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an overview of a new(ish) frontier in digital entertainment

September 2022

By Andrea Rizzi and Francesco de Rugeriis, Andrea Rizzi & Partners, Milan, Italy

Pardon me: an e-…what?

According to the definition in the Oxford Advanced Learner’s Dictionary, an esport is “a video game played as a competition for people to watch as entertainment”. Albeit with some approximation, this definition captures the essence of the phenomenon and helps us introduce this first very important point: any videogame (whether it’s a virtual simulation of a traditional sporting activity or not) can be an esport.

Only a fraction of esports involves virtual simulators of traditional sports like soccer or basketball. League of Legends, the videogame developed by Riot Games, is one of the most popular “esports” worldwide but on the face of it has nothing to do with “sport.” (Photo: © Riot Games)

Only a small fraction of esports involves virtual simulators of traditional sports like soccer or basketball. League of Legends, the videogame developed by Riot Games, is one of the most popular “esports” worldwide and yet, on the face of it, it has nothing to do with a “sport;” it’s a battle-based videogame set in a fantasy world where teams of fanciful characters fight for victory and glory.

The significance of esports

The significance of esports should be appreciated both from an economic and a communications standpoint. In economic terms, in 2022, the esports industry is expected to generate USD 1.38 billion, up from USD 1.11 billion in 2021, with year-on-year growth of 16.4 percent, according to Newzoo’s 2022 Global Esport & Live Streaming market report.

From the communications perspective, esports can connect with both newer and older generations with a high spending capacity. As such, they are becoming an interesting target for big brands like Louis Vuitton and Mastercard, which until recently, were totally unrelated to the gaming world. Their ability to reach a broader and more varied audience is appealing. In 2019 the League of Legends World Championship Final had roughly 100 million viewers, while the NFL Superbowl had “only” 98 million spectators.

Unlike in traditional sports, where nobody ‘owns’ the game as such, in videogames a whole host of (physical or legal) persons may have proprietary rights to the game or its components.

Esports as IP protected videogames

For there to be an esport, there must be a videogame. This has meaningful implications from a legal standpoint. If we think of a videogame as being, in essence, a layer of software (or game engine) on top of which sit audiovisual components, such as animations, images, text, sound effects and music, which are IP-protectable subject matter, then the legal complexity surrounding esports becomes clearer. Copyright is arguably the category of IP rights that is most immediately relevant to videogames. However, virtually every category of IP rights is potentially pertinent.

From a European perspective, the Court of Justice of the European Union (CJEU), in its Decision No. C-355/12 (the Nintendo case), has clarified that “videogames […] constitute complex matter comprising not only a computer program but also graphic and sound elements, which […] are protected, together with the entire work, by copyright […].”

As IP rights are proprietary/inherently monopolistic rights, their owners can, in principle, exclude others from using the relevant subject matter. Unlike in traditional sports, where nobody “owns” the game as such, in videogames a whole host of (physical or legal) persons may have proprietary rights to the game or its components: coders, artists, writers, music composers and performers, to name a few.

The IP rights to videogames are typically owned or controlled by the publisher, who acquires them for their distribution and commercial exploitation. Such exploitation takes place, at core, through the sale of licenses to end users, the terms of which are governed by the End User License Agreement/Terms of Service (EULA/ToS). Under these agreements, the publisher’s license is virtually always limited to personal/non-commercial uses. This leads us to the second fundamental point: unlike that of a soccer tournament, the organization of an esports tournament requires, authorization, in principle, from the videogame’s publisher.

The esports landscape is expanding and esports are growing in popularity as videogames become an increasingly important entertainment and communication medium for younger generations. (Photo: © Riot Games)

Esports as complex ecosystems

Here’s the third crucially important point: the presence and the interaction between stakeholders and their respective IP rights create a complex ecosystem, as outlined in Figure 1.

Such complexity is managed through a web of agreements, each of which must “converse” with the others: get it wrong and you may find yourself infringing third-party IP rights. In navigating this ecosystem, it’s important to remember the following key points.

First, each esport is a videogame that has its own built-in rules, which are the result of the developer’s game design decisions. Generally speaking, these design decisions cannot be changed by the user without authorization. Second, the use of the videogame is governed by a license agreement. This may be the general EULA/ToS or a bespoke license granted by the publisher to allow for the organization of a specific tournament. And third, several other parties holding IP rights are likely to be involved in an esports competition, which adds further complexity from an IP perspective.

An esports tournament may be organized by the publisher or by a third-party organizer and may have its own (additional) rules. Any violation of the event’s rules may entail the violation of the IP rights of the publisher and/or the third-party organizer. A tournament may be a standalone competition or part of a larger event, such as a league, which will entail additional rules.

The tournament organizers (whether the publishers or third-party organizers) will monetize their rights through sponsorship agreements with brands, (also covered by IP rights), and by granting broadcasting/streaming rights to content distribution platforms (such as Twitch or YouTube), normally on an exclusive basis. In addition, they will generate revenue from ticket sales to h physical events and the sale of physical or digital merchandise of all sorts (also covered by IP rights).

And then, of course, there are players and teams, which may have their own sponsorship agreements with brands and event sponsors. Teams and players own or control rights over images of the players and viewers watching the competition. Viewers often interact through the streaming platforms (which also own IP rights in their proprietary technology) and potentially create content that may also attract additional IP rights depending on the platform’s EULA/ToS and – to the extent content includes any game content – the terms of the publisher’s EULA/ToS.

Esports represent a complex ecosystem of IP rights. This complexity is managed through a web of agreements, each of which must “converse” with the others to avoid any infringement of third party IP rights.

A fundamental question: who should regulate esports?

As often happens with new phenomena, esports are largely unregulated by national law. Consequently, publishers with IP rights have great freedom in administering the esports ecosystem (within the scope of general law, including consumer and antitrust laws). From a publisher’s perspective, this is reasonable since the publisher normally bears the economic burden of financing and marketing its game. It is also the most efficient arrangement as nobody understands their product/service (and the associated user community) better than the publisher. As such, publishers are best placed to make the game ecosystem flourish.

Some argue, however, that from an esports market perspective, the substantial monopoly individual publishers enjoy over their games is not the optimal solution. Those who see a risk in leaving the ecosystem in the hands of the publishers argue that the interests of other stakeholders may not always be aligned with the publishers’ interests. They argue for the need to counterbalance the publisher’s power to protect third-party stakeholders’ interests and investments.

Some advocate regulatory intervention by the State, which may take two forms. First, bespoke regulation (ranging from a “light touch” intervention limited to rectifying the shortcomings of the existing regulatory framework, to more comprehensive legislative intervention). And second, to bring esports within the regulatory framework applicable to traditional sports, and thereby within the remit of the International Olympic Committee (IOC).

As often happens with new phenomena, esports are largely unregulated by national law. Consequently, publishers with IP rights have great freedom in administering the esports ecosystem.

In April 2021, the IOC released its “2020+5” agenda, which notes a distinction between virtual sports (i.e., virtual versions of recognized sports) and videogames. While the IOC acknowledged the importance of videogames in reaching young people and encouraging them to engage in sport, its recommendations make it clear that the IOC’s focus is on virtual sports, in relation to which it sees room for International Federations to assume governing and regulatory responsibilities (recommendation no. 9). This leaves out the numerous esports that are not virtual simulators of traditional sports, to which a different regulatory regime will apply.

In May-June 2021, the first Olympic Virtual Series took place. It saw eplayers compete in virtual sports (ebaseball, erowing, ecycling, esailing and emotor-racing) and the involvement of the five International Federations governing the corresponding sports.

While the roles and responsibilities of the Federations at both international and national levels are still to be defined, their inclusion is bound to add complexity to the esports ecosystems. Why? First, because the Federations will inevitably impose extra layers of rules on esports organizations, and second, because the Federations’ governing and regulatory responsibilities envisaged by the IOC may, if not carefully managed, cause friction with the publishers.

The dispute between the developer/publisher Blizzard Entertainment and KeSPA – the Korean e-Sports Association established by the South-Korean government to oversee the local professional scene – offers an indication of the problems that may arise. The dispute centered around the management of broadcasting rights relating to the airing of Blizzard’s Starcraft videogame on television. The dispute was eventually settled (on undisclosed terms) but only after Blizzard sued KeSPA.

Summing up

The esports landscape is expanding and esports are growing in popularity as videogames become an increasingly important entertainment and communication medium for younger generations.

Esports are complex ecosystems, which historically the publishers have administered, leveraging the powers and flexibility that IP and contract laws confer upon them, with little or no interference from the State and its legislation. This may, and often does, create problems. However, the lack of bespoke State-made rules leaves room for courts and regulatory authorities to apply existing regulations (e.g., often burdensome prize promotion and/or gambling/regulated gaming regulations) that were created before esports emerged. This, in turn, generates a regulatory risk and may represent a disincentive for potential investors.

Equally, the lack of ad hoc national rules carries the risk of leaving important gaps in the system, for example, in relation to player-visa issues. Such issues arise when players enter a foreign country to attend an esports event. As professional eplayers, they are technically “workers,” and need to comply with local immigration laws, which may require a work visa. However, it is often impractical, if not impossible, for an esports player to obtain an “ordinary” work visa. This is why, in traditional sports, pro athletes benefit from bespoke, simplified, visa rules). On the other hand, bringing videogames into the remit of traditional sports organizations may not be entirely satisfactory either, as an overly regulated environment may collide with the prerogatives of publishers.

It remains to be seen how, from a governance perspective, the role of international and national sports Federations may be shaped, and which rules will apply to esports that are not virtual simulators of sports. The goal, however, is for a governance system that is both beneficial to the industry and respectful of the IP rights of the publishers to avoid disputes like the Blizzard-KeSPA case.

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