Valve’s decision to ban skin gambling has huge implications for Counter-Strike: Global Offensive’s (CSGO) multibillion-dollar skin gambling market, CS:GO viewership, and esports as a whole. Here’s some context for those unfamiliar with the situation.

Context

This decision was the climax of a series of events that started with a Bloomberg piece, “Virtual Weapons are Turning Teen Gamers Into Serious Gamblers,” published this April. While skin gambling was well-known in the gamer community, this article brought this murky world into the spotlight for the general public.

A major catalyst for this decision most likely involves two class action lawsuits filed against Valve. Both lawsuits were filed shortly after revelations of previously undisclosed relationships between skin gambling websites and the gaming influencers who promoted the use of these sites.

The first revelation came from Mohamad “mOE” Assad, a player-turned-General Manager of Echo Fox (an esports team owned by former NBA player Rick Fox), who tweeted about his dispute with the skin gambling site CS:GO Diamonds on June 13. Ten days later, the first lawsuit was filed on by against Valve for being complicit in the creation of an “illegal online gambling market.”

The next major revelation came from YouTubers Ethan “h3h3Productions” Klein and HonorTheCall, who accused two popular YouTubers, Trevor “Tmartn” Martin and Thomas “ProSyndicate” Cassell, of deceiving their audience by playing and winning on the skin gambling site CSGO Lottowithout disclosing that they owned the site. A third YouTuber, Josh “JoshOG” Beaver, revealed his own equity interest in CSGO Lotto shortly after the news broke.

The second lawsuit was filed on July 7 by a mother on behalf of her son, a minor, in Florida. Martin and Cassell were added as defendants. Martin is also a minority owner in Team EnVyUs, an esports team that recently received a “seven-figure” investment from SierraMaya360, a Charlotte-based venture capital firm. The co-owners of EnVyUs distanced themselves from Martin after learning about his involvement with CSGO Lotto.

The confluence of venture capital, team ownership, and skin gambling reflects the opportunities and pitfalls of the fast-growing and fast-moving esports industry.

Skin gambling: banned, for now

In most jurisdictions, it is illegal to offer both skin gambling plus the liquidation of skins for real-world currencies. Therefore, the whole process has been broken down into three components: gambling, marketplace, and pricing API.

1) Skin gambling is being assaulted on two fronts: operations and streaming. From the operations front, Valve is beginning to issue cease and desist orders. A few popular skin gambling sites such as CSGO Double and CSGO Wild have decided to shut down in light of Valve’s announcement alone.

From the streaming front, Twitch announced that any streamers who continue to stream skin gambling content is violating Valve’s terms of service, and by extension is also violating Twitch’s terms of service. Skin gambling sites are only one part of the equation.

2) Skin marketplaces still operate within Valve’s terms of service and appear to be stable, for now. Skin liquidity also seems to be relatively stable. At the time of Valve’s announcement, a factory new AWP Dragon Lore (one of the most coveted and expensive skins) was selling for a range from $1,328 to $1,389. More than 24 hours later, the range dipped 15–19% to $1,130 to $1,150. The open question is if demand will match the increase in supply as some skins owners seek to liquidate their inventories on the marketplaces.

3) Pricing APIs exist because customers feel more “safe” that there is an independent party pricing items in an unregulated market. These services appear to comply with Valve’s terms of service and therefore shouldn’t be affected.

Ultimately, skin gambling may follow what has happened with “traditional gambling” in the U.S. — implicit acceptance, scandals, banning, and then regulation. Example: PokerStars launched in 2001 along with many other online poker sites. It continued its U.S. operations in defiance of the passage of the Unlawful Internet Gambling Enforcement Act of 2006. Federal prosecutors finally forced it to shut down U.S. operations in 2011. Five years later, starting in March of this year, PokerStars has been allowed to operate in New Jersey.

The biggest threat to viewership is newer, popular games

One of the most heated debates that has raged in the CS:GO community is whether or not skin gambling leads to increased viewership. If yes, the logic goes that Valve’s ban will result in lower viewership, lower sponsorship, and decreased stability for the CS:GO ecosystem.

1) According to research done by EsportsBettingReports.com, there seems to be conflicting data on that question. On one hand, there seems to be a correlation, but not causation, between viewership and betting averages.

On the other hand, peak betting volume increased from 307,000 to 321,000 while peak concurrent viewership dropped from 1.6 million to 1 million between the last two CS:GO Majors, MLG Columbus and ESL One Cologne, respectively.

The conflict in the data leads to another hypothesis: the drop in viewership (peak concurrent viewers and total online hours) for the latest CS:GO Major is due to the meteoric rise of Blizzard’s new esports game, Overwatch.

2) Overwatch recently ended League of Legends’ 46-month reign as the most-played game in Korean internet cafes, a key indicator of global game popularity. Furthermore, Overwatch garnered 7 million players within the first two weeks, and 10 million players by the third week, of its launch. Overwatch’s success

Majors viewership won’t change much due to skin gambling. However, the smaller tournaments that were propped up by these skin gambling sites are likely going to disappear. CS:GO Lounge has had the ability to boost viewership by 5–10k concurrent viewers just by featuring a match on its front page, oftentimes between two unknown teams.

Is this the beginning of the end for decentralized esports?

Among developers, Valve has had the most open ecosystem, exemplified by:

• Allowing third-party organizers to run tournaments around their games, never asking for licensing fees (as far as our research shows)
• Helping fund Majors through sticker and items sales
• Having one of the most open APIs of any game developer

All of this reflects Valve’s laissez-faire philosophy and their lack of desire in taxing their nascent esports ecosystem.

Now that Valve has been forced to act on skin gambling, it is very possible that they are evaluating their open ecosystem approach. Should Valve decide on a more centralized approach (closed ecosystem) to their esports activities, as adopted by other gaming giants like Riot Games and Activision-Blizzard, tournament organizers such as ESL may face licensing fees or even possible extinction if Valve creates an exclusive league.

The centralization of Valve esports into actions such as creating exclusive leagues may create a virtuous cycle that increases stability in the Valve esports ecosystem:

1. Exclusive league: sponsorship dollars and prize pools will be consolidated and then divided among franchises (teams)
2. Franchises: increased financial stability through revenue sharing and less tournaments will enable teams to have more time to craft interesting strategies and to hone mechanical skills, ultimately leading to better matches
3. Increased competition: Better matches between better teams will increase viewership
4. Bigger audience: More eyeballs, combined with properly trained sales staff, will result in more revenue
5. Increased revenues: More money for the league means more money for the teams, increasing stability further

Skin gambling, esports leagues, and the decentralization of esports are flash points that we are closely monitoring at BRaVe Ventures. If you want to chat about esports, hit me up on Twitter or if you’re attending Casual Connect in SF, come check out my panel at 2PM on Monday, July 18.