Esports Stumble Forces Sports World Investors to Retrench—or Retreat
After laying off staffers last month, Madison Square Garden Sports recently sold its controlling interest in Counter Logic Gaming (CLG). Team SoloMid (TSM), a major esports organization once backed by Stephen Curry and Andre Iguodala, is reportedly considering a halt to its gaming division. Dan Gilbert’s gaming organization, 100 Thieves, has been hit by steep layoffs, and Kroenke Sports & Entertainment recently laid off a large portion of its esports division.
The moves are part of a broad reset in the world of esports, which only a few years ago was filled with investor darlings. In the mid-2010s, during what some call the golden age of gaming, owners from sports leagues were buying up esports teams or starting their own gaming organizations at an impressive rate.
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The appeal was simple. Billionaire investors were itching to connect with the next generation of fans, and competitive gaming had captured a mouth-watering demographic that traditional sports were struggling to reach: boys and men between the ages of 16 and 35, with roots from around the world.
Esports tournaments were selling out NBA venues like Barclays Center, and prize money and player salaries were rising. Individual events were drawing millions of livestreams, and major networks like ESPN and TBS inked deals to show matches. FaZe Clan, an esports and content creation collective, became the first esports-focused brand to win unicorn status, going public through a $750 million SPAC deal.
As a business proposition, the long-term opportunities looked a lot like they did for mainstream sports leagues: ticket sales, media rights, sponsorship, and, thanks to the millions in VC money pouring into the space, continually escalating team valuations. Even better, some team owners saw esports as a means to drive new fans to their stick-and-ball properties.
The pandemic caused an initial dip before another wave of interest and expansion. But that high-water mark proved unsustainable, especially amid interest rate increases, a banking crisis and the looming threat of recession. The current correction within the industry is a response to the over-hiring and ill-advised investing inspired by lockdown-driven gains and an abundance of exuberance.
“Some bought a ticket thinking they were going to a certain destination, and it turned out to be a completely different destination,” esports veteran Avi Bhuiyan said in an interview. “That doesn’t mean it’s a bad place to go necessarily. Maybe they thought they were going to the mountains, but instead it’s a tropical [island].”
Yes, an island with a limited supply of fresh water and few connections back to the mainland. Some owners have packed up the canoe and made for more familiar territory—others are prepping their exits—while those who remain assess what went wrong and formulate survival plans.
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While there are similarities in how fans consume both traditional sports and esports, whether cheering in an arena or yelling at a television in the basement, there remain drastic differences between them as businesses.
Arguably, the biggest gap is access to massive media rights deals, which esports teams don’t have. The cable deals were a symbol of mainstream success, but they were never very lucrative, and most gamers, ingrained in streaming culture, don’t consume entertainment that way—part of the reason the cable industry is struggling. Amazon’s Twitch and YouTube dominate the streaming scene, and influencers with large followings have been able to cash in on those platforms. But these platforms are free to use and never delivered lucrative media deals to teams like some expected.
Established pro sports teams also have developed meaningful revenue streams like a recurring season-ticket base and decades-long relationships with corporate sponsors. Marketers still want to connect with Gen Z, but relying solely on year-long sponsorships has proved risky for esports orgs in a challenging economic environment where marketing budgets have shrunk.
“Sponsorship is definitely the majority of revenue for organizations, and that’s just unsustainable,” esports consultant Rod Breslau said.
FaZe Clan, which owns a house in LA where team members live, train and provide a constant stream of social-media content, much of it sponsored, had net losses amounting to $53 million last year and are in danger of being removed from the Nasdaq stock exchange. Kyler Murray and Ben Simmons have been investors and ambassadors, among many others, but FaZe has proven that even the mightiest in the industry are vulnerable and that popularity doesn’t necessarily translate into reliable revenue.
Beyond that, competitive team and multi-player gaming leagues are at the mercy of game publishers and developers. Game publishers, who control revenue share, are arguably the biggest roadblock in terms of profitability. Many believe that sustainability will be difficult to achieve until publishers change the way esports teams are incentivized. While various publishers have dealt with the wider economic headwinds, they sit in a comfy position because they own games and therefore influence monetization potential.
And unlike traditional sports fans, who tend to stick with their allegiances and interests, gamers will flip from one game to another without hesitation. The industry continues to deal with how to navigate the dynamic landscape, which changes at a quicker rate than traditional sports when it comes to product popularity.
As world-renowned as the New York Yankees are, their popularity is aided by baseball’s long presence in the consciousness of sports fans, and yet it’s also threatened by the decline in overall baseball attendance and youth engagement. In esports, that phenomenon is multiplied, as popular game titles like Epic Games’ Fortnite and Riot Games’ Valorant didn’t even exist a decade ago. Investors must continue to measure if paying the price to get into a game is worth the investment in new players and equipment and training, because some titles flop while others pop.
A Cautionary Tale
In 2016, Activision Blizzard CEO Bobby Kotick pitched a glowing business proposition based on a game called Overwatch, a new multi-player shooter that would launch its own league featuring city-based teams, replicating the real-world sports model.
Kotick personally helped convince his business partners and wealthy friends, including New England Patriots owner Robert Kraft, Los Angeles Rams owner Stan Kroenke and former New York Mets COO Jeff Wilpon to buy franchises, according to sources. Some of these billionaire sports investors decided to take the leap without a solid grasp on the path to achieving a viable business model.
Despite a strong first season, which resulted in some franchises selling for more than $20 million, it soon became clear that the game wasn’t generating enough of a following to become a spectator sport and therefore didn’t justify the millions paid by investors. The original vision, based on consistent events with thousands in attendance and millions more watching at home, turned out to be more of a pipe dream.
Kroenke Sports and Entertainment (KSE) owns The Guard, an esports organization that fields teams in Call of Duty and Overwatch, but according to a source, the endeavor has been a frustrating outlier for KSE, which continues absorbing costs to execute live events while not receiving efficient revenue share for the games it plays. Esports may be the connection to a new and younger fanbase, but for some, the cash burn is simply not worth it.
Activision’s struggle to make the Overwatch and Call of Duty leagues viable has had a notable impact on the industry, because it’s one of gaming’s giants, and the company recently admitted it has concerns about its current business model.
In a recent filing statement, Activision said: “We continue to work to address these challenges, which could result in significant costs, and such efforts may prove unsuccessful.”
The Long Haul
GameSquare Esports Inc. CEO Justin Kenna remains bullish on the future of esports but understands that the headline-generating valuations of a few years ago were never realistic. He believes there’s now a great opportunity for esports organizations, especially those that are game agnostic, to create sustainable business models despite the turbulence.
“Profitability is key,” Kenna said in a video interview. “Proving a model that you can get cash flow positive is more important than ever to investors.”
Some organizations are already doing that. Gilbert, the Cleveland Cavaliers owner, has turned 100 Thieves into a lifestyle brand, finding additional revenue streams in consumer products like apparel and energy drinks.
The Dallas Cowboys possess one of the biggest brands in America, but even owner Jerry Jones realized that attaching the “star” to his esports organization, Complexity, wasn’t going to be enough to overcome its limitations. That’s one of the reasons why, Kenna says, Jones sold the franchise to GameSquare for nearly $27 million in stock two years ago, leaning into the expertise of the Toronto-based parent company to reach youth audiences.
The move has since elevated Complexity’s value by providing a media component. Among other things, Complexity will arrange an in-person event with Cowboys All-Pro cornerback Trevon Diggs, where he can engage with gaming fans in Dallas. Besides the initial stock capture, Jones has participated in multiple funding rounds since—a testament to his belief in esports—so he’s gone along for the ride.
Monumental Sports and Entertainment, the parent company of the Washington Wizards and Washington Capitals, has also found a way forward. The company believes esports will rise to stand alongside the Big Four sports leagues, and it has continued to invest, recently opening a new 14,000-square foot live-event theater and gaming facility, District E.
The building, adjacent to Capital One Arena downtown, will serve as a hub for its NBA 2k team and its NHL 23 team. Anchored by global NBA and NHL brands, MSE is focusing on a local approach with esports. It aims to drive grassroots development and activations with greater frequency through investments like District E, which is hosting the 2023 NBA 2K season and the NHL 23 North American Championship.
MSE president of media and new enterprises Zach Leonsis believes there’s a growing divide between the haves and have-nots in esports, with the strongest companies likely to endure the industry headwinds. MSE invested in multi-gaming organization Team Liquid eight years ago. And while the esports org has experienced layoffs, Leonsis is proud of the revenue growth and sustainable business model they’re building, fueled by diversified revenue streams. Team Liquid, primarily owned by Axiomatic Gaming, has launched an influencer management agency and merchandise business, for example, and expects to be profitable before year’s end.
“Some teams are burning cash hand over fist, and that’s not any of our properties,” Leonis said in a video interview. “We’ve really driven good diverse revenue streams in a responsible way. I think our collection of esports assets are a model for how it’s done.”
And while some sports owners are bailing out, others are buying in. Philadelphia 76ers’ and New Jersey Devils’ parent company Harris Blitzer Sports & Entertainment bought Clutch Gaming from Houston Rockets owner Tilman Fertitta in 2019 (now rebranded to Dignitas), and when Milwaukee Bucks owner Wes Edens wanted to unload esports org FlyQuest, Florida Panthers owner Vincent Viola and his family bought.
“You must have a very prudent approach, when it comes to business model, cost structure and ways to scale up over time,” Axiomatic Gaming CEO Mark Vela said in an interview. “All the teams are striving for sustainability, which comes from being profitable, and not requiring capital infusions every 12 to 24 months.”
For those who can follow the script, there are still reasons for cautious optimism. Gaming engagement numbers continue to increase, with more than half the U.S. population participating in digital gaming, according to Insider Intelligence. The gaming industry overall is expected to be worth around $185 billion this year, according to research company Omdia.
Beyond the numbers, the industry is far bigger than it was 10 years ago in terms of mindshare and addressable audience. Nobody has completely figured out esports, but there are plenty of reasons to keep trying.
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