BRYCE BLUM AUGUST 2023
The esports industry is going through some rough times. In the past six months, dozens of esports-related companies have undergone massive layoffs. Most of the biggest teams and leagues are struggling. Engagement is down, and so is monetization. Many investors are getting burned, and some will never come back. Same with many of the hardworking, talented people that helped build some of the best companies in the space. Colloquially, this is becoming known as the “esports winter”.
This essay series makes frequent use of the word esports because it’s a useful umbrella term to refer to the entire industry, but it’s important to recognize that esports is not a monolith. Esports refers to a broad-based, highly diversified group of businesses and individuals that operate across different aspects of the industry and within the confines of different games. We don’t analyze the business of sport as a whole, as if the sins of baseball (being boring) can be held against basketball. We shouldn’t do the same for esports.
When this project began, I set out to encapsulate every cause of the esports winter into a single piece. My attempts to do that failed for reasons that have become obvious in hindsight—the esports winter is far too complex for hot takes or half measured analysis.
In order to understand how the industry set itself on this path, the challenges it faces now that the esports winter has come, and where the industry goes from here, the different aspects of the ecosystem must be analyzed independently. This is a conversation that requires all the nuance it can get. It also needs expertise on a wide array of interrelated topics, such that no single industry stakeholder can possibly tell the whole story.
This essay series is our attempt to discuss many of the biggest variables, though undoubtedly others are worth considering as well. This essay is my attempt to tie all of it together in order to better understand the current state of the industry without rehashing all of the topics that are covered at length in the other essays in this series.
Understanding the esports winter is necessary to ultimately get through it. When the dust settles, the esports ecosystem will be infinitely better situated for sustainable, long-term growth. The problem was never the underlying thesis that a real business can be built around competitive gaming; the problem was the approach to building those businesses undertaken over the past decade and the bad expectations many industry stakeholders set surrounding when and how those businesses would reach scale.
Before the winter, there was summer.
Buoyed by a massive esports hype train, general economic growth, and easy access to capital (e.g. low interest rates), a veritable gold rush of esports investments occurred between 2015-2018. During this period, esports-related properties were some of the hottest investments in the world. According to Deloitte, the number of esports investments grew from 4 in 2014 to 68 in 2018. [1] Nearly $4.5 billion was invested in esports in 2018 alone. [2]
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Esports businesses were flush with cash, but that cash came with strings attached. Investors demand returns. Though those demands vary by investor and certain types of investors were willing to play the long game, essentially every investor expected to see significant growth in the short run.
As the saying goes, you have to spend money to make money. The complexities of a business running numerous business lines and revenue strategies required additional headcount and hands on deck to accomplish the goal. As such, esports businesses started hiring like crazy to build whatever it is they sold.
Thousands of esports fans found their way into business roles for the first time in their lives. Problematic veterans in the space received opportunity after opportunity, despite their failures, because esports expertise was hard to come by. Startups routinely built out the type of high-tech, high-perk offices that were becoming commonplace throughout Silicon Valley. In short, esports transitioned from a mom and pop niche hobby culture to big business virtually overnight.
All of this is true for esports teams as well, though there was another layer to the problem: player salaries. As more and more teams received a massive influx of capital, all of them felt the pressure to win. Whether an established powerhouse or an up-and-comer, winning was seen as the primary tool for growing a team’s fan base and in turn its monetization prospects. Winning required signing the best players, so the best (and most popular) players often found themselves in the driver’s seat when it came time to negotiate their new contracts. While revenues were growing steadily during this time, for many organizations flush with venture funding the calculations around player salaries were decoupled from revenue generation; it became more about winning ruinously expensive recruiting wars to impress fans, publishers, and investors in the short term, which impacted the market for everyone.
During this period, it was not uncommon for five or more teams to engage in a frenzied bidding war for a player. This was virtually unheard of prior to 2016.
While esports salary information isn’t generally publicly available, North America’s largest League of Legends league (the LCS) has disclosed average player salaries throughout its recent history. From 2017 to 2019, the average LCS salary ballooned from $107,000 to $300,000. [3] This further increased to more than $410,000 in 2021. [4] Though not every esport has seen this level of growth, the trajectory of massively increased player salaries is an industry-wide phenomenon.
Of course, rising costs aren’t unusual for growing businesses. They’re also not inherently problematic. If costs rise by 10x but revenues grow 20x, no one is going to worry about mounting expenses.
The problem for many of these businesses is that (1) the addressable market was still far too small to rapidly scale revenues, (2) the business models too often mimicked traditional sports businesses and failed to account for unique challenges in the esports space, and (3) core stakeholders often failed to execute at the level required to find success. As a result, most esports-related businesses struggled to reach profitability and fell far short of generating the returns investors needed to deem their investments a success.