Regulation in the esports industry

Esports (electronic sports) is a new concept to many, defined as ‘a multiplayer video game played competitively with spectators’. Esports promotes individuals and teams to play computer games in a competitive environment for cash prizes. The esports industry has seen rapid growth since the outset of the global pandemic, which restricted viewing and participation in traditional sports. In 2020 the market revenue for esports was valued at $996 million and in 2023 this had grown to $1.4 billion.

By 2029 the market revenue is forecasted to be $5.48 billion. Such growth is also attracting international brands to the industry, with the likes of Mercedes AMG and Porsche entering their own professional teams to the ESL R1 Series. In addition, the number of mergers and acquisitions taking place within the sector is also increasing with Drake Star Partners reporting that there were 651 merger and acquisition deals closed in the first half of 2022 alone.

Opportunities

Due to organisational similarities between esports and traditional sports, esports is currently dominated by sports companies and athletes. However, with such forecasted growth in esports, one can envisage it is only a matter of time before the current trend of large private equity firms and US investors investing in traditional European sports, such as in the Premier League and F1, is replicated in the esports arena.

One example of athlete involvement in the esports arena is David Beckham and his franchise ‘Guild Esports’ that completed a public market floatation in June 2020, raising £41.2 million. This was the first time an esports team has been listed on the London Stock Exchange and shows the increasing global reach of esports.

Unlike traditional professional sports, such as professional football clubs, esports typically adopt a franchise model with relegation free leagues, thereby promoting the stability of revenue, viewership numbers and talent given the elimination of the risk of relegation to a lower division.

The law

As of yet, there are no specific laws in England and Wales which apply to regulate the esports industry. Esports therefore currently operate in a similar way to traditional sports under the existing legislative framework. Franchises will have similar legal needs to traditional professional sports teams and bodies, whether that be support with player contracts, the protection of intellectual property, the establishment of the franchise from the outset along with any initial and follow-on investment.

For those looking to establish an esports franchise, one of the first key decisions they will need to consider will be the form of legal entity that the franchise will take. The current trend, as with Gareth Bale’s Ellevens’ Esports team, is to incorporate a private limited company. However, other structures are available and should be considered along with suitable tax advice.

Similar to any early-stage business, one of the key matters an esports franchise will be looking to secure will be its initial investment. This can take many forms and can include investment from friends and family, wealthy individuals with an interest in the sector, and/or by funds specially set up to look at early-stage opportunities in the sector. Whichever form the investment may take it is critical that such investment is appropriately documented to ensure that there is clarity between each of the parties as to the terms of such investment and the rights and restrictions relating thereto. From the investor’s perspective, they will want to ensure that the investment is suitably protected and used for the purpose for which the investment is made.  For the franchisee, they will want to ensure that the terms of the investment are such that they have the flexibility to develop and grow the franchise moving forwards.

It is often a difficult balance to strike, however, it is the role of lawyers to help, advise, negotiate and draft the relevant documentation to achieve such balance.