The FTX collapse of 2022 had an impact on esports as well with its TSM and LCS sponsorships directly impacted. In 2023, the esports industry will strive to explore differnt revenue models.

Over the past decade - in the modern era of esports - the industry’s growth has been phenomenal both in terms of viewership and investments. But the industry has fallen behind when it comes to increasing its revenue and constructing viable business models that ensure sustained growth. The unraveling of the FTX story last year brought into focus the lack of sustainable revenue models in esports. But 2023 is the year when, hopefully, esports will bring forth innovations and sustianable business models in addition to rapid growth.

FTX: Crypto and esports

When the news of Sam Bankman-Fried-led FTX’s collapse broke out, there were quite a few worried minds in the esports industry. FTX is a somewhat familiar name in esports, having inked one of the largest sponsorship deals in the industry. 

Late last year, the Sam Bankman-Fried-led FTX collapsed, its valuation plummeting from nearly $32 billion to $1 in a single day. The collapse also impacted esports as FTX had sponsorship deals with some of the biggest entities in the industry - TSM, FURIA, and LCS.

FTX had sponsorship deals with TSM and the LCS.
FTX had sponsorship deals with TSM and the LCS.

FTX signed a 10-year sponsorship deal with TSM in mid-2021 for a whopping $210 million. The esports org would receive $21 million every year but that was not the end. Weeks later, FTX was named the official cryptocurrency exchange partner of the North American LCS.

The crypto industry itself is a very speculative market. While traditional financial instruments often have to pass through regulatory approvals, the crypto industry has not had to go through similar checks. So while there were astronomical highs, the FTX situation highlights how these highs can come crashing down – to $1 in a matter of hours.

"There's an assumption that there's some regulatory background and backing and safety because people are conditioned to have that trust in financial instruments," said Jason Chung, a professor, and director of the esports and gaming initiative at New York University."But the crypto industry is still not super regulated. So I think we're beginning to see the signs of what happens when something doesn't have adequate regulation and things go south. And obviously, that impacts retail investors, probably more than any other investors. So it's important to know what coverages you do have and what you don't."

For another still-niche industry, esports, there is an urgent need to continue to grow at a very fast pace. And till now, this growth has mostly come through VC money and sponsorship revenues. But can it continue to be an attractive investment opportunity on these two pillars of revenue alone?

Esports and sponsorships 

Esports has developed faster than we can develop systems for it. That's why I am bullish on esports. 

Jason Chung, professor, and director of the esports and gaming initiative at New York University

However, late last year, after the FTX foundation was found to be built on a layer of lies, it exposed some of the vulnerabilities of the esports industry's revenue models. The over-reliance and ease of acquiring sponsorships and venture capital funds have lowered the urgency of trying to prove the industry’s viability as a sustainable business. As we head into 2023, when financing and sponsorships are not as easily available, esports organizations are already making changes to have a shot at profitability. 

“There needs to be a realignment and there certainly needs to be a broader conversation with publishers,” said Jason Chung. “Hey what can we do to make the fundamentals of sports stronger and how do we actually make it something attractive enough that we can package either as a media rights opportunity for the networks or streaming services of the world? Or is it something where we take the boxing model, the UFC model, and is it something that people are going to spend money on a pay-per-view basis to come watch.”

One of the biggest sources of income for physical sports are media rights. Media rights for games like Football, Cricket, and Basketball are often the largest share of the revenue for leagues. In esports, media there have been very few instances of exclusive media rights. The biggest reason for this is the lack of competition. 

Amazon-owned Twitch has a near-monopoly on the live-streaming industry. A substantial chunk of esports lives on Twitch with tournaments and streamers with massive followings broadcasting their content on the platform, for free. 

With no real competition, Twitch has all the cards when it comes to negotiating a broadcast deal. In 2018, the Overwatch League signed an exclusive broadcasting agreement with Twitch for $90 million. The deal was not renewed in 2020 with OWL (and CDL and Hearthstone esports) moving over to YouTube Gaming. Blizzard has already announced Hearthstone esports will stream on both YouTube and Twitch in 2023. The Call of Duty League has also been streaming on Twitch pointing to the lack of an exclusive broadcast deal for the Blizzard games. 

Alternative models

"When it comes to mainstream, even though esports has become even more mainstream, is still not as easily explainable,” Chung told “So the test I always use is - Hey if you were going to explain esports to your grandmother, how would you do it? and the minute you talk about esports, you have to start explaining genres and titles and variations between publishers and whatnot - you've already lost (their interest)."

In many ways, esports is the digital-only version of sports. While there might not be many similarities in the types of games, the esports audience has always been online. That is a big reason why when the world went into shutdown mode during the pandemic, esports was one of the only industries to be up and running smoothly. The transition from offline to online was quick, efficient, and seamless for most esports organizations. 

"First of all, will the community be able to support it or want to support it? And secondly, the publishers are also in the business of marketing the game. The idea is you want your product in front of as many people as possible. So the incentive to leverage the media rights of the game is almost become secondary compared to just putting it in front of people. So why would you put it behind a paywall? That's a highly complex question that will require a lot of cost-benefit analysis about marketing vs monetizing and what's the appropriate balance."

But esports fans are used to watching streams for free online. There have been attempts at pay-per-view revenue models and they failed miserably because of the massive drop in viewership. 

Fans accustomed to free live-streaming on Twitch, YouTube, and other websites will need more incentives to dish out their wallets. 

I would be okay with a team-specific paywall but only if it came with exclusive incentives. Do fans get exclusive pov of their favorite team? Do we get an exclusive comm listen ins etc? It would be a crime to simply ask fans to pay to watch. 

Jordan Marney, avid Cloud9 supporter

And in many cases, viewership is the biggest selling point for many TOs. There is also the bigger question of competition, or rather lack of it. There is no real competitor to Twitch when it comes to the live-streaming space. We had Mixer, but Microsoft shut down the streaming service and YouTube Gaming is still finding its feet. 

The growth of esports - The Perfect Storm 

We are trying to condense decades worth of professionalization in traditional sports into the space of a few years in esports and that's where we are running into problems. 

Jason chung

In many ways, esports’ growth had several things going right for it. As Jason Chung puts it, it was the perfect storm. 

"When you're talking about esports, you are talking about a very condensed form of time where not only did we get great online games, great servers that could actually handle the load, and communication systems that could handle the instantaneous communications across the globe, but also broadcasting systems - in terms of streaming sites - all happening at the same time. So it was a perfect storm in the form of technology and culture and business coming together."

The size of the esports market ranges around $1.5 billion with expectations for a 4-5 fold increase in just as many years. After undeterred growth over the past decade, even accelerating during the pandemic, esports is entering a period where sustainability and ROIs are key indicators of the industry’s health. Has esports’ growth been too big too fast?

"How to operationalize a global audience for sponsors - what does that even mean, communicating that has been a challenge. How we actually broadcast has been a challenge. Also, how did the stakeholders interact? How much say should players have versus publishers versus the tournament organizers including what happened with Panda and Nintendo? All of these things we are just figuring out on the fly. So really what's gone too fast is the human element of it. It has developed faster than we can develop systems for it. That's why I am bullish on esports."

"I think the soup is ready but the person with the ladle is kind of sleeping in the back," he continues with a unique analogy. "It will take a little while for everything to catch up. But it will get there. The question is who are the people who are empowered to make those changes? Should they come from outside the industry as increasingly has happened? Or should they be people that made up the space and are leading the charge? Then there are all these cultural things such as whether it should be the tech people that should lead. Is it the traditional sports people that should lead? All of these things are being worked out."

These are all focal points as the industry strives to maintain its growth, but this time in a sustainable manner. One that is less reliant on sponsorships and advertisements. The Santa-Monica-based developer drastically scaled down the scope of Hearthstone esports. Previously, they had also announced Heroes of the Storm won’t receive any more major updates.

The Publisher conundrum

Publishers play a very important role in esports. Unlike many traditional physical sports, game companies often own the IP. This means, there is a centralized often-private org that can, on paper, single-handedly alter the direction of a game’s esports scene. 

Activision Blizzard has been nefarious with its decisions to massively scale down or sometimes just shut down its games’ esports titles. 

“It definitely has an impact and it has an impact in the sense that to a large extent, there has been a ceding of the ground to the publishers,” Jason Chung says about publishers’ overbearing presence in esports. “Because again, it is their IP and that is the most important thing. One of the side-befits of the 'professionalization of esports' and having more higher-powered investors coming in and owning these teams is that they can bring the publishers to the table. because you've paid a bunch of money in franchise fees.” 

The Overwatch League started off with a city-based franchise model. This is an image from 2018 wit thousands of fans in attendance. Image Credit: <a href="" target="_blank" rel="noreferrer noopener nofollow">Robert Paul.</a>
The Overwatch League started off with a city-based franchise model. This is an image from 2018 wit thousands of fans in attendance. Image Credit: Robert Paul.

The Overwatch League introduced a franchise-based model that saw massive investments from traditional sports team owners or media companies. With each team playing tens of millions of dollars as franchise fees – the teams are now reportedly seeking compensation from Blizzard – there has been significant investment in esports. Naturally, the franchise owners are committed to aiding the growth and development of esports as a whole. 

“Obviously for publishers, right now, esports acts as a giant marketing deal and they use it as a loss leader,” he continued. “But that doesn't work for investors who have paid tonnes of money in terms of franchise fees and are frankly losing money every year running teams. I do believe that there will be a natural equilibrium that is reached; there will be probably a more robust conversation between powerful investors and publishers. Just simply because investors, no matter how rich they are, don't like to lose money forever on this topic. “

Diversification and expanding the esports base

"I think the soup is ready but the person with the ladle is kind of sleeping in the back

chung on the rapid growth of the esports industry

If the motive is to explore other revenue models other than sponsorships and investments, there are many options available. But the intent to explore these alternate revenue models has to be present. It takes some level of innovation to go beyond the norm but necessity breeds innovative inventions.

Even as teams explore alternative revenue models, there is a need to make esports more inclusive. Diversification of the esports fanbase will help remove the stigma of the esports (gaming) stereotype is that of a teenage boy in his parents’ basement. 

“I think there's also a need to diversify in the space as well,” said Jason Chung. “The main thing I also say is that making the sport more accessible, bringing in new audiences, and marketing to all people across the board, that's just going to enhance your player base and fanbase. At that point, if you have mature systems, e-commerce systems, and subscription models that you can bring them, you're just going to have a larger base of people to engage with.”

There have been noticeable efforts in bringing in more women in esports. Riot Games’ Valorant Gamechangers awards the same level of prestige and production as they did with the VCT Champs Istanbul. South Korea, often referred to as the Capital of esports, has a massive esports fanbase. However, when it comes to women’s representation, it still. 

“I had my students reach out this semester. For eg, Korean teams - what are Korean teams doing to reach out to female gamers? And the answer was not much.  That's not great. Especially considering in Korea, there's a sizable female audience and esports organizations are not doing it because the assumption is it is still a young male-dominated industry and ofcourse that's a self-defeating prophecy.”

However, there are ongoing efforts when it comes to providing more inclusivity and assistance to the development of the Game Changers scene. Late last year, DRX signed its first Gamechangers player.  Apex Legends also has had women participate in ALGS, although much more can be done by the publisher and tournament organizers in this regard. 

The next year is a decisive year for esports with some leagues ramping up (Valorant) while some others seem to be receding in interest and glory (OWL). But from a business perspective, this year will be the year where teams are focusing on ensuring profitability and showing that esports is a sustainable business. The FTX crash last year has only served as a warning for esports teams to ramp up their monetization efforts.