By Daniel Schnapp, Skyler Hicks & Samuel Cohen, of Sheppard Mullin
The emergence of legalized sports gambling in more than half the states across the country appears destined to coincide with the rise of competitive video gaming or “esports”—a wildly popular sphere within the entertainment industry now facing increasing regulatory scrutiny.
In 2022, close to 500 million people worldwide are expected to consume esports content and the industry is forecasted to generate between one to two billion dollars in global revenue. In addition, the average fan is an estimated 26 years old and a recent study suggests that 49 percent of the esports audience is between 25 and 44 years old. Given these demographics and the rapid growth of online sports betting or “iGaming” in only a few short years since the landmark Supreme Court case, esports gambling could quickly become a multi-billion dollar industry and sportsbooks are eager to open new betting channels for fans.
Legalization of Esports Betting
In the last few years, nearly a dozen new states have legalized esports betting through new legislation or state agencies’ statutory interpretations. Much of this development has come on the heels of legalized sports gambling laws with definitions of “sporting events” that specifically include “e-sports,” “electronic sports,” “competitive video game event,” or other formulations of “esports.” However, a number of states still impose esports-specific age and gambling restrictions that limit, for instance, the types of esports games on which fans can place wagers. Pursuant to Colorado HB 1327, the Colorado Limited Gaming Control Commission decides which esports competitions can be bet on and the type of wagers that can be made.
Legalized Esports Betting (year enacted into law or recognized by a state agency):
Arizona (2021)
Colorado (2020)
Connecticut (2021)
Louisiana (2021)
Maryland (2021)
Nebraska (2021)
Nevada (2017)
New Jersey (2021)
Ohio (2021)
Tennessee (2019)
Virginia (2020)
Washington (2020)
Wyoming (2021)
In contrast, there are a number of states that have yet to legalize traditional sports betting and have not publicly considered the issue of wagering on esports. And among the states that have contemplated esports, some have used their sports gambling laws to exclude esports from definitions of “sporting events” or to simply note that wagering on esports remains illegal. However, it is expected that many more states will legalize esports betting in the coming years. West Virginia’s House of Representatives recently passed such a bill which will now proceed to the state Senate.
Current Esports Gambling Avenues
For years, skin betting—placing wagers using a form of in-game assets rather than cash—provided a largely unregulated avenue for gambling in jurisdictions where esports gambling was illegal. However, the lack of regulation and verification can result in rigged odds and it is not uncommon for fans, sometimes minors, to lose substantial amounts of real money buying skins in order to gamble with them.
In contrast, a number of states that have legalized esports gambling now provide a variety of regulated betting options. For example, fans can use real money to place wagers on the outcome of a match, a tournament, or even proposition bets such as who will score the first goal in an esports match, if they do so in a legally compliant manner. In addition, daily fantasy esports can be played in states that permit traditional daily fantasy sports.
Future Innovations
Although the esports gambling options offered by legal sportsbooks have been more or less limited to the same types of betting opportunities offered for traditional sports gambling, the rise of iGaming could help accelerate innovation in esports betting markets in the coming years.
In the near future, sportsbooks may be able to more effectively leverage game data to offer esports fans an even richer gambling experience in which fans are not only constantly placing bets on what is about to happen next during a match, but also able to bet on a near infinite number of new betting categories. While a typical sporting event already allows for proposition bets and in-game betting (i.e. who will win the next point in tennis), esports competitions provide operators, publishers, sponsors and other key stakeholders with the opportunity to leverage an immense amount of real-time usage and performance data that can be exploited to create an even wider variety of in-game wagering opportunities. For instance, esports’ data advantage could allow oddsmakers to offer bets such as how many passes it will take a team to score its next goal or how many times an esports player presses a particular button before securing that next score, with odds changing by the second based on the current gameplay. Given the nearly infinite amount of outcomes and actions that occur in any particular esports game, bookmakers will likely be able to offer fans a much greater number of in-game betting opportunities for esports competitions than they can for traditional sporting events.
In addition, the arrival of the metaverse and virtual reality technologies could offer esports fans the opportunity to virtually sit in and bet on the action by viewing a competition from inside the match’s gameplay while interacting with other fans. While some traditional sporting events will incorporate this technology on a limited scale, the use of these technologies in esports could provide fans and players with a more connected, engaging experience, along with tools facilitating the community building essential to the culture of gaming and esports.
Furthermore, online casinos and esports bookmakers continue to explore the potential of blockchain based technologies and platforms in betting markets, often allowing bettors to gamble and win cryptocurrency or digital assets such as NFTs. Esports teams and organizations continue to experiment with using NFTs to sell digital collectibles, to represent membership in a social club, or to provide access to other perks. Esports fans tend to be more accustomed to and accepting of emerging technologies, so the industry is posed to adopt these trends, and the resulting legal risks and challenges are imminent. See our in-depth discussion of the legal considerations of esports and NFTs here.
Finally, while the vast majority of esports betting takes place online, we will continue to see more integration of esports into physical casinos, and for good reason: future generations of casino patrons prefer interactive entertainment and skill based gaming over slots. The largest source of slot revenue for casinos comes from players between 60 and 70 years old, while players between 20 and 30 years old accounted for the smallest share. Casino operators have taken note. For example, the Luxor Hotel and Casino recently opened a 30,000 square foot esports arena to host in-person competitions, events, and live broadcasts; and the Casino Esport Conference in Las Vegas, now in its seventh year, aims to integrate the casino industry with esports stakeholders.
Going Forward
Twelve states have welcomed esports gambling in the last few years and the rapidly growing esports viewership should only accelerate the mainstream adoption of this new entertainment vertical. However, what is specifically permitted (i.e. what types of games can be betted on, who can bet on those games, and what kinds of bets can be made) is constantly changing via new legislation and state agency interpretations. As new technologies are adopted, the heightened risks of fraud and online crimes will continue to invite regulatory scrutiny and enforcement in the coming years. We will continue to analyze the rapid developments in the regulatory landscape and remain available to assist our clients in the formulation and implementation of their respective strategies and offerings related to the emerging esports sector.
