I Am Not Bullish On esports Currently
While I hate to be the ultimate contrarian, I don’t know that I feel esports is ready for prime time. That means despite hearing that the esports industry may be approaching a $1 billion valuation, I don’t feel that it has earned a sustainable business model from its rag-tag organizers or industry professionals, to be worth the trouble.
My position against esports is merely based on revenue metrics. It is not about personal taste or preference.
And in learning as much as I can about the esports industry, I feel that it is in its infancy as business development. It reminds me of the “tough man” competitions which eventually gave way to the Ultimate Fighting Championship in the early 1990s. Essentially, “tough man” competitions were nothing more than human-cock fighting in bars, casinos and convention centers, lacking a depth of organizational knowledge from their shady promoters, young fan base and “puncher’s chance” competitors.
After making several attempts at a deeper dive into the financial and business knowledge of esports competition by engaging their community peers and organizers, I’ve discovered there is a massive short-fall for most of these event balance sheets that should scare off smart investors.
The impulsive investors will jump at any opportunity without looking at the lack of cash flow, meager profit/loss and negative balance sheet. That’s what we’re seeing now with some sports owners, who are seeing the attendees in the stands, hearing about the massive television/streaming ratings for each competition, and possess a willingness to dump billions into an unprovable product.
That’s where esports competitions sit for me at the present time. Still hasn’t earned enough of its press in actual revenue value for me to want to invest in it, or advocate for anyone else to do the same.
But make no mistake about it, esports investments will grow. There are always billionaire sports owners or other investors who are willing to buy major stakes to grab original marketshare positions.
This occurred with the Arena Football League during the 1990s/2000s (right before its 2008 collapse) and daily fantasy stocks recently. The AFL investments of those billionaire owners were catastrophic write-downs with teams folding, washing out as attendee growth was sustainable, and both of the major daily fantasy companies are collapsing.
Which brings us to esports.
I realize by taking this position on my blog, I will discover many stark defenders of esports competitions willing to write me back to tell me that I’m wrong on their beloved budding industry.
My issue is not with the substance of their matches from a competition point of view, but more on the numbers, as well as the lack of acumen by esports organizers needed to understand how to foster revenue generation. I’m not looking at whether there is passion from each competitor or their organizer. Nor am I disregarding their booming attendance numbers.
But I do have a few major hang-ups on the revenue side, which I find more than a bit concerning.
I’ve spoken to multiple esports organizers before writing this blog. A few were actual esports convention organizers, who create educational sessions and scheduling for match/competition organizers. When I challenged most on their numbers, on their acumen basis, I found that there was a severe drop-off. Especially with those convention organizers who are focused on building the knowledge base for match organizers.
None of the organizers seemed to know much about the RFP (request for proposal) process that most matches, conventions and conferences use in order to select host cities or venues, nor used a visitor and convention bureau (VCB) to level-out hotel/venue costs. The majority used each property without a contract bidding position, including when dealing with casinos, and continually had major issues with room rates changing, additional F&B charges, and conference/venue room cross-bookings.
None of the organizers know standard event revenue generation terminology such as per cap estimates, or ways to foster additional revenue streams.
Title esports sponsorship for even major arenas selling out at 19,000+ seats were sold to Fortune 500 companies at $3,000. Tickets are a static $55. Both revenue streams basically are funneled into the prize pools for the competitors, or cover the costs of hosting the event itself.
The majority of these esports organizers are just running a large party. They break even at their events. And these were the larger ones that I’ve spoken to for this blog post, not just the guy down the street running a single tournament match out of the local YMCA.
This is troubling. Especially as esports grows with investors.
The stars of esports agree to show up for airfare and lodging. No contract. And have the ability to compete for a major cash prize of $250,000 – $400,000 for larger tournaments. Sure, esports stars can sell their “skins” digitally online for additional revenue, but a lot of ancillaries aren’t really considered or established yet. When esports stars start to take into account the use of representation agents, such as Leigh Steinberg, there will be a major shift in esports competition as well as its revenue viability. The current upside to esports event organizers is that the actual investment in competitors (aside from travel costs and prize money) is relatively low. When esports players gain the eye of agents, that changes, whether the industry is ready for it or not.
Sure, there are some esports “teams” that have been purchased by sports owners. But those rosters can be as fickle as the gamers who follow them. The guarantees are less than solid, because the games that the players engage in change. There’s a stark difference between a baseball player for 10-years because you know he’ll play only baseball for that period, and an esports star/team, who may end up playing 5 different games that they may exhibit a varying skill level at.
There is often an issue of esports players not being paid, despite some of them having massive followings of millions of people worldwide. Sometimes, they get a better offer from a rival organization’s conference match, and just “bounce” on the event organizer.
Several digital companies are starting to act as an escrow account for prize money, simply because many of the esports competitors (especially the stars), don’t trust esports organizers to pay up.
Most of the ticket prices are set at $45-$55. There are no premium seats for fans. There are no add-on events. Most of the esports attendees pay the ticket price with the assertion that they also are donating to the prize pool for the players. This creates the problematic issue of not having different pricing tiers, nor conditional pricing such as dynamic or variable, in order to generate more revenue.
Merchandise right ancillaries are not locked down either, where esports organizers don’t have set logo specifications, or the inability to stop guerrilla sales. This is also a costly endeavor as a lot of these folks are still running by the seat of their pants, robbing Peter to pay Paul.
The majority of the esports demographics also skew much younger. That means while there is massive disposable income, there is also the ability for today’s game to be yesterday’s news, no different than a social media platform. One day, Snapchat has 100 million followers, the next day, it has 10 million. To me, this shows that the marketplace is so fluid that it could evaporate as taste in games changed, etc.
How far are sports owners and organizations willing to go to be held hostage by a game developer, such as Blizzard? While you have the ability to host an esports competition, you’re now paying a game developer for access. At what point does Blizzard or any other game developer decide to “box out” various matches, or hold exclusives, where if you aren’t hosting the hottest game, your match is left out in the cold? Given the audience metrics, this may end up transforming into a quasi-NFL television contract within the next few years if game developers decide to create that position and challenge.
So, this is what I am struggling with in terms of esports. It seems like a great vertical, but it hasn’t grow up enough yet that I would ever recommend investing it in. All of these investments by billionaires are being heavily touted as showing that esports has arrived. I don’t know if I believe that, or if esports has earned the right, long-term, to show such stabilization. Thus far, even billionaire investor seems happy with their buy-in, and that works, until someone wants their money back. Then, we’ll see.