The “esports winter” continues to impact the industry.
Decrypt‘s GG conducted interviews with over a dozen leaders, players, and executives in the esports sector to get an insider’s perspective on the current condition of competitive gaming, along with the ongoing battle for the industry’s future.
Marco Mereau, the co-founder and CEO of M80, described to Decrypt that the current climate in esports is a “survival war”.
Prior to the pandemic and its ensuing disruption of live events in 2020, the esports industry was on a roll, regularly filling stadiums with enthusiastic fans to watch players compete on giant screens. However, esports didn’t skip a beat, continuing to grow as people began seeking at-home entertainment during quarantines. This led to deals like the $725 million SPAC deal for FaZe Clan and TSM’s $210 million FTX sponsorship, making the industry appear to be cash-rich.
Nevertheless, various leagues and events have since run into significant issues. Many esports leaders pointed out to Decrypt that the now-dissolved Overwatch League serves as a cautionary tale for what not to do in esports, and its failure could mean a loss of up to $120 million for Microsoft, the new parent company of Activision Blizzard.
Last month saw the sale of FaZe Clan for a mere $16 million following CEO Lee Trink’s departure amid ongoing controversies and plummeting stocks. Moreover, TSM no longer has access to FTX funds, a result of the exchange’s highly public meltdown in November 2022.
Justin Stefanovic, Misfits Gaming Group’s SVP of Partnerships, commented on esports valuations, saying that assuming market targets are reached, high valuations can be justified. However, reality often differs from projections, causing valuations to diminish. As a response, industry leaders are reassessing how to generate alternative revenue, as fan engagement alone is not sustainable.
Pandemic bubbles and revenue woes
Before the pandemic, concern was already growing that the esports industry was encased in an over-hyped bubble. Darren Glover, Vayner Sports’ VP of Gaming, now sees the esports boom in 2020 to 2021 as a result of over-exaggerated predictions made during the pandemic.
Glover pointed out to Decrypt that the sudden surge in growth the industry experienced was not indicative of real-world patterns.
Many esports organizations were overly dependent on advertising revenue to sustain their increasingly bloated budgets. However, the need for additional revenue streams became more pressing as time went on.
Peter Dager, former CEO of Evil Geniuses, confessed that while they were one of the most significant esports organizations out there, their revenue was near zero. His confession was shared in an interview with Decrypt.
Dager, also known by his gamer name “ppd”, is a former Dota 2 esports player who later became the CEO of Evil Geniuses—well-known in CS:GO and League of Legends esports circles. He left the executive role voluntarily in 2017 after about a year at the helm and now sees himself as an “esports survivor”. He is currently involved with Nouns Esports—a crypto and NFT-backed esports company.
Andy “Smoothie” Ta, a 26-year-old professional League of Legends player, thinks that he may be getting too old for esports. Previously, he has played for popular organizations like Cloud9, TSM, CLG (now dissolved and part of NRG), Echo Fox, and Team Liquid. He witnessed the evolution of esports from a young industry with limited infrastructure to what it is today.
In an interview with Decrypt , Ta claimed that most League of Legends teams “make no profit from esports at all”.
Ta observed that the existing business model leaves little room for profit, concluding that esports is still in its early stages.
Venture capital struggles
Dager noted to Decrypt that over time, esports attracted a significant number of venture capitalists, which ultimately led to financial unrest.
He noted that many saw the opportunity to attract VC funding due to the hype around esports. Unfortunately, this led to many investing large sums into businesses that were yielding little to no revenue.
Likewise, Glover identified the involvement of venture capital in esports as a tipping point. These capitalists saw esports as a golden opportunity and invested heavily, often without a clear business plan.
“There was no revenue, it was all just hype,” as Dager described it. He observed that this effort to build up hype to attract investor funds led to a lot of giveaways for fans, which only further perpetuated the revenue problem.
Dager went on to say that this mentality created a culture of fans accustomed to not paying for esports content, which necessitated looking into other revenue sources such as cryptocurrencies and NFTs. The fact that esports fans have traditionally been “under-monetized” is supported by a 2022 report by Deloitte , which found that barely 10% of 25,000 survey participants spent money on esports.
Recently, Evil Geniuses let go more than 20 of its approximately 130 employees, according to the Sports Business Journal. The layoffs included the VP of operations, the senior director of gaming and performance, and the head of socials and digital marketing, among others.
Reports from Dot Esports indicated that Evil Geniuses was already operating with a “skeleton crew” prior to the layoffs.
Evil Geniuses hasn’t been alone in facing financial difficulties. Other organizations such as FaZe Clan, 100 Thieves, Esports Engine, TSM, and CLG also had to lay off staff this year. 100 Thieves, for example, had to let more staff go this month in what was their second round of layoffs this year. In the interest of doing “less, better,” the company decided to spin off its energy drink and video game development divisions.
“100 Thieves is committed to making esports sustainable,” said 100 Thieves President and COO John Robinson. “These changes will make 100 Thieves a healthier company.”
In addition, there were rumors amongst guests at the Esports Gaming and Business Summit (EBS)—including discussions on the panel “The Path Forward After the Esports Winter”—that one of the largest esports organizations is delaying its salary payments.
However, it’s essential to remember that not all esports organizations operate in the same manner. While many face financial challenges, some have been structured differently from the beginning to sustain financially.
Mereu explained to Decrypt that he manages M80 in a similar manner to a laundromat or a family restaurant. As a result, the organization has a small team of eight employees, a strategic move intended to ensure its sustainability.
Discussing the organizations that hire a large number of employees only to lay them off later, Mereu attributed their actions to a lack of experience in scaling a business. Mereu added that for M80, a dip in marketing budgets, due to economic downturns, wouldn’t be as crippling, as they’re not wholly dependent on existing sponsor relationships.
While Dager estimated that 80-90% of Evil Geniuses’ revenue came from advertising sponsorships, M80’s CEO maintains that they rely on sponsorships for only around 25-30% of their revenue. Having shifted their focus to digital goods, like NFTs or other blockchain applications, the company continues to expand their revenue streams. As an example, in May, M80 was able to secure $3 million in funding for its Web3 initiatives.
Ageism and collegiate challenges
While some esports players are now commanding six-figure salaries, projections by Mereu and Ta reveal that player salaries are starting to decline across the industry. This is often complicated by perceived age limitations in the industry.
Ta noted to Decrypt that age often becomes a detractor in esports, with players over the age of 21 or 22 often considered “washed up”.
This perceived age bias in esports hampers the growth of collegiate esports, where players, aged 18 to 24, join university programs while pursuing degrees.