‘Significantly more’ market consolidation expected in esports

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Over a year ago, signs of an esports downturn began to appear.

In the boom years of the 2010s, the dazzling spectacle of competitive gaming – stadiums filled with roaring fans, professional players with large followings, bombastic headlines boasting of million-dollar prize pools – had investors pouring millions into team organizations and other entities.

Longstanding games like League of Legends and Counter-Strike continued to captivate audiences, while fresh introductions like Fortnite, Overwatch, and Rocket League only heightened the excitement.

As the anticipated growth of the billion-dollar industry persisted, brands, businesses, and backers jumped on board. High-ranking professional gamers commanded lofty salaries, with a handful earning over $1 million a year, excluding their prize money and individual sponsorship earnings.

Even the pandemic could not halt the meteoric rise of esports, with tournaments proceeding online or in studios with new safety precautions. Games and hardware sales soared as players found themselves confined indoors, leading some companies to expand in response to growth.

However, as the pandemic ebbed, physical events resumed, and investors focused on the future, it became apparent that their anticipated return on investment had not materialized. Esports teams were struggling to turn a profit due to exorbitant player salaries, an over-reliance on sponsorships, and a fanbase reluctant to shell out more money for an activity that is essentially free to watch and follow. Publishers intensified the issue by over-hiring.

“Despite consolidation in the esports sector, organizations with solid fundamentals are likely to emerge stronger and leaner.”

Jasmine Skee, Guild Esports

Simultaneously, expectations were dampened by inflation, a cost of living crisis, and economic uncertainty.

The prosperous period in esports came to a close. The gold rush had ended. The ensuing reality was difficult to face.

Cutbacks, closures, and consolidation hit the industry, and are still occurring. Some are dubbing it ‘the esports winter’. Major game publishers and broader industry players also announced multiple layoffs, as did businesses in other sectors.

FaZe Clan, an organization formerly valued at $1 billion, now has a market cap of approximately $14 million.

Dave Harris, Guinevere Capital

Dave Harris from Guinevere Capital, which invested in Excel Esports (now known as GiantX) back in 2018, comments: “The transition from a long-term low interest rate environment to a higher interest rate one has significantly influenced the reallocation of investments away from high growth/risk assets.”

“This change occurred simultaneously with the end of a standard five-to-seven-year investment cycle in the esports sector, particularly from VCs in North America who increased their market investment around 2017 and 2018. The VC model primarily aims for a hockey stick-shaped growth profile, accepting that only two or three in ten will successfully achieve that.”

“Despite the overall industry growth over that period, some groups invested based on excessively optimistic expectations that were not met. The resulting resource cutback in some areas, following an aggressive growth push, has affected VC-backed companies across the board over the past couple of years – a trend not unique to esports. Likewise, when examining SPACs, a stock market listing instrument that was popular during the market peak, most have experienced a price crash since, and the case of FaZe Clan in esports definitely is not an exception.”

According to Dave Harris, a drop in sponsorship, in addition to lower investment, is also impacting teams. Esports marketing budgets have been reduced, primarily due to pandemic-induced supply chain issues and more recently because high-end tech sales have veered towards crypto mining and AI, away from gamers.

Esports has gradually been shifting towards a lower cost model, necessitating a consequent shift in expectations from all stakeholders.

“Market consolidation has already occurred – and there will likely be a lot more,” asserts Dave Harris.

Dave Martin, the senior vice president of the British Esports Federation and someone deeply involved in teams and investment, adds: “It’s not that teams can’t be successful, but sometimes the valuation metric used is excessive, particularly when it’s 10 to 20, or even 30x turnover in some cases, when nobody is genuinely making substantial profits.”

“The valuation model being used was akin to that of tech companies. However, tech companies boast a product and client base to sell to, which is not the case with esports. Therefore, it is inappropriate to measure them on the same metrics.”

Several esports staff at publishers such as Activision Blizzard, Riot Games, and Epic Games, along with tournament organizer ESL FACEIT Group, to name a few, lost their jobs due to cost-cutting.

Teams Face Tough Times

While the ongoing correction impacts esports, competitive gaming remains a small component of the games industry, a billion-dollar market in a major $180+ billion sector. Esports is a sort of enigma, a small (albeit glittery) fish in a colossal sea, a hopeful marketing vehicle for games-as-a-service titles, but an unstable one, dependent on the efforts of teams and fan support.

But these teams are now in a predicament.

Like many other esports organizations, 100 Thieves shrunk its workforce. The Quake Pro League, Gamebattles, and Overwatch League shuttered. FaZe Clan was acquired by GameSquare; CLG closed and was acquired by NRG; OverActive Media acquired KOI and Movistar Riders. Excel Esports and Giants Gaming combined to form GiantX.

Esports betting companies, including Luckbox, Unikrn, and Midnite, also downscaled.

Image Credit: ESL Gaming

Specific to the UK, we observed closures like the ESL UK & Ireland Premiership and Promod Esports, along with teams like X7, Vexed, and MNM Gaming. The list continues.

Esports organisations are arguably undergoing their sternest test since the 2008 financial crisis, where organizations like Fnatic, SK Gaming, and Dignitas emerged as major esports organizations today. Perhaps those resilient enough to weather this latest storm will emerge stronger as well.

Some have repositioned themselves as content creation entities, veering away from traditional esports team organizations, like Misfits.

Jasmine Skee, Guild Esports

Jasmine Skee, CEO of Guild Esports, tells GamesIndustry.biz: “What we’ve seen in the last few years – and what we’ve been leading the way in – is esports organizations diversifying their revenues and transforming into more versatile, esports-and-gaming-centered entertainment brands. This business strategy is far more sustainable than conventional esports approaches.

“Guild shifted away from being purely an esports brand in 2023, instead focusing on a broader media and gaming, effectively positioning the company to capitalize on the consistent popularity of video games and gaming entertainment. Our business model has evolved, for instance, we’ve launched Guild Studios, our creative and production division, which permits us to concentrate on activations and events, and efficiently leverage our existing Gen Z and Gen Alpha audiences for brands aiming to connect with these elusive demographics.”

“So although there has been a consolidation in the esports sector, organizations with robust foundations are anticipated to emerge stronger and more streamlined. Furthermore, the esports sector is projected to grow to $1.87 billion by 2028, so while many established businesses in the sector have encountered difficulties, the notion of an ‘esports winter’ is misleading considering the robust growth and enthusiasm for the industry.”

Co-owned by David Beckham, Guild has formed major partnerships with companies like Sky, Subway, Samsung, and more. It is one of several large esports organizations headquartered in London, like Fnatic and GiantX.

While several organisations are pivoting to entertainment, their esports players and influencers continue to take center stage. However, there’s been a salary adjustment.

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