Game On or Game Over: Unveiling the Critical Challenges Facing the E-Sports Industry
According to 「Newzoo」, the e-sports industry achieved a noteworthy milestone by surpassing a valuation of 1.1 billion USD in the year 2019. Projections previously indicated a sustained trajectory of growth with an anticipated year-on-year expansion of 26.7%.
While all these look like peaches and cream, the truth might be excruciating.
What is going on?
The e-sports ecosystem can be delineated into following categories.
Sponsors
E-Sports Organizations (Agencies + Players)
Game Developers / Publishers
Distribution Channels (Streaming Platforms)
Audiences
Tournament Organizers
The primary catalyst for the ongoing challenges is currently centered around and the significant reliance of e-sports organizations on sponsorship.
*Digital : digital assets such as NFTs
Sponsors + eSports Organizations
In a concerted effort to achieve positive cash flow, prominent e-sports organizations are implementing cost-cutting measures such as letting go of talent and withdrawing from certain games to curtail expenses and reduce burn rates.
Moreover, the predominant allocation of sponsorship to teams with perceived potential for success in major leagues mirrors the traditional sports paradigm, where player performance plays a pivotal role in securing victory. However, the financial constraints faced by many small to medium-sized e-sports organizations pose challenges in recruiting top-tier talents, largely attributed to the escalating demands of the average e-sports player.
Compounding this issue is the absence of recognized minor leagues or development platforms for players with limited experience or those who have yet to garner attention from sponsors. This absence of structured pathways for emerging talents not only hinders their growth but also exacerbates the difficulty for smaller organizations to nurture and attract promising players.
Previously, external venture capital funding served as a remedy for the cash flow challenges within the e-sports industry. However, new funding sources are diminishing. According to 「Drake Star」, there were 59 e-sports financing deals closed in 2022, amounting to $400 million. This reflects an 81% decline from the $2.1 billion generated across 718 deals in 2021.
⚠️ Insolvency administrator 「Shane Cremin」 of 「Rogers Reidy」 sheds light on the financial challenges faced by 「ORDER」, an Australian e-sports organization, stating, "ORDER's expenditure appears to have been well outside of its means, with significant losses being suffered since its inception. In particular, the company was making losses of an average 300,000 AUD per month in the 2022 financial year with minimal revenue." The situation has escalated since the close of 2022, with 「ORDER」being the initial casualty, subsequently leading to the cessation of operations for several medium and smaller-sized teams, including 「eUnited」 and 「Torrent」.
The crypto winter also has significantly impacted the e-sports industry. With a perceived market fit and shared audiences, numerous e-sports teams entered into deals with crypto companies in 2020 and 2021. However, this influx of cash dissipated suddenly, resulting in the elimination of a previously lucrative source of sponsorship revenue.
Game Developers / Publishers
As indicated by the graph from 「ESPORTS CHARTS」, among the top 10 e-sports games with the highest number of peak viewers, four belong to the MOBA (Multiplayer Online Battle Arena) genre, while the remaining titles fall under the category of FPS (First-Person Shooter).
Moreover, the substantial disparity observed between the top two games and the remaining titles in the Top 10 lists, coupled with the observation that a few entries on this list originate from the same company, may suggest a lack of significant concern among various game developers and publishers regarding the present downward trajectory of the e-sports industry.
「Riot Games」 : League of Legends / Valorant
「Valve」 : Counter-Strike / Dota 2
It is also noteworthy that, despite the prevalence of e-sports games being played on PCs, the mobile game industry constitutes nearly 50% of the total revenue in the global games market. In contrast, PC games account for only 21% of this market.
Distribution Channels
The distribution channels for e-sports, namely 「Twitch」 and 「YouTube」, may harbor some concerns, albeit to a lesser extent. This is attributed to the fact that their business models are not dependent on the e-sports industry. Platforms like 「Twitch」 and 「YouTube」 operate within the realm of passive entertainment, where audience attraction is primarily centered around influencers rather than the specific games or products being presented. Consequently, the removal of certain games as content to stream should not significantly impact their revenue as much as the broader industry might anticipate.
Audiences
Based on chart provided by 「Statista」, despite the continuous growth in peak viewer counts for 「League of Legends World Championship Finals」 from 2021 to 2023, there is a contrasting trend in average viewer counts, which have seen a decline over the same period.
Furthermore, the dominance of South Korean teams, securing eight titles since the inception of the first championship in 2011, alongside the three titles won by Chinese teams, provides context to the observation that Korean audiences contribute 1.87 million out of the total 6.4 million view counts (approximately 30%). This trend raises the plausible consideration that the valuation of the e-sports industry could be over-hyped, with regional factors playing a significant role in viewer engagement.
Tournament Organizers
In the event that the e-sports ecosystem faces a collapse due to a combination of the previously mentioned challenges, tournament organizers may find themselves compelled to make strategic adjustments. This could manifest in a reduction in the number of events held annually or a decrease in the overall prize pool to offset the decline in profitability, rendering the e-sports industry insipid for those involved.
In Summary,
The current state of the e-sports industry ecosystem is conspicuously precarious. There exists the possibility that the entire industry is overvalued, or alternatively, it may be moving in a positive trajectory but has not yet reached a defining moment.
In my upcoming post, we will delve deeper into this topic to explore potential opportunities that the e-sports industry could capitalize on.
