Published: May 16, 2018

How The Ruling Impacts Esports

From Unikrn To Skin Betting: How The Supreme Court's Sports Gambling Ruling Impacts Esports The crowd at the Spring Split Finals of the North American League of Legends Championship Series.

Founded in 2014, Unikrn is a Seattle-based web platform where users can bet on the outcome of esports matches, from League of Legends to Counter-Strike: Global Offensive. Backed by, among others, Mark Cuban and Ashton Kutcher, Unikrn has pulled in $10 million in equity financing, plus around $80 million from last year’s sale of its Ethereum-based cryptocurrency. And with the Supreme Court’s decision Monday to effectively open the door for state-regulated betting on sports, Unikrn stands to win big.

“We’ve been expecting this for a while,” says Rahul Sood, Unikrn’s cofounder and CEO. “We felt that fantasy was operating in a loophole and it was unsustainable, so instead we focused on building technology around sports betting knowing that the U.S. would eventually come around. And we effectively built a technical motor on Unikrn that put us light years ahead of anybody else in the space. So, we’re excited about this.”

With an impending license coming through to operate in Malta, Unikrn will be open to 80% of Europe, but with the ruling, the company may now be able to sell to the 40% of its global users located in the U.S. These customers currently bet on games using a valueless, free-to-earn virtual currency that can’t be pulled out of the service.

“When we open it up, it’s going to be a significant uptick for us,” Sood says.

It’s not just the obvious players like gambling sites that will feel the waves of this ruling, though, especially in the burgeoning, ever-complicated world of esports. From team owners to the publishers who run the leagues to the audience itself, gambling touches many segments in the industry. After all, the total number of esports wagers annually may have already crossed a billion dollars.

Unikrn’s Sood claims legal wagering alone accounts for around $2 billion, with illegal transactions knocking it up to around $8 billion. Similarly, a report from software analytics company Narus and research firm Eilers & Krejcik Gaming claims the whole market will hit $6.7 billion in 2018.

The relationship between video games and gambling has been spotty in the recent past, ranging from match fixingin major esports to underage players betting on unregulated third-party sites. Most of it runs through something called “skin betting.” Valve’s Steam, the largest PC gaming online store, allows users to take cosmetic items from games like CS:GO and either buy and sell them on a market or trade items with each other. Prices for items can be absurd. For example, a set of clothing in PlayerUnknown’s Battlegrounds—what amounts to a trench coat and bandanna with no gameplay benefits—is currently selling at around $600.

Cosmetic items in games clearly have real-world value. So it’s not surprising that third-party sites, most notoriously CSGO Lounge, popped up allowing unregulated gambling using these virtual assets, whether that be a roulette wheel with likely fudged odds or bets on esports matches. The British Gambling Commission’s 2017 annual report found that 11% of 11-to-16-year-old kids in the UK engaged in skin betting. After a little legal pressure and fevered controversy, Valve—which gets a cut from skin sales on Steam—decided to shoot out cease-and-desist letters to these unregulated gray markets and began instituting caps and time limits on trading to prevent its platform from being used for illegal gambling.

The hope from industry insiders is that state regulations will help put a final nail in the coffin of these third-party sites, while also improving the integrity of matches.

“There will always be betting on sport, and when it’s underground, in dark, and in gray markets, then there are constant attempts to manipulate the market and manipulate sports competition,” says Ian Smith of the Esports Integrity Coalition. For the past two years, ESIC has worked with gaming control boards and gambling sites like Unikrn to help facilitate communication and ensure the integrity of matches. But it’s been quite the effort without proper regulation. “A well-regulated system addresses some of those challenges better than just ignoring the fact that betting’s going on.”

Looking forward, though, gambling in esports also presents the same benefits to team owners and broadcasters as it does in traditional sports. Essentially, more engaged viewers and more ad and sponsorship opportunities.

“We’ve seen that betting increases fans’ engagement with the content they bet on,” says Jurre Pannekeet, the head of esports at marketing research firm Newzoo. “Enabling betting will increase the number of matches fans watch to follow their bets, which is something the whole industry, ultimately, benefits from.”

Michael Brown at United Entertainment Group likened it to the NFL and fantasy football. “Engagement in a sport increases in proportion to the rise of fantasy sports. As esports fantasy increases, combined with legal sports betting, I can see a rise in viewership as people have a financial stake in the potential outcome of individual players and teams.”

Because the young industry lacks metrics showing return-on-investment for ad and sponsorship opportunities, the enthusiastic engagement from fans is often the linchpin for brands to pull the trigger on deals. Currently, ads and sponsors are the top two drivers of revenue in the industry, with brand deals likely to make up 40% of all revenue in 2018, according to Newzoo.

However, it’s up to the publishers and tournament organizers to decide whether such investments from gambling companies are allowed. The world’s largest tournament organizer, ESL, allows the Ninjas in Pyjamas CS:GO team to display its jersey sponsor, Betway, during broadcasts. (ESL has even accepted sponsorships from Betway for some of its events.) However, when NiP had a temporary stint in the League of Legends Championship Series, the sponsorship came to an end due to Riot Games' stricter rule book.

“The publishers that have historically prevented any affiliation with gambling are extremely brand conscious, and I don't see this decision as changing their viewpoint on gambling more generally,” says Bryce Blum, a founding partner of ESG Law and the outside general counsel for Unikrn. “That being said, the most prominent harms associated with gambling—threats to competitive integrity, addiction and underage gambling—are all exacerbated when league operators choose not to be involved in the potential solutions.”

While it’s a sentiment shared by other insiders, associating with gambling companies does have a way of recalling match-fixing scandals and underage gambling. As far as the former is concerned, leagues like the NBA have proposed an “integrity fee,” which is a percentage cut on the wagers that can be used for oversight and enforcement measures. As reported by Forbes’ Chris Smith, a single percentile of all bets waged could amount to a significant chunk of the final gambling revenue. And as ESIC’s Smith says, “I’ve long believed and advocated for the fact that legalization and good regulation well-enforced in sports betting is the only way to protect sports integrity."

As for the latter, it’ll take a careful balance. Esports viewers tend to skew younger than their counterparts in traditional sports, and gambling in the space can easily be likened to playing an addictive video game.

“Given the younger audience, I would hope that the publishers, event organizers and even the players would look to protect minors from the potential onslaught of gambling advertisements,” UEG’s Brown says. “Underage players now will be inundated with gambling advertisements. The real issue is going to be monitoring underage gambling.”

Still, despite the vast implications of state-regulated sports gambling, changes won’t happen overnight. “This is going to be a very long process,” says Smith. “People are obviously excited about this decision, but we’re a hell of a long way from this being really implemented in a meaningful sense in America.”

While states like New Jersey, Pennsylvania, Mississippi, West Virginia and New York are more readily prepared to begin implementing standards for sports gambling, the rest of the country is behind the ball—or not interested in the ball at all. Even then, unless states adopt a standardized set of regulations—as Sood hopes—there will be myriads of rules that companies like Unikrn will have to wade through and consider. This is all to say that bettors who are currently gambling illegally will likely continue for the time being, and possibly for the foreseeable future if their home states aren’t on board.

“Currently, of course, the vast bulk of Americans are betting across state lines in contravention of the Wire Act,” Smith says. “So let’s not pretend many, many millions of sports bettors are suddenly acting legally and going to migrate to some kind of legal system or legal regulated system. This is going to take years for this to work out.”

Still, esports gambling has become even more of a reality with this week’s Supreme Court decision, and despite a lot of uncertainty and potential pitfalls, its being out in the open ready to be regulated seems to be a positive for nearly everyone making decisions in the industry.

“Gambling will always exist in sports in some form,” says Marty Strenczewilk, the cofounder and CEO of the multi-esports team Splyce. “Finding the right legal path forward allows the sports leagues, players and teams to benefit from the upside, instead of illegal companies. It also creates the safest consumer experience possible. It's a win-win if done right.”

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