About a month ago, Kotaku published an article entitled “Shady Numbers And Bad Business: Inside The Esports Bubble.” The article makes a lot of bold claims about the esports industry, which I don’t intend to discuss line by line, however it did get me thinking about the title’s premise. Is esports a bubble? Are we only a few years away from a collapse that will take many popular leagues and teams down with it? Or was Mavericks owner Mark Cuban right when he said recently, on the Freakonomics podcast, that if he had to invest his money in sports entertainment today he would bet long on competitive video gaming?
The answer is a complicated one. The facts around team, league, and publisher expenditures are fuzzy, at best. There are persistent rumors of participants in the market acting irresponsibly, some of which are probably true. However, it is also possible that the supposed industry-wide bubble is confined to a relatively small number of teams and tournaments. Esports is not a monolith and each publisher handles their competitive title differently, each broadcast and/or event team takes a different approach to monetizing their product, and each sports’ top players have different expectations about compensation. Dota 2 is not the same as Overwatch is not the same as Super Smash Bros Melee (SSBM). There are some people in the space who are going like gangbusters and spending themselves into oblivion. There are some that have been much more conservative with their growth and are able to live within their means.
The Kotaku article doesn’t take a firm stance or support its positions with hard economic facts. Rather, it chooses instead to catalogue a variety of perceived financial issues within esports and heavily imply they are indicators of a bubble. It discusses some harrowing facts about potential illegitimate tournament viewership numbers, but then incorrectly conflates the companies that cheat their numbers as a marketing tool with the esports that have grown organically. It correctly identifies several esports organizations that have gone away in recent years, but never goes deeper into the specifics of why those particular teams or leagues failed, instead presenting it as something dangerously commonplace. It brings up how personality streamers can offer better return on investment (ROI) for sponsored gaming content, but doesn’t address how many personality streamers built their brands through competitive success. It undercuts all the legitimate points it raises by writing in a sensationalist way that belies the realities of a very diverse and complicated market. It even hedges its bets at the very end, giving us the old Reading Rainbow sign off: “…but don’t take my word for it!”
Still, the Kotaku’s article does get many things right. One key area it calls attention to is the opinion among some insiders that investment in the scene is far outpacing the actual revenue being generated. I agree, especially with the trend of monied individuals looking to invest for no other reason than the appearance that esports is the next big thing. A kind of financial fear of missing out, if you will. As a result, a lot of investment capital is coming in from eager outsiders who don’t seem to fully grasp how esports operates. A perfect example of this is the announced esports venue in south Philadelphia, which is reportedly going to cost sponsoring organization Comcast something in the realm of $50 million. Called the Fusion Arena, it will be an esports focused expansion to the South Philadelphia Sports Complex, with a 3500 seat stadium intended to one day house the Philly Fusion, the city’s nominal Overwatch League team. This investment makes no sense.
Overwatch League has regional teams in name only. Most of the teams are not organically from their named region, nor is their ownership group from that region, nor are a majority of their players from that region, nor do they currently play in that region. For example, the London Spitfire is owned by Cloud 9, a United States based multi-team esports organization, whose primary investor is Chicago’s Valor Equity venture capital firm. Their roster is 100% Korean and the team plays in a studio space in Los Angeles. There is nothing London about the Spitfire, other than Blizzard’s aspirations for a “truly global league.”
Blizzard, the game publisher behind both Overwatch and its competitive league, has begun expanding the Overwatch League’s event locations beyond its home studio in L.A., something they call homestanding. This is a far cry from the kind of regular, regional games that Comcast’s proposed arena would need to justify its construction costs. Even if the Overwatch League transitions fully into the home/away game structure of traditional sports, and there are rumors they want to roll this out in 2020, I’m skeptical there is enough interest in any given city to fill an arena that size. Blizzard’s homestanding tests have been a success, but they have functioned more like special events than a regular season game. For perhaps a more direct comparison, the studio used for Riot’s North American League of Legends Championship Series, also known as the LCS, has a seating capacity in the low to mid hundreds, which it fills each week with a mixture of Los Angeles locals and out of towners. It rarely sells out. Truly major games, such as the season finals for both the LCS and Overwatch League, can pack large stadiums like L.A. Live, Madison Square Garden, and the Barclays Center, in the same way that the NBA finals sell more tickets than a regular season game. However, even if these bigger events can fill a 3500 seat venue, they only happen a few times a year and there is no guarantee they would happen in Philly. Again I’m left wondering how Comcast thinks they will make their money back on this deal. Even if the idea is to build for the future, live attendance for traditional sports is down, across the country, while online and television viewing is either stagnant or growing (depending on the sport). I haven’t seen anything to suggest esports is any different. At the moment, the couch viewing experience is simply beating the live event.
Another economic point the Kotaku article gets right is how high franchise fees may not be justified by the current earnings potential of the leagues’ respective audiences. In particular, Kotaku focuses on the the two most popular franchised esports leagues, Blizzard’s “international” Overwatch League and Riot’s LCS (North American league) and LEC (European league). Both leagues, and perhaps franchised esports in general, have some similar issues, ones I intend to address in more detail in another post coming soon, however, in terms of a bubble, Overwatch is by far the scarier of the two.
While Riot announced their plans for franchising first, both leagues came into existence in the same year: 2018. Riot Games sold their ten slots for $10 million flat each, unless the accepted team was already a successful member of Riot’s pre-franchising league, in which case they would be given a substantial discount. Blizzard sold their initial slots for twice as much, starting at $20 million with higher prices for some teams based on the “value of the market” of the associated city, and have sold subsequent spots for even more, anywhere from $30 to $60 million.
This makes little economic sense to me. The LCS and Overwatch League have comparable viewer numbers. The Esports Observer estimates both games hit between 180,000 to 200,000 concurrent viewers, across multiple platforms, on game days. The LCS slots are like limited print baseball cards: we know exactly how many there are and we can be pretty sure there won’t be any more made any time soon. This should drive the price up, not down. On the other hand, the Overwatch League has grand plans for league expansion, so their available supply is more in flux, something that ought to drive the price down. Given that the two leagues are of similar size and cultural impact, why is one so conservative in their valuations and the other so aggressive? It makes me question the bullishness of both Blizzard’s designs for the league and the investors/teams that are buying in.
As it happens, I’m not the only one who feels that way. The difference between the cost of joining Overwatch League and the LCS was so great that many teams that had Overwatch teams on their roster before franchising, and were either accepted into the LCS or submitted bids and didn’t make the cut, declined to even apply for Overwatch League when it become franchised.
I don’t think anyone is acting maliciously here. Plenty of pie in the sky types have secured round after round of venture capital investment in an attempt to make an amazing, and potentially very lucrative, dream into a reality. This doesn’t mean they are taking advantage of anyone. These kinds of investors are playing a numbers game and most know that plenty of their investments will amount to nothing. Still, if enough investors are taking too rosy a view of the future, that’s how a bubble forms.
Overwatch League may be one of the more questionable high profile esports ventures out there, by my estimation, but they aren’t alone. Call of Duty is now trying to switch to a city-by-city franchised model a la Overwatch. It will likely have all the same problems, only worse. Call of Duty is, in every way, smaller than Overwatch. Overwatch has 40 million players. Call of Duty’s most popular title, Modern Warfare 3, sold only 30 million copies. Sales of the most recent title, Black Ops 4 in 2018, sold just 17 million copies. Overwatch League gets 200,000 concurrent viewers. Call of Duty’s CWL gets 80,000 concurrent viewers. Overwatch League has a $5 million prize pool. CWL has a $700,000 prize pool. So why is the CWL franchising fee $25 million? Did they pick this price point because Overwatch League set a precedent for the public value of a team? Or did they come to this number genuinely, based on their own research on the market for their unique and distinct product? How can investors justify paying that much knowing they will have less viewership and smaller prize pools than a similarly priced Overwatch franchise or, even worse, a cheaper League of Legends one?
Something the Kotaku article touches on very little, but I think is extremely relevant to the growth of a potential bubble, is the push for every competitive multiplayer video game to try and develop their own esports scene. While I can see the appeal to the developer in having on ongoing source of engagement with their title, not every title is destined to be a big, mainstream success. Essentially all the successful esports have developed organically and companies would do better to let competitive interest arise naturally rather than trying to buy an audience. This is as true for using esports and competition to increase player base (a la Magic: The Gathering Arena) as it is for trying to capitalize on a large existent player base by using esports as another method for monetization. For an example of the latter, Epic Games is investing huge amounts of money into the competitive community for Fortnite, but fails to understand why they are the most viewed game on Twitch: kids enjoy watching their favorite players stomp their way through public servers. When players of equal skill face off in Fortnite, the smart move is to play very conservatively for most of the game, taking as few fights as possible, which is extremely boring for the audience. The same holds true for other battle royales that have tried to kickstart a competitive scene, like H1Z1 and PlayerUnknowns Battlegrounds (PUBG). Even mobile games, like Clash of Clans, have tried to get in on the esports action. Mobile players, however, are looking to kill time while waiting in a dentist’s office not climb a rankings ladder to prove they are best, and mobile game monetization systems are typically “pay-to-win” which is not compatible with normal expectations of fairness in sport.
These issues paint esports in a pretty dire light, but in truth, they are just one aspect of the industry, which is one of the key problems with the Kotaku article. It treats all esports businesses, endemic sponsors, players and streamers, and even esports titles/leagues as essentially the same. This is a mistake. While the NFL, NBA, MLB, and UFC are all traditional sports, they are also completely separate and distinct. Some have wider demographic appeal, while others skew by gender, age, and ethnicity. Some have salary caps by team, others by player, others have no cap at all. There are issues of revenue sharing, whether production is in house or outsourced, teams vs individual athletes, pay per view vs broadcast television. If the UFC gets into legal trouble over treating their fighters as exempt from the Ali Act, it won’t meaningfully affect the NBA’s bottom line. If people stop watching as much NFL, it isn’t likely to adversely affect MLB’s popularity. These things are essentially all true about esports as well. While esports has a decent amount of overlap in terms of teams, sponsors, and event production companies from sport to sport, it is important to not speak in generalities.
One of the concerns raised by the Kotaku article, often expressed through quotes from insiders, is that the esports bubble exists because the whole industry requires sponsorships to function and the ROI provided to the sponsoring companies is out of step with the ever-growing costs of operating in the space. If revenue really was from sponsorships only, then this might be a very real concern. However, sponsorships aren’t the only source of revenue, costs aren’t growing in every esport, and money is still coming in to plenty of esports scenes even if they can’t show the potential for astronomical growth.
In particular, it amused me that the Kotaku article referred to Dota 2’s The International as an example of a tournament that grows more and more expensive to run. Yes, every year the prize pool grows more massive than the last, but it isn’t as if Valve and their production partners were making fervent calls to their connections in the gaming peripherals industry to scrape together enough sponsors to make it all work. In fact, this couldn’t be further from the truth. The International’s prize pool comes from the viewers. It uses a system called The Compendium to essentially crowdfund the costs of putting on the tournament, including the prize pool, with things like in-game cosmetics as rewards to incentivize contribution. In this way, Valve does not need to deal with sponsors as financial middle men, they can go right to the source. People who love the event can (optionally) contribute to make it great. And they do. This makes Dota 2’s esports ecosystem incredibly resistant to the sort of investment bubble so many worry about. If Corsair and Kingston Hyper X decide they are spending way more than they are getting back on esports, and pull all their tournament affiliations, it won’t affect The International at all. As long as the people who enjoy watching and playing Dota 2 have disposable income, there will be a big prize pool for Dota 2 events.
Others have picked up this model as well. For example, Ubisoft’s game Tom Clancy’s Rainbow Six: Siege has shown you can do a lot with a dedicated fan base, even if you don’t have the massive international reach of a game like Dota 2. While The Esports Observer reports that their biggest tournament, named the Six Invitational, is only able to muster around 190,000 viewers, compared to Dota 2’s 14 million, Rainbow 6 is still able to sustain a tournament series funded largely by the fans. They sell items in-game, a publicized percentage of which feeds directly into the esports department. From these sales, Ubisoft has been able to raise enough money to not only hit their goal of $2 million for the Six Invitational 2019’s prize pool, but also more than $1 million in bonus money they are putting towards supporting at least four other, smaller events.
It isn’t just the big publishers that have embraced this idea. The southern California based esports production team Beyond the Summit hosts a series of smaller, more intimate events for various esports titles. They are produced for online consumption only, no in-person audience at all, and they cultivate a community feel by utilizing players in between matches as casters, hosting side events on stream like the party game Mafia, and other features. They are able to put on several of these events each year by using their own crowdfunding system. They can’t always provide in-game rewards like Valve or Ubisoft, but they can always offer rewards like limited edition merchandise, the ability to vote for which players or teams get invited, an opportunity to be flown to the event to hang out with the players and broadcast staff, and other goodies that will be familiar to anyone who has used Kickstarter or Patreon.
There are plenty of grassroots movements in esports too, best exemplified by fighting games and their communities, such as Nintendo’s surprise hit Super Smash Brothers Melee, as well as more traditional fighting games such as Street Fighter and Tekken. All of these competitive communities have been self-sufficient for years. SSBM was published more than 15 years ago for the Nintendo Gamecube, and yet an extremely dedicated, and growing, number of fans keep the game’s competitive scene alive with grassroots tournaments and (largely) self funded prize pools, typically taken as a percentage of entrance fees.
Titles in the more traditional fighting game communities function a little differently. They switch to the newest version of the game upon release, unlike the SSBM crowd, and enjoy a more congenial relationship with their games’ publishers, which includes financial backing for some of their tournaments: the Capcom Pro Tour for Street Fighter and BANDAI NAMCO’s Tekken World Tour, for example. However, like SSBM, these traditional fighting games have their origins in grassroots tournaments, with even their largest, most prestigious, and most expensive to produce events like EVO and CEO being community-driven. If Capcom pulled the plug tomorrow, the top players would lose some of their earnings potential, but the scene wouldn’t die; the community would just go back to doing it on their own. This form of independence does lead to lower incomes for top players, but it also provides another example of an esport whose model is as detached from the high-wire spending of Overwatch League teams as the Pay Per View bouts of the UFC are from Monday Night Football.
Having a direct revenue source, from crowdfunded prize pools to grassroots tournament organization, isn’t the only way to be stable in esports. Once the vanguard of mainstream acceptance of esports, Starcraft II’s competitive scene keeps chugging along with minimal financial underwriting from its publishing company. Blizzard has largely ignored it in favor of promoting Overwatch as its main esports title. It doesn’t have massive views or enormous prize pools, but the fact that it has survived despite being completely eclipsed by other titles in the space, and having lost viewers along the way, suggests that the ecosystem of fans, players, teams, sponsors, and event organizers have found a healthy equilibrium. If teams are relying on astronomic growth numbers to keep up with investor expectations, as pieces like the Kotaku article imply are common, then an esport like Starcraft II, with its diminished but stable numbers, would be a toxic asset and the title should have died an ignominious death like so many others before it: Smite, Heroes of Newerth, Vainglory, and others.
And, of course, this piece wouldn’t be complete without discussing CounterStrike: Global Offensive (CSGO), the largest competitive first person shooter title right now. Surprisingly, when compared to similarly successful titles, CSGO earnings are fairly tame. Only a team like Astralis, one of the most dominant teams ever, can boast lifetime winnings that extend beyond $1 million per player. It is common for the players to draw a salary but, according to esports journalist Richard Lewis, the typical pay for a player on a Tier 1 team, meaning teams that consistently make deep runs at major tournaments, is only about $48,000 a year. Better than flipping burgers, but not much better than the mean income per capita in the United States. For comparison, the minimum salary in the Overwatch League is $50,000 a year and the top player earns over $190,000 a year. CSGO appears to successfully live within its means. As far as we can tell from the outside, it avoids massive prize pools, doesn’t overpay its players, and has worked with the same event production partners for years, many of which are old enough to have survived economic downturns in the past, such as ESL/IEM, PGL, and Dreamhack. CSGO might be the most precarious of the stable games I’ve listed, since its tournament prize pools are often highly dependent on event sponsorships, but I believe that it too is an example of a scene operating outside of any supposed esports bubble.
Okay, so leagues and tournaments can be stable, but what good is that if the teams are spending like crazy? Overspending teams may not dominate the industry the many people think. Plenty of competitive organizations are well positioned to avoid being part of a bubble. Not everyone is feeling the pressure to spend big, grow quickly, and satisfy investors’ greed. Nor does more conservative spending relegate a team to mediocrity. There are still a solid number of independently owned teams that have not taken investor money, instead choosing to focus on more incremental growth, while still achieving great competitive success. Companies like Team Solo Mid (TSM), a multi-team organization with its roots in League of Legends, Panda Global, an organization that specializes in fighting game players, Ninjas in Pajamas, a multi-team organization with its roots in CounterStrike, and OG, a Dota 2 team, are just a few examples, from a variety of esports titles, that have been able to produce big wins, or at least deep tournament runs, despite remaining apart from the investor-backed spending sprees affecting many other teams.
Another thing missed by the Kotaku article is that industry-wide bubbles, like the one they are insinuating plagues all of esports, are scary because they don’t take down just the bad actors, but also all the providers and cottage industry companies that serve the bad actors, which in turn can take down good actors that rely on those same providers, and so on. Is this true in esports? I don’t see much evidence that an economic shock to one aspect of the industry will cause the rest to come tumbling down.
The great fear among insiders, and those with a decent knowledge of esports history, is that this perceived bubble is getting uncomfortably close to what happened with the Championship Gaming Series (CGS). The CGS was the brainchild of a former Fox executive who, upon learning about esports from his grandkid, saw a big opportunity. With help from his contacts in the media industry, he built a massively well financed league with regular broadcasts on DirectTV. Mirroring many of the concerns of today, this new level of exposure, and consequent availability of capital, caused the teams in the CGS to begin a spending war, with players getting extremely well compensated. At the same time, the injection of TV money caused the cost of broadcast talent to skyrocket as well. When the 2008 economic collapse hit, the whole thing blew up in everyone’s faces. Not only was the CGS destroyed, but so too was confidence among mainstream media companies, non-endemic sponsors, and other key elements to mainstream success, that esports was economically viable.
However, the broadcast landscape today isn’t like the broadcast landscape back then. Grassroots organizers don’t need to convince TV producers to put their content on the air. Twitch lets them do it on their own terms. Tournament organizers don’t need non-endemic brands to put up the kind of money for prize pools and production costs that endemic brands can’t afford. Crowdfunding and game publisher partners can cover those costs. A collapse of any given tournament scene might be disastrous for the players and teams invested in that scene, but there shouldn’t be any fear that other, stable actors will be taken down at the same time due to failing infrastructure, or failing confidence among partners, as frequently happens when bubbles burst and the market corrects itself. Sites like Twitch don’t need tournaments to be successful. The vast majority of their revenue is generated by individual, personality streamers who produce content from their homes. Tournaments are just a nice bonus. The same goes for YouTube. It is just a platform for hosting videos. It won’t be noticeably affected if all the match videos from CSGO tournaments disappeared off their servers tomorrow. The separation of broadcast tools, sources for operating capital, and the competitive titles themselves means that any game that falls should fall alone. Which they have. As I mentioned previously, there have been plenty of promising looking esports titles that came, failed to make it big, and retreated back into relative obscurity.
Teams have come and gone too. Despite what the Kotaku article implies, I don’t see this as a cause for concern. Yes, some teams have had to completely close up shop, but their mismanagement doesn’t reflect an instability across all of esports. Denial Esports’ years of controversy, missed payments, dissolution, rebirth, and eventual death does not say anything about TSM’s long term profitability. Even big multi-team organizations have come and gone without shaking the foundations of the industry. Infinite Esports over-extended into too many games at once, including costly franchised titles like League of Legends and Overwatch, and recently had to sell their Optic brand and teams to Immortals. Still, while there are some logistical, and ethical, concerns over Immortals acquiring several teams that compete against teams they already own in the same leagues, at least for now the Gjallarhorn of Heimdallr does not appear to have been blown, signaling the end of the (esports) world.
So we return to the original question: is esports a bubble? Wikipedia describes an economic bubble as a situation in which asset prices appear to be based on implausible or inconsistent views about the future. Key to this, though, is these implausible ideas about the future have to be rampant across the relevant industry. One or two businesses given bad valuations is human error. Almost every business being given ridiculous valuations based on pipe dreams of unimaginable wealth is how you get the Dotcom bubble of the late nineties. The real answer to our question, then, comes from whether there are enough bad decisions and run away spenders to spoil the whole industry. I would argue no. Is there a bubble in Overwatch? I think so. Is there a bubble growing in Call of Duty? There might be. Is there a bubble in esports as a whole? I’m not buying it.
With big titles like CSGO and Dota 2, and smaller titles like Rainbow 6: Siege, as well as grassroots movements such as the fighting game community, I believe much more of the industry is stable than unstable. Some companies, leagues, and teams may crash, which would be devastating to all the parties involved. Before Major League Soccer, the North American Soccer League (NASL) spent a few glorious decades trying to bring professional soccer to the United States, even attracting star players like Pele. Investors got way too bullish on soccer, the league grew too quickly by opening too many expansion teams, and everything fell apart. It was a huge disaster for many of the players, coaches, teams, and investors. It may have set professional soccer in the United States and Canada back by a decade or more. But it did not change the trajectory of baseball even a little bit. In other words, some ventures may fail, but esports will soldier on.