a loss leader in terms of a product that creates the brand, and then you end up selling normal products to people.”

Even Team Liquid is considered to be one of the more competitive esports organizations. The company now has nine sources of revenue including an entrepreneur. e-sports encyclopedia website, said Mark Vela, the chief executive of Axiomatic Gaming, Team Liquid’s ownership group.

“It’s a natural evolution,” Mr. Vela said. “Everyone’s having to take a step back, and seeing what’s really working for us here.”

Team Liquid took in over $38 million in revenueWhile the site is not yet profitable but Mr. Vela (whose ownership group also includes the Leonsis dad-son duo), said that esports remain attractive due to the rare type young, wealthy viewer they attract.

Although Mr. Spoont remains optimistic for the long-term, he doesn’t want to wait. Spoont sold his European League of Legends team for $35 million to a Spanish esports group. He explained that Misfits was being restructured to be more focused on content creation as it may take another decade for competitive esports to reach their full potential.

“We were trying to accomplish as an industry what took the N.B.A. 50 years, but we were trying to do it within a five-year time period,” he said, referring to the many N.B.A. These were not lucrative businesses and they did not make a lot of money. “Turns out that it doesn’t happen.”