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February 1, 2023

Esports Winter Should Result in Stakeholder Net Positive

Esports winter is upon us.

Venture capital dried up across the tech and growth landscapes in H2 2022 making it increasingly difficult for esports-related companies to raise the funding needed to maintain their existing operations. According to recent reports, several Overwatch League teams are

seeking economic relief

from the league after years of high operating costs and underwhelming revenues.

CMOs across the sponsorship business are also scrutinizing their marketing and advertising spends more closely, a significant problem for an industry largely reliant on the revenue stream, and macroeconomic headwinds are accelerating valuation declines across the emerging sector.

“Riskier [businesses] that are more cash intensive, meaning where business models are not necessarily mature and there’s not short-term positive cash flow opportunities abundant, [are being] hit the hardest,” Mike Sepso (CEO, Vindex) said.

FaZe Holdings’ (NASDAQ: FAZE) share price is down more than 90% since it went public six months ago and the company now faces a

potential delisting

from the NASDAQ exchange.

But the long-time esports executive is not panicking. In fact, Sepso convinced the “chilly year or two” ahead will result in a net positive for stakeholders. Companies will be forced to cut unnecessary expenses, dial in on their most efficient revenue streams and “take data and the proving of value to different constituents in the ecosystem more seriously," he said. "That will create significantly more valuable [assets] and attractive investment opportunities as the capital markets do start to come back.”

This is not esports’ first down cycle. It just feels shocking bad to all of the new entrants into the space over the last four or five years, who have only known an up and to the right growth curve.

But Sepso, who has experienced several down cycles over two decades in the business, thinks the esports winter narrative is overblown. “More people every day are watching esports content and creator content, and more people are playing video games, not less. These macro trends are not going to get interrupted by whatever is happening in the economic part of the world,” he said.

And when the global economy bounces back and esports comes out of its latest downturn, the Vindex executive believes the industry at large will be better for it.

Consolidation should help some of the more established esports technology and infrastructure businesses, game publishers and team organizations reach scale quicker. “One of the best defenses against lack of capital is scale,” Sepso said. “If you can put [businesses] together, create efficiencies, generate bigger growth numbers and more revenue, ultimately you’ll get there that way.”

The hard times are also expected to force esports business' to take a more mature approach to their models. That should mean cutting costs. “On the team organization side, you’ll probably see some of these organizations that had teams in five or ten games pullback to the ones most likely to get mature quicker from a business point-of-view,” Sepso said.

Those same team organizations are likely to temper new fan acquisition and content creation efforts. “Most of these esports [organizations] have the pro teams and also creators on their roster,” Sepso said. “Teams [have been] paying a lot for that talent and in a more restricted advertising market you’ll see less investment in that.”

Taking a more mature approach could also mean “refocusing on one or two lines of business that are most able to drive profitability, longevity and sustainability,” Sepso said.

Look for bigger team organizations, like 100 Thieves and Optic Gaming, to increasingly lean into their most efficient direct-to-consumer businesses (think: 100 Thieves’ ‘rejuvenation’ drink or luxury keyboard line).

That seems like a wise decision. Esports teams are at the mercy of the publisher who owns the IP. So, the most efficient way for these organizations to control their own destiny is to evolve into lifestyle brands and subsequently launch products.

It should be noted that Sepso is on the board of 100 Thieves.

The winter of ‘23 could be the catalyst that pushes the esports industry to take data capture, collection, measurement, reporting and ultimately ROI more seriously too. “Esports provides a ton of value to the core video game industry. It also provides a lot of value to advertisers who want to get in front of the gaming audience, Sepso said. “But it has [historically had] a really tough time proving that value.”

That is in large part because the industry has failed to produce the comprehensive reporting data that is found and used as currency within more mature professional sports. “Any CRO, across any of the major traditional sports leagues and franchises, has tons of data that they bring to the table every time there’s an advertiser or sponsorship conversation. That just has not been developed in the esports and gaming space effectively,” Sepso said. “

But that is the next phase.

There are a host of companies that measure streaming analytics. The problem is esports game consumption and engagement occurs across a multitude a channels and platforms. Vindex, Stream Hatchet and Esports Charts are among the omnichannel data aggregation and insights platforms trying to capture all of that activity and understand any direct correlations that may exist.

While difficult to piece together, if executed properly the insights could be invaluable to the industry long-term. “The ambition is to show the full flywheel effect,” Sepso said. “You produce a big esports league and program it out. That [spawns] a halo effect of other creators creating even more content [around the game] and now you have this organic community building around it. The more that happens, the more you will see players going from that viewing experience into playing.”

Having data that shows the value an esports organization brings to a given game may ultimately allow it to share in the revenue generated as a result of its participation. Sepso said there would likely be “a more interesting interplay between game studios, publishers and the esports ecosystem, where there is a bit more revenue sharing in the core business,” if team organizations could prove their worth.