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Insiders: eSports Organizations are Overvalued, Market Correction Coming
Ben Fischer (SBJ) has reported that eSports insiders believe gaming organizations (think: Cloud9, OpTic Gaming) are overvalued assets and are “increasingly convinced” a market correction is on the horizon. Negative cash flow balance sheets caused by organizational spending (think: gamer salaries) that’s far outpaced team revenues, flat (see: League of Legends) or declining (see: Overwatch) viewership for the games with the most money invested in them and the continued belief that eSports organizations are getting less than full cooperation/support from publishers have all dampened short-term investor enthusiasm. The prevailing belief now is that eSports are “much more analog than digital”, meaning like traditional pro sports, organizations will need time to “build a distinctive brand, a deep emotional bond with fans and long-term relationships with sponsors”; it’s now suspected that those invested are at least 5-10 years out from capturing meaningful returns.
Howie Long-Short: Jason Lake, the founder of compLexity Gaming, applied some “good, old-fashioned common sense” and stated, teams with revenues under $25 million shouldn’t be raising capital at valuations over $300 million. Sure, eSports organizations have the potential to develop truly global fan bases (think: Manchester United), but “the revenue (at this time) has still not caught up to the size of the demographic and eyeballs.”
Fischer’s article stated that organizations “lack the hard assets” that sponsors desire. Jeff Eisenband is a esports journalist and was a host/analyst for the NBA 2K League in its first season this past summer. I spoke to Jeff to find out exactly what eSports organizations have to sell to sponsors and where the opportunities lie to grow the revenue pie?
Jeff: Esports organizations have an identity to sell and they can offer sponsors direct access to the players and usage of organizational IP (think: logos). Kyrie Irving isn’t the best player in the NBA, but he’s one of the most marketable because he identifies with fans. His dribble moves are eye candy, his sneakers are fresh and he even acts. Just as sports leagues and teams use their players as marketing chips, so can esports organizations. People relate to people. That’s why Ninja’s Fortnite streams are a bigger deal that Fortnite’s own Twitch channel. These players and organizations have fans and these organizations present a more direct marketing play to those fans. Also, Overwatch League and the NBA 2K League are among the first to build around locally-based franchises. This is a long-term play to connect not only to the cities’ fans, but to their sponsors. Wawa might have no interest in a general publisher, but it will happily sponsor the Philadelphia Fusion and 76ers GC.
In terms of revenue growth, these organizations are not tied down to simply running teams. Gaming is a lifestyle, not just a competition. Streaming outside of competition is a simple and easy wait to gain a little revenue (remember, Ninja is still technically signed to Luminosity Gaming). There are also other ways for teams to utilize their gamers for appearances, consulting and content. Think of the esports community as a large-scale grassroots operation. Gaming events like E3, TwitchCon and the League of Legends World Championships are massive summits with the most-engaged fans looking to open up their wallets. Just like NBA All-Star Weekend or Super Bowl week, this is a major opportunity to create satellite events on site and connect with potential fans. It is all about maximizing the value of the logo/roster and selling sponsors on not just a few name mentions, but on being aligned with an experience for fans.
Many organizations feel as if they’d be able to generate additional revenue with greater support from the publishers, so it’s worth wondering why publishers aren’t more motivated to work with eSports organizations. I asked Jeff, isn’t it in their best interests for organizations/teams to be successful with their games?
Jeff: Yes, for sure, but think about it this way, who needs the other one more? Publishers can use esports organizations as an asset, but esports organizations do not exist without the publishers. Many publishers see esports organizations and leagues as marketing tools, but not as moneymakers for them. Activision makes much more money from direct sales of its games and accessories than its esports competitions, so the focus is on selling games and making gameplay conducive to competition. Now, if these esports organizations build identities and fan communities, the publishers will have to play a little bit nicer.
Labor costs have steadily risen as investment capital has poured into the eSports space, but as mentioned, organizations aren’t generating enough revenue (see: mid-7 figures, top organizations generate 8 figures) to operate in the black. Now we’re seeing organizations (see: Infinite Esports, Echo Fox) laying off gamers, teams and staff on less popular titles (see: Call of Duty) to minimize losses. Eventually capital will begin run out for some of these organizations. When that happens, they’ll once again be in the market for investment capital; this time, they’ll be taking money at a lower valuation.
Fan Marino: It’s difficult to make the case eSports organizations are not overvalued when you consider that Forbes’ 12 most valuable eSports organizations are said to be worth an average of 14x annual revenue; by comparison, NBA teams are valued at just 6.5x revenue. Those buying in see the potential to capture “the long-term value accretion of (global) sports franchises with high-growth, early-stage tech multiples.” It’s far too early to talk long-term value (teams in other pro sports lose money as their value grows), but it’s clear that because of their similarities to traditional sports, eSports organizations do not have ability to scale revenue-wise at the same rate that a promising early-stage tech start-up does.
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