December 2, 2023


An Interactive Session

The esports industry in 2023… is it game over or game on?

For many people, the pandemic gave them their first interaction with esports. From virtual Formula One races to Premier League stars competing on FIFA, the decimation of the sporting calendar meant the wider world got a taste of competitive gaming in 2020.

The exposure prompted several questions. Namely, would esports become a regular part of the global sports conversation and could it be the key for traditional leagues and teams to reach a younger fanbase?

At the height of lockdown, the general consensus from those working in the industry was that Covid-19 would be a watershed moment for esports. Attention soon turned to what would happen as restrictions lifted.

Since then, non-endemic global brands have signed on as partners of various competitions and teams and an esports organisation has even listed on the Nasdaq stock exchange. On the flipside, some franchise leagues have stagnated and major losses have been incurred.

As with any industry, there will be peaks and troughs. In esports, though, those sometimes feel more pronounced, partly because the hype around competitive gaming has often been disputed by those sceptical of whether the sector will live up to its lofty financial forecasts.

Still, interest in competitive gaming remains high. Seeing that appetite reflected in a sustainable business model, however, remains a pressing concern.

What did Covid do for esports?

Alex Inglot is the commissioner of the ESL Pro League, a Counter-Strike:Global Offensive (CS:GO) professional esports competition, which saw around 568,000 viewers watch its season 12 finals in 2020.

The competition’s audience numbers have remained steady since, with the season 14 finals in 2021 delivering 758,000 viewers, while the season 15 and season 16 finals last year were watched by a peak audience of 413,000 and 509,000, respectively.

“There were a lot of stories and coverage around the time of Covid which suggested that esports is going to thrive and benefit,” Inglot tells SportsPro. “But there was also a feeling at the time that there would inevitably be a correction once Covid passed and what came up would have to come down.

“I think what we found, at least with CS:GO, is that is not strictly true. When we track the viewership numbers of our events, yes, there was definitely a spike in the Covid years. But when the post-Covid correction occurred, it didn’t go back to pre-pandemic numbers.

“We have managed to retain the viewership and the interest, and attract new fans.”

The precise value of the esports market can be difficult to quantify, though it has been projected to reach US$5.74 billion by 2030. That said, despite all the attention generated during lockdown, things may not have kicked on as first hoped.

“The pandemic definitely brought esports much more mainstream,” says Phelan Hill, Nielsen Sports’ head of strategy and consulting, international, who specialises in esports.

“All of a sudden you had acknowledgement of esports on main broadcasters. It was on the BBC and Sky [in the UK]. It certainly brought it to the forefront.

“Because you’re starting from a slightly lower base, you saw massive rises in growth commercially. So, theoretically, at that point there was real buoyancy. Fast forward to now, in some ways I don’t think things have progressed on.”

The likes of Formula One leaned heavily into their esports competitions during lockdown

What’s the current situation?

Esports’ revenue model has been under the spotlight. Put simply, the industry relies heavily on sponsorship to prop up its income. One example is Guild Esports, co-owned by English soccer icon David Beckham, who saw their 2022 revenue rise to UK£4.5 million (US$5.8 million), up 137 per cent year-over-year (YoY). Of that, UK£3.2 million (US$3.9 million) came from sponsorship.

That puts significant pressure on getting partners in. Brands may have initially bought into esports’ futuristic vision but they are now becoming more wary.

“Some brands realise they’re now not getting that return,” explains Hill, who says companies wanting to reach younger demographics can now do so through other – and cheaper – platforms, such as TikTok.

“It’s becoming a lot more competitive for sponsorship dollars,” he adds. “Ultimately, people are questioning a little bit the numbers which came out [during Covid].”

Investors that were quick to jump on the esports bandwagon are also tightening the purse strings, according to Hill. Venture capital firms were among those enticed by lofty growth metrics, chiefly related to audience reach and engagement, under the assumption that returns would swiftly follow.

Generally, that hasn’t happened. Even League of Legends’ (LoL) esports operation, and probably competitive gaming’s most popular title, doesn’t turn a profit. Faze Clan, which went public last July, is at risk of being delisted by Nasdaq. At some point, the industry will need to start making money.

Even so, that is a challenge when many premier esports events exist mainly as a marketing tool for the actual game being played. Deep-pocketed developers such as Epic Games and Riot Games, which make Fortnite and LoL respectively, can afford to take the hit, knowing that gaming tournaments will help generate more awareness for their titles.

Inglot pinpoints three universal challenges that the industry is facing.

“The first is there continues to be tonnes of misconceptions about esports and gaming flying around,” he says. “That it’s bad for society, that it’s antisocial, that it’s only for kids.

“The second issue is macroeconomic circumstances. You’ve got rising interest rates, inflation, supply chain pressure and the cost of living crisis. All of these have come together at the same time. We’ve also got investment capital [being] more hesitant than it was in the past because of that.

“The third layer is esports, unfortunately, is overly reliant on sponsorship. That means in the current economic climate, sponsorship is becoming more difficult to secure or maintain because of these marketing budget restrictions that are happening across companies.”

Will there be a market correction?

Inglot and Hill agree that things need to change in order for the esports industry to move forward. Mergers and acquisitions, layoffs and bankruptcies are being forecast as organisations within the sector look to adjust to the current challenges.

“Long term, it’s probably a good thing,” notes Inglot. “You’re going to see stakeholders driven to better efficiencies. Through mergers, you might see more attractive scale and higher revenues which might be more attractive to the investors that will inevitably return. There will be those who fall away and there will be those who adapt.”

“I think you will probably see, even with some of the major teams, some form of streamlining,” says Hill. “They might cut various teams from their rosters and focus on leagues which have the biggest audience and good cash pots.

“Those franchise structures in the likes of the League of Legends ecosystem will be relatively strong. I also think some of the other teams which play in much more of the open ecosystem, so CS:GO etcetera, will also remain strong.”

Faze Clan, which bills itself as a gaming, lifestyle and media brand, went public last July via an SPAC merger

What needs to change?

1. Know your product

The Overwatch League (OWL) is one of the high-profile esports competitions to have missed revenue targets and suffered dwindling viewership, despite much hype when it launched. The competition’s decision to adopt a more traditional sports model, including home and away fixtures, hasn’t paid off. Last year, it was reported OWL’s franchises owed publisher Activision Blizzard roughly US$6 million to US$7.5 million each.

Ambition is one thing, but the offering has to be strong, especially for newer titles.

“If you look at the Overwatch League, they were very ambitious to try to introduce an unproven proposition.” Inglot says.

“They launched it with a new game and IP and they leaned heavily on established NFL and NBA-esque norms. That was an attempt to try and see if an unorthodox [for esports] format structure and ecosystem could survive and flourish.

“Covid hindered the format and the concepts, because home and away became almost impossible. The gameplay also didn’t quite resonate with the audience.

“CS:GO is not struggling. You’ve got a global game with over 20 years of history and ten years in its current incarnation. It’s got the right ecosystem with power and revenue sharing. You’ve got that collaborative spirit. You’ve got competitions formats which have been iterated over the last decade which really resonate with the fans. You’ve got personalities and storylines.

“Those ingredients make for ongoingly successful esports.”

Overwatch League is among the esports competitions to miss revenue targets and see falling viewership

2. Overhaul the revenue model

As well as the aforementioned dependence on sponsorship, the spend per fan in esports is low. A solution is for organisations to position themselves as gaming, lifestyle, and media brands, though Faze Clan’s struggles show that won’t guarantee success.

For traditional sports, media rights are the biggest moneymaker. However, esports fans and gaming aficionados in general are used to consuming live broadcasts for free on streaming platforms such as Twitch. YouTube Gaming and Microsoft’s Mixer, both now defunct, tried and failed to get users to pay for content.

Esports athletes and gamers have seen more success in monetising their audiences. For organisations and leagues, making specific paid-for content, and having it available on a direct-to-consumer (DTC) subscription service or pay-per-view (PPV) platform, could be an option.

Major esports events, such as the Fornite World Cup, provide massive marketing opportunities

“There are a lot of esports organisations that are exploring how to get that B2C revenue from esports fans, some with more success than others,” says Inglot.

“But, as a general proportion of the revenue pie, media and direct-to-consumer is not really where it needs to be for a well-balanced esports ecosystem.”

In addition, Inglot believes that more revenue generated by publishers and tournament organisers should trickle down into the esports ecosystem, while he also thinks there should be greater recognition of the role competitive gaming plays in building products and audiences.

For Hill, there are parallels with the current plight of English club rugby where, since the sport turned professional, wages have skyrocketed but other areas haven’t caught up. It comes down to building the product itself, he says.

“If you compare the ESL product with the League of Legends product, I’d say the on-site experience for ESL is so much better,” Hill adds. “That’s partly because [ESL] actually need to make a great product and they recognise the fact that they can’t just survive off sponsorship or in-app purchases like the League of Legends ecosystem.”

3. Lean on the community aspect

Hill reveals that some esports teams are spending “over UK£100,000” to do a two-minute video announcing a partnership. Couple that with other high costs, such as ballooning staff numbers, and the sector risks losing sight of the community that made it appealing in the first place.

“What really attracted me to esports at the beginning was the fact that it was actually quite raw,” continues Hill. “It had loads of super bright young people being super creative.

“You can create great content which is creative and cheap. Somewhere along the line there’s been this race to get something even more polished and [look] like a Hollywood production at times.

“Go back to the core things that make it work well – the whole directness with the fanbase. Twitch, Discord, Reddit, all these community-based things offer so much more direct access.

“How easy is it to talk to Messi or Neymar? It’s impossible. But you can talk to your [esports] star through Twitch.”

He adds: “We need to move away from this obsession of just showing a bigger and bigger number.”

Fans are accustomed to getting plenty of access to their favourite esports players

Is the future bright?

Esports’ troubles are symptomatic of the challenges currently facing the wider technology industry, where more than 200,000 roles have been cut since the start of 2022.

It would be wrong to write off competitive gaming completely given that many of the problems it is experiencing apply to other businesses across multiple sectors. Still, those within the industry will be hoping that the changes coming to the sector will provide the shakeup needed to spark renewed optimism about esports’ growth potential.

“I remain bullish on esports in the long term,” says Inglot. “The player base is growing worldwide. For example, CS:GO has hit a record 1.3 million concurrent players in 2023. Without generalising, the games are growing in users, in community. We’ve seen mobile gaming really start to find its feet, which is opening up markets. We’re seeing viewership going up across events, especially those that have the right formats and ingredients.

“I think a lot of investors are looking long term. Of course, there are some who are thinking, ‘what do I get in the next three to five years?’, but if they’re allowed to be a bit more long term, esports has to be in the portfolio. It’s still a bridge to all of these exciting macro trends, whether it’s virtual reality, the metaverse, digital asset valuation and collection.

“Stakeholders will adapt. They will trim their expenses and focus on leaner and more profitable aspects of their business. That will mean that those who survive this will be ready for the next esports spring.”

Mobile gaming is opening up new markets

“The wider gaming ecosystem is huge,” adds Hill. “You’re going to get more and more people growing up with esports.

“You have to go through a period of adoption and think: ‘actually, how do I make more money and how do I look for my ARPU?’ Then it’s [about] greater emphasis on pivoting to ‘we are a lifestyle brand’ and looking at collaborations.

“When you do see a collaboration, it generally goes pretty well. When the likes of Gucci and Balenciaga have done collaborations, everything has sold out. So it tells me there’s a market there.

“You can’t just keep chucking money at it. You have to be a little bit more thoughtful about how that money is spent.”