Clifford Chance

We wanted to create an all-in-one legal guide for those that currently operate in or are considering entering the video games industry with the purpose of providing an overview of the life cycle of a video game – from the early stages of development, past the grind of regulatory compliance, through to the final stages of monetising the product.

In Levels 11 and 12 of the Guide, we look at esports and gambling, including revenue streams and the greatest risks that key stakeholders should be aware of before entering the industry.

LEVEL 12: GAMBLING AND ESPORTS

It’s certainly not a new thing to bet on games. Gambling has been around for centuries, and following in the footsteps of the first slot machines of the late 1800s and modern day virtual sports and other casino games, as video games have leapt out of children’s bedrooms and developed into a fully-fledged and growing commercialised competitive sport, the ability to gamble on esports has also been on the rise.

Gambling is about opinions, and just like those held by individuals on their favourite football team’s chances in a particular match, or by how far and in what way they may beat an opponent, gamers have their own opinions on the chances of those competing for the large prizes on offer. The gambling industry has certainly taken note and not missed the opportunity to expand into another market and source of revenue with more and more industry participants providing esports gambling services throughout the last ten years. Today, long-established industry players, such as traditional UK high-street bookmakers, compete with newly formed esports focused operators to offer a variety of esports betting markets, much in the same way as more traditional sports.

As with any betting, there are certain risks that need to be managed, but not all elements of traditional betting are applicable to the esports market and the everchanging nature of both the underlying sport and those providing betting services means that there is a long way to go before the esports gambling market can be deemed to be fully developed. As industry players jockey for position whilst esports continue to grow, betting on such events will continue to become a much more significant part of gambling companies’ operations and such organisations will need to ensure that they adapt to any changing regulation to take advantage of this new global market.

How is betting on esports regulated in the UK?

Gambling in the UK is governed by the Gambling Act 2005 and, accordingly, betting on esports falls under the remit of the Gambling Commission in the same way as any other live event. For those wishing to offer esports betting services to customer, a betting licence is required. The Gambling Act is currently under review to ensure that it remains fit for purpose, but it is not clear how much, if any, of the review will focus on esports. Calls for evidence closed at the end of March 2021, and the review has primarily focused on affordability checks of bettors, advertising/sponsorship by gambling companies, age limits, verification of bettors and the scope of the Gambling Commission’s powers.

What is the size of the esports gambling market?

Estimates have placed the legitimate 2020 global gambling market at anywhere between the US$400-500 billion mark, and this is expected to continue to grow. Betting on esports remains a small fraction of that total market, with estimated 2020 revenues having doubled from 2019 to US$14 billion, seemingly largely driven by the impact of the COVID-19 pandemic.

As various high-profile sports and leagues were suspended around the globe, bettors looking for a usual slice of their gambling action not only turned to brushing up on their knowledge of the Belarussian football league or Ukrainian table tennis, but also started to dip their toes into the esports market.

It will certainly be interesting to see how strong the appetite for esports betting remains in the coming years, but early indicators from the Gambling Commission show that there has been a change in bettors’ habits with esports now contributing far more significantly than before to UK gambling revenues.

Throughout the COVID-19 pandemic, the Gambling Commission has been monitoring monthly expenditure on gambling. By way of comparison, March 2019 betting on esports reached just over £50,000, but this rose to a peak of over £4.6 million in May 2020 and revenues have since settled around the £1.5 million per month mark by the end of 2020 and into early 2021.

That is certainly a marked increase from before the pandemic and suggests that esports betting is here to stay in the UK, but it still has a long way to go to be a significant contributor to the UK’s £14 billion gambling market and still ranks well behind the £200-300 million approximately wagered each month on live sports betting (but does fare relatively favourably against the £10 million per month staked on online poker).

What are the key risks that the esports betting industry faces?

The Gambling Commission is particularly focused on ensuring that esports do not lead to an increase in problem, underage or illegitimate gambling.

The Gambling Commission continues to monitor levels of problem gambling in the UK and is considering the results of a consultation on the matter which closed at the end of February 2021. Any findings are likely to be a key part of any proposals to reform UK gambling law but it is unclear yet how much of the Gambling Commission’s conclusions will focus on esports following the first year of significant esports gambling revenue in the UK. However, with the prevalence of global betting markets on traditional sports available at all times of the day to bettors wherever they are located and able to bet, it is assumed that gambling on esports will not necessarily lead to different conclusions to other live betting.

The risk of underage gambling is, however, certainly something that the Gambling Commission is keen to monitor with respect to esports. Whilst any preconceived notion that esports are only watched by children is unfounded, with more than 1.2 million British adults having watched esports in 2019, according to Kantar data, it is undoubted that there is a risk that children who are watching esports are inadvertently drawn into gambling promotions and activities on esports. For the moment, the Gambling Commission does not have esports specific policies to deal with underage gambling, believing that the existing framework to prevent underage gambling is sufficient, primarily placing the onus on operators to ensure that they have policies in place to prevent those not legally able to gamble from gambling. As the latest Gambling Act review has expressly sought to consider underage gambling, it is possible that the latest findings will lead to changes in this area (e.g., further restrictions on advertising, further mandatory policy requirements etc.).

With respect to illegitimate gambling, the Gambling Commission is alive to the fact that due to the developing nature of both esports and betting on it, there is an increased chance of the integrity of events being undermined. Whilst it may be hard for match fixing to take place in traditional sports (but several high-profile cases do exist), responses to the Gambling Commission’s initial consideration of esports several years ago flagged a concern of participants being able to cheat in order to win, to underperform or to intentionally lose.

There were particular concerns that no recognised governing body existed to oversee esports but in the last few years, participants in the industry have acted to alleviate this concern. The Esports Integrity Commission (ESIC) was established in 2016 “to take responsibility for disruption, prevention, investigation and prosecution of all forms of cheating in esports, including, but not limited to, match manipulation and doping”. ESIC requires stakeholders to sign up to various codes of conduct and ethics, and monitors offences, handing out fines where it considers breaches have occurred.

Other organisations, such as the World Esports Association, also seek to clamp down on corruption and bribery through the rules that they require members to sign up to. This, along the various penalties under the Gambling Act (or other applicable legislation globally), will also provide some protection.