There are millions of fans around the world and an increasing number of deep-pocketed investors. Now the world of esports is making its first tentative steps into the merchandise licensing arena.

“We have gone from just trying to keep pace with it to having three- to five-year plans [for] esports, says John Friend, Head of Consumer Products for Microsoft/343 Industries. “Kids today have grown up playing these games and with the availability of [streaming platform] Twitch, they are watching them the way people used to view other sports on television. And people don’t just tune in to watch the game; they want to know what the rivalry is and what is behind it.”

It’s a landscape that is still taking form. Even Activision Blizzard executive Mike Sepso, who came to the company when it purchased his Major League Gaming (MLG) organization, referred to it as “the wild, wild West” in a presentation at the recent NYC Licensing Summit. There are multiple entities operating leagues and tournaments (each of which is built around a specific game), with no central unifying structure.

For example, MLG has staged local and or streamed tournaments for Activision Blizzard games such as “Call of Duty” and “World of Warcraft.” Microsoft partnered with Electronic Sports League (ESL) in conducting “Halo” World Championships, the most recent of which culminates with the finals at an ESL facility in Burbank, CA on March 24-26.

Riot Games runs tournaments for its “League of Legends” which are among the biggest esports events. The “League of Legends” finals last year, which drew 21,000 people to the Staples Center in Los Angeles in October, was viewed by a streaming audience of 43 million unique users, up from 36 million a year earlier.

“League of Legends” also is the game around which a venture between Riot and Big Ten Network is built, with a two-month tournament in which clubs from 12 of the 14 universities in the Big Ten conference are competing, with the finals televised on March 27 by the network. (Earlier rounds have been streamed on its mobile platform, BTN2Go and on watch.lolesports.com) Among other popular tournaments are a series built around “Defense of the Ancients” (Dota 2), sponsored by its publisher/developer Valve with a championship event slated for Kiev, Ukraine in April. And the “Counter-Strike: Global Offensive” world championship occurred in Atlanta in January as part of Valve’s partnership with eLeague.

As with more traditional sports, there’s a growing in-person aspect to esports, as in the previously noted “League of Legends” finals in Los Angeles. Millennial esports, which operates esports venues, recently opened a new 15,000-square-foot esports arena in Las Vegas with capacity for 1,200 fans; a similarly-sized facility in Santa Ana, CA is operated by eSports Arena, which also has a 16,000-square-foot venue in Oakland, CA. Allied eSports, an investor in eSports Arena,  also operates a facility in Beijing.

Gaining Mainstream Attention

With the plethora of tournaments, and the increasing amount of mainstream sports and entertainment media coverage – ESPN has regular coverage on its website and in its print magazine, and last year basic cable network TNT began televising a league based on “Counter Strike: Global Offensive” from its studios in Atlanta — esports are making the first moves toward a more visible position beyond just hardcore gamers. Team brands and individual stars are emerging, and high-profile investments are being made in teams, many by people connected to more traditional professional sports.

For example, a player group formerly known as Team Gravity was re-named Echo Fox, after former Los Angeles Laker star Rick Fox star acquired it and its League of Legends squad for $1 million in 2015. And Team Liquid last fall gained financial backing from aXiomatic, an investor group that includes Golden State Warriors owner Peter Gruber, Washington Wizards owner Ted Leonsis and former Lakers star Magic Johnson.

It’s a fragmented world that they’re buying into – but one that’s racking up some impressive viewership and attendance figures.

“I think everyone is looking at it just because of the sheer size of the potential market, and it is important for us to be there first,” says Jinx’s Zac Scuffham, whose company operates the Echo Fox and Team Liquid ecommerce stores in addition to supplying apparel for them. For esports products to move into the mass market, teams and players are going to have to become much more widely known among a broader consumer base. “People understand the New England Patriots, but it is going to be some time for esports to get to the same level of awareness,” acknowledges Scuffham.

Market is Growing

As esports moves to raise its profile, companies are placing their bets, whether as investors, sponsors or licensees. The potential return is sizeable. Research firm NewZoo forecasts that total esports revenue — media rights, merchandise and tickets sold at the events, online advertising and brand sponsorships — will grow to $1.1 billion by 2019, up from $463 million last year. The total audience (online and in arenas) is projected to swell to 427 million by 2019 from 292 million in 2016 and a projected 385 million this year.

MLG will launch an “Overwatch” League in September, leveraging an Activision Blizzard title that has gained 25 million registered users since its launch in June. The league will have franchises with defined city locations, attempting to bring a more localized, personal feel to potential fans that has been lacking in esports.

The company will generate revenue from broadcast rights, licensing, sponsorship sales and franchise fees; according to Sports Business Journal, potential franchisees are being asked to pay $2-$5 million each for rights in smaller markets and significantly more in larger regions such as Los Angeles. The franchisees take in money from such things as local ticket sales, team sponsorships  and prize winnings, among other sources.

Activision has sold licensed merchandise at tournaments involving its games. “We are all learning as this business opportunity grows and what we have seen is this is a meaningful opportunity where players, consumers and viewers are engaging in this as a relevant sport,” says Activision’s Tim Kilpin. “What comes with that is the opportunity to build an affinity around the players, teams and franchises that support it.  When you start to do that you create an opportunity to bring merchandise forward that celebrates that.

Other moves hint at where this could be headed:

• Salt Lake City-based Fanzz, a 90-store retailer, recently launched online sales of eight SKUs of Jinx’s Echo Fox and Team Liquid jerseys, t-shirts, hoodies and snapback caps ($21-$69).
• Computer accessories manufacturer Razor recently completed a three-month promotion with Best Buy featuring a Team Liquid branded DeathAdder USB optical gaming mouse packaged with a mouse pad, priced at $59. In other promotions, smartphone supplier HTC produced a version of its HTC One M9 model featuring the Team Liquid logo engraved on the cover. Alienware also has produced Team Liquid-branded console boxes compatible with Valve’s online gaming network.
• Jinx launched sales of jerseys bearing the name and number of Team Liquid League of Legends player Juan “Hungrybox” Debiedma. The royalty revenue was split between the player and team, says Team Liquid’s Caleb Anderson. While the jersey was “well received,” licensed player jerseys aren’t something “that is offered across the board yet,” says Scuffham.
• Some teams such as Cloud9 and Team SoloMid (TSM) operate their own ecommerce sites, sourcing items such as hoodies, t-shirts, key chains and mouse pads in conjunction with third-party logistics companies. It’s still a relatively small business, with most team ecommerce sites generating less than $1 million in annual revenue, according to Jinx’s Scuffham.

Getting in on the Ground Floor

For the time being, licensees – there are only a handful – don’t view esports as a major revenue generator, but rather as a chance to be with a brand on the rise, say industry executives. The potential payoff, many concede, could be 3-4 years away.

“We are never going to sell as many team jerseys as [other mainstream licenses] and we don’t look at it from a raw revenue standpoint,” says Scuffham. “Deals are structured more favorably for the teams, especially when compared to traditional licensing. For us right now it has a lot more to do with brand association and endorsement; we are willing to give up a few points to make sure [the fans] are talking about us. I don’t think it will be that way forever, but right now we are comfortable with that, because we can take something that isn’t quite ready and have a hand in shaping it.”

The teams themselves also are taking a hand in shaping their licensing programs. For example, Team Liquid recently hired Yoni Ginsberg as Head of Branding to work with players in preparing them for licensing and understanding “why they need to grow their brand,” says Anderson. Anderson ran the team’s ecommerce store before switching last year to a merchandising role when Jinx took charge of the online business.

“The licensing through teams will really grow in the next year or two and players are starting to care more and more about their brands,” says Anderson. “It used to be that the most money players could make was through tournaments, but they can only play for so long. With an established brand, many are realizing there are other things they can transition to once their playing days are done.”

While esports are long on potential, it faces hurdles to creating a long-term licensing business, say industry executives. Most teams aren’t regionally based and players can be spread around the globe, making it difficult to put down the local roots needed to attract fans in a given market. It is a strategy that is a given with most professional sports, but that is still being developed with esports. In part, Activision is trying to address the issue with its “Overwatch” League franchises.

Since players also typically sign short-term contracts – minimum of six months and average of 12– it’s difficult to create a market for player licensing. Players also frequently switch teams. Jonathan “Fatal1ty” Wendel was among the first gamers to create a player brand, starting in the late 1990s, with branded headphones co-developed with consumer electronics supplier Monster. And while Wendel has retired, his web site still hawks the headphones along with branded motherboards.

For the teams, short-term promotions such as Razor’s holiday program at Best Buy potentially lay the ground work for a longer-term, year-round business, say industry executives.

“There is no-one, unlike other pro sports, that is born into being an esports fan, and we have to build on that because the tournaments and leagues are still relatively new,” says Echo Fox’s Elie Desche. Team Liquid isn’t “comfortable enough” yet that licensed products can be sold year-round through brick and mortar retailers, says Anderson.

“Our age demographic is a 17-24-year-old male; where they live is in social media and online, so is it really necessary for us to be in brick and mortar retail?” says Anderson. “We aren’t sure yet and we are still trying to figure that out.”

While industry executives are confident esports will emerge as a licensing business, the early uncertainty surrounding it stems its being unchartered territory with no blueprint to work from. While Major League Gaming carries a high profile in esports, it’s relatively new to the licensing business, says Kilpin, who is charged with helping shepherd the league into licensing.

“There is no tried and true playbook for any of this at this point so we are all going learn and see what elements work,” says Kilpin. “You can see a path down the road to building some authentic story-telling around this. In any established sports league you have teams and players that take on personas and rivalries that take shape and that provides opportunities for story-telling. You can usually tell those stories in terms of merchandise.”

Contacts:

Activision Blizzard, Tim Kilpin, Pres. Consumer Products Division, 310-503-9001, tim.kilpin@activision.com

Echo Fox, Elie Desche, Chief Marketing Officer, 614-458-8326, elie@echofox.gg

Jinx, Zac Scuffham, Licensing and Business Development Dir., 858-602-1715, zac@jinx.com

Microsoft/343 Industries, John Friend, Head of Consumer Products, john.friend@microsoft.com

Razor, Erin Bitar, VP Global Marketing, 562-345-6000, ebitar@razorusa.com

Team Liquid, Caleb Anderson, VP Operations, 404-576-0756, canderson@teamliquid.net