As the eSports industry grows to include new entrants, in the form of startups and established firms, the race for profitability heats up. Chris McCann’s market ecosystem map provided an especially informative snapshot of the entire landscape (see below). One specific area that has generated a good amount of activity is the eSports fantasy and betting space.

Eilers Research analysts Adam Krejcik and Chris Grove estimate that there are currently about 595k paid active real-money fantasy eSports bettors, 1.72m paid actives at eSports books and 3.2m players betting with in-game items. Eilers forecasts that 19.4m bettors will be wagering $23.5b by 2020 (discounting the informal markets). To better sort this space out, an analysis of its competitive forces can better frame future direction. Michael Porter’s five forces analysis framework will be used as a guide. These are outlined in the diagram, below:

[Image courtesy of “Elements of Industry Structure” by Denis Fadeev – Own work. Licensed under CC BY-SA 3.0 via Commons]

New entrants

Given the nascent nature of the eSports industry, as whole, it’s not surprising that new entrants are more the rule than the exception. Additionally, acquisition into the market with intent to build market share is not yet a viable option. New entrants face several barriers to entry, some more relevant to companies listed above than others. Some of the notable barriers to entry are, as follows:

• Economies of scale – Economies of scale refer to declines in unit cost of a product as volume increases. In other words, it becomes cheaper to produce more. Currently, eSports betting products are all offered online. Thereby removing premium on the operation of physical production. However, economies of scale apply to functional areas as well. Such as, the costs of providing fantasy support for an entirely new eSport category, or the cost of new paying customer acquisition.
• Product differentiation – Brand identification and customer loyalties stemming from past advertising, product positioning, or longevity within the industry. This is less a factor since professional eSports are a relatively new phenomenon. Plus, the customer overlap between sport and eSport is not overly large, as of this writing. Meaning, operators with past sports betting/fantasy experience do not hold an insurmountable advantage over startups.
• Government policy – Gambling on the outcome of sporting events is not yet uniformly legal. There is a maze of legalities determining who can place a moneyed wagered on what. These statutes carve the worldwide betting market into segments, with certain regions wholly excluded. For example, Unikrn, an eSports betting operator, is headquartered in the USA where the activity is almost entirely forbidden. Should the USA loosen its laws to allow eSports betting, Unikrn would be in a unique position to profit. Until then, its location might serve as a slight disadvantage compared to competitors based elsewhere.

Pressure from substitute products or services

Given that the eSports industry is in the early stages of maturity, along with the related products and services, the odds of substitute products emerging, now, are slim. Yet, as the industry matures, it is inevitable that various substitutes will be introduced. Even today, betting with in-game items (skins and/or other digital articles) offer a form of substitute product. These in-game items can be bought and sold, using real-world money, providing loose equivalency to a form of currency. Gamers who watch professional eSports matches can wager these digital items on the outcome and potentially “cash them in” at their leisure. This form of betting is not legally recognized or approved but offers gamers an alternative wagering channel.  It’s possible that a firm could formalize an offering around this format in the near future; but it hasn’t been done up to this point.

Power of customers

Customers (buyers) have bargaining power when they are strong enough to be able to put collective pressure on the companies producing a product or a service. This power is highest when buyers combine for a large percentage of the producer’s sales revenue or when there are a number of suppliers providing the same type of product. Today’s climate for eSports betting/fantasy maximizes customer power.

Take eSports fantasy, as an example. Customers (users) have an array of choices competing for their activity. Not only are startups like Vulcun, AlphaDraft and eSportsPools, which all offer fantasy for multiple eSport titles, jockeying for position; but also verticals like Riot Games’ fantasy league for its own eSports flagship, League of Legends. Similarly, well-regarded organizations like the Electronic Sports League (ESL), offer fantasy.

 Power of suppliers

The companies pictured in Mr. McCann’s market overview visual serve as the suppliers for the eSports betting and fantasy space. Attractive, high growth markets tend to feature low supplier power during early stages of the industry life cycle, steadily growing as volume and high margins increase. Suppliers typically wield power when:

• There is a concentration of suppliers compared to buyers.
• There are high switching costs associated with moving to another supplier.
• Proprietary expertise or technology is needed by suppliers.
• A product is highly differentiated.

None of the above is a reality for the eSports betting/fantasy market today. However, as the industry progresses through its lifecycle, several factors will begin to enact change. For instance, consolidation, whether through acquisition or the emergence of clear market leaders, can easily power a concentration of suppliers. Likewise, as users become entrenched with certain offerings, switching costs will become prominent. This will shift the marketplace balance that currently favors customers.

Industry rivalry

All companies belonging to a target industry are competing in one fashion or another. Industry rivalry deals with competing firms and the amount of pressure they place on each other. This pressure can limit profit potential for all enterprises involved. For the eSports industry, the intensity of competitive rivalry is currently muted by the equally fast developing discipline of professional gaming. Companies today are less focused on competing with one another as attempting to establish traction as the world of pro gaming continues to spin, ever faster.

Still, the competitiveness of an industry is influenced by the following factors:

• Competitive advantage through innovation – How much of an edge does innovation provide?
• Advertising expense(s) – What is the premium placed on advertising
• Strong competitive strategy – Use of competitive insights to craft strategy
• Firm concentration ratio – Output of industry by number of companies
• Degree of transparency – how easy is it to find information about industry

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Alex Fletcher is founder & president at eSports Group, where he helps customers meet their eSports advisory & consulting needs. When Alex isn’t glued to a screen, he spends time with his wife, their two dogs, and pretends to learn Polish. Feel free to stalk him on Twitter – @FletchUnleashed