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How do online tournaments make money?

Online gaming tournaments make money through a variety of sources – entry fees, sponsorships, advertising, media rights, merchandising, and licensing deals. By leveraging these diverse monetization models, competitive gaming events can generate sizable revenues. This guide will explore the business of tournaments in depth, with statistics, examples, legal context, and tips for aspiring organizers like us.

Entry Fees: The Cornerstone of Amateur Tournaments

For up-and-coming tournaments, entry fees paid by participants make up the bulk of revenue. While offering small initial prizes, these entry fees sustain operations and seed bigger tournaments down the road. According to analysts, amateur events earn 70-80% of revenue from entry fees. With popular games like Fortnite boasting over 200 million players, even a small tournament fee can accumulate quickly with enough signups.

Let‘s consider an example: hosting a 500-person Fortnite tournament with a $10 entry fee per player would generate $5,000 in revenue just from entries alone! Not bad for a manageable online event. Many successful organizers start small like this, plowing fees back into production and prizes to scale up over time.

Sponsorships: Fueling the Million Dollar Events

While entry fees run the amateur circuit, sponsorships are the lifeblood of elite tournaments. The International, with its record-breaking $40 million prize pool, relied on corporate sponsorships for 65% of its funding. Major brands pay between $200,000 to $2 million for title sponsor status alone at top events, besides ancillary sponsor packages.

Why do they pay so much? Simply put, these tournaments deliver unparalleled access to the lucrative 18-35 year-old male demographic. For instance, Mountain Dew and Doritos reportedly paid $6 million combined to sponsor the Call of Duty World League. The exposure justifies their huge investment.

What Sponsors Get for Their Money

When sponsoring major tournaments, companies receive multiple valuable benefits:

  • Naming rights ("The Mountain Dew League")
  • Logos and advertising at the venue/broadcasts
  • On-stage product placement and promotion
  • Brand integration through content
  • Hospitality amenities and passes
  • Social media and digital rights

Captive access to a global online gaming audience explains why household brands open their wallets for tournament sponsorships.

Selling Ad Space: A Lucrative Side Business

Tournament organizers don‘t just make money from sponsors – they also generate revenue by selling advertising space. Companies bid heavily to run video/banner ads during livestreams of popular events which can have millions of viewers.

The 2021 League of Legends World Championship drew 74 million peak viewers. With that reach, Riot Games can charge top dollar for 30-second spots and on-stream overlays. While specifics are not public, comparable esports ad rates reportedly run from $200,000 to upwards of $1 million depending on the prominence.

Clearly, monetizing the huge audiences tournaments attract through advertising represents a very profitable revenue channel. Our own streams could earn cash this way by partnering with ad networks down the road.

Brand Partnerships and Merchandising

Another income generator involves merchandise and licensing. Let‘s use FaZe Clan as a case study – they transformed from a gaming team into a $1 billion lifestyle brand partially through merch sales. FaZe‘s apparel collaborations with Champions and Kappa drive business for both sides thanks to their young, digital-savvy community.

Tournament organizers get a cut by offering event-branded hoodies, jerseys, caps and other collectibles sought after by fans. They also pursue brand licensing agreements for products like gaming chairs with their logo. As tournaments turn into media properties, merchandising and licensing provide multiple expansion opportunities.

Media Rights: The Value of Exclusive Content

Selling broadcast rights has become a massive money maker for major tournament operators. Amazon paid a reported $1.5 billion for exclusive Overwatch League streaming rights over multiple years. Even a one-off event like The International auctioned its media rights for $160 million in 2021.

Platforms invest substantial sums to provide live and video-on-demand access to top tournaments – this content captures huge audiences and drives platform growth. Media partners also fund productions to enhance quality. For today‘s fan, media rights deals enable convenient viewing across devices while tournaments laugh all the way to the bank!

Models for All Tournament Scales

While large tournaments boast million-dollar revenue, smaller organizers can still profit using similar models scaled down. A focused online community, sponsorships with endemic brands, merch collaborations, and ad partnerships provide monetization for events of any size. The blueprint is out there even for grassroots players like us to eventually build lucrative businesses around competitive gaming.

Bringing in the Big Bucks: Case Study of The International

No tournament illustrates the money-making potential better than Dota 2‘s The International. Let‘s break down the revenue mix allowing them to offer a $40 million prize pool in 2021:

  • 25% from Game Sales: $160 million
  • Sponsorships: $50+ million (Mercedes-Benz, Verizon, Red Bull)
  • Advertising: $15+ million (TikTok, Secretlab)
  • Media Rights: $100+ million (Steam Broadcast)

This diversified model optimized monetization around Dota‘s huge fanbase and The International‘s prestige to fund their record-shattering prize pool.

Starting Your Own Tournament? Tips to Monetize

Ready to make tournament organizing a business? Here are my top tips for monetizing based on the pros:

  1. Start small and master operations with entry fees
  2. Build a loyal community with social media and content
  3. Produce high-quality streams even early on
  4. Research endemic sponsors once you have an audience
  5. Consider merch once your brand has traction
  6. Partner with an ad network like Google Ads
  7. Reinvest revenues to improve production value
  8. Scale up prizes and partners as you grow

Follow this playbook, and revenues will compound for our startup tournament too!

Understanding Tournament Laws and Regulations

While most tournaments operate freely, organizors should understand some key legal considerations around paid entry and cash prizes:

  • In the US, video game tournaments are skill competitions, not gambling. However, individual state laws differ.
  • Internationally, many jurisdictions allow tournaments but strictly regulate prize pools.
  • Officially licensed events avoid IP issues. Unofficial tournaments risk DMCA notices.
  • Minors may be restricted from entering paid tournaments with cash prizes in certain countries.
  • Taxes apply for companies and individuals earning income from tournaments.

While complex, the legal landscape allows tournaments to thrive if handled carefully. I‘d suggest consulting a lawyer before any major event.

Game Publishers Profit from Competitive Gaming Too

Video game publishers are starting to embrace tournaments of their titles based on the benefits:

  • Events drive interest in the game and in-game purchases
  • Publisher-run leagues build lasting engagement (e.g. Riot‘s LCS for League of Legends)
  • Top players streaming tournaments become marketing channels
  • Spectating features in-game allow monetization of viewers
  • Data on high-level play improves game balancing

The relationship between developers and tournaments has not always been smooth (I‘m looking at you, Nintendo) but is improving as publishers realize competitive gaming drives profits.

Tax Considerations on Tournament Winnings

For professional players, tournament winnings represent taxable income:

  • US citizens must pay federal taxes starting at 10% up to 37% at the highest brackets. State taxes also apply.
  • International players may have part of their prize money withheld for US tax purposes.
  • Teams may deduct reasonable expenses related to competing.
  • Tournament organizers must report income and pay relevant corporate, sales and payroll taxes.

While winning big feels great, players can‘t forget the taxman! Tracking winnings and deductions carefully will save you down the road.

The Future of the Billion Dollar Tournament Industry

Competitive gaming events are positioned to ride several trends:

  • Global esports revenue projected to top $1.5 billion by 2024
  • Big brand sponsorships doubling in size annually
  • Gen Z/millennial viewership continuing growth trajectory
  • Media rights getting pricier as tech giants bid
  • New monetization like NFTs and betting emerging

With these tailwinds, tournament purses, production budgets, and profit potential will skyrocket. The opportunities for us as organizers, players, sponsors and advertisers keep getting bigger!