How recession proof is the esports industry?

The idea that the esports market is recession proof is a misnomer. It doesn’t even have a clear path to profitability. That said, the sector is more diverse than ever and tends to benefit from people spending more time at home. So while the economic winter will hit esports, it seems relatively well insulated from the worst.

No matter what some esports prospects look like, they’re not set in stone. Not least because the global video game market – a key indicator of the commercial health of esports – will contract this year. That’s according to researchers at Ampere Analysis, who predict the market will contract 1.2% this year, from $191 billion to $188 billion. CFOs are the new powerhouses in esports.

“Companies that have negative cash flow, that are not profitable, will close because the cost of capital is many times higher than it was two years ago when interest rates were zero for hundred,” said JP Lee. , product manager at investment firm VanEck. “The mergers and acquisitions will be there; underperforming teams are going to be bought or incorporated into new ones, or they will simply disappear.

To survive, let alone thrive, esports companies have redefined and grown what they do – while furiously coveting their competition. Of course, these pressures existed long before the economic crisis. They’re just sharper in the wake of the pandemic, media sputtering, and beer glasses eventually falling off as investors fall back in love with the P&L.

The economic situation will only accelerate the inevitable for everyone

That is to say, few, if any, esports organizations will deviate from the path they were on pre-recession. Rather, the crisis is pushing them all faster, whether it’s Faze Clan’s race to become an entertainment conglomerate or Subnation’s transformation into a holding company. To be clear, not all of these companies will be closing in on these destinations during this tumultuous time. Some will struggle, no doubt. Either way, consolidation is inevitable. Here are some examples:

  • In January, the Saudi-backed Savvy Gaming Group acquired leading esports tournament operators ESL and FACEIT for $1.5 billion.
  • In April, metaverse company Infinite Reality bought esports company ReKTGLobal in a $470 million all-stock deal.
  • 100 Thieves flagged mergers and acquisitions as an important part of its strategy during the organization’s latest funding round, kicking things off with its acquisition of peripheral maker Higround in October.

“I expect further consolidation to occur as esports teams lack diverse enough revenue streams to support the currently saturated market and lack of media deals to offset costs. said Chris Mann, vice president of REV/XP, the esports division of sports marketing agency rEvolution.

There are opportunities in everything, even an economic downturn as confusing as this.

“The ability over the next year to buy companies at deep discounts, at much lower valuations, is going to present a huge opportunity,” said Paul Dawalibi, the host of the follow-up podcast. industry “Business of Esports”. “Some very smart people are going to make a lot of money doing this.”

The pragmatic case of esports

After the 2008 financial crisis, some economists said the sports industry was recession-proof, citing the industry’s stable long-term contracts and sports’ deep-rooted position in modern culture. Clearly, they were right: even during tough times, people still gravitated to Sunday Night Football with a beer in hand. To some extent, this is also true for esports.

“There are certain things that we as consumers prioritize, even as our budgets shrink,” said Irina Shames, chief revenue officer at G2 Esports. “If you’re into games, if you’re a hardcore fan, that’s not going away, is it? You’re not going to stop consuming this content or engaging with your favorite brand.

As true as that is, let’s cut to the chase: the coming economic downturn is bad for the esports industry right now.

For one thing, esports hasn’t solved the media rights conundrum as fans are used to watching esports broadcasts for free. Certainly, esports organizations have other ways to make money. Many of these organizations are experiencing a resurgence in non-endemic brand partnerships, for example. But it’s not nearly as isolated a source of revenue as media rights. In fact, advertising and sponsorship budgets are among the first to be cut when times are tough.

“We’re starting to see long-term sponsorship deals, so we definitely have a revenue floor that’s going to keep coming in,” said Adam Rymer, CEO of esports organization OpTic Gaming. “I don’t think we’re quite at that level – it’s not like we have guaranteed broadcast rights from NBC or ESPN, where there’s a certain amount of money coming in, whether they whether or not advertisers fill that out or not.

Even live events for franchise games – the lifeblood of many esports organizations – will be impacted by ticket sales, travel and accommodation costs. In short, many esports business models are on shifting sands.

Short-term pain (rather), long-term gain

As precarious as all of this may seem, this moment will come to an end. Lasting until then is difficult but not impossible for esports bosses. After all, many of them have been in tears over the past couple of years cultivating a variety of commercial rights beyond sponsorship and broadcast deals. Even at a more fundamental level, there are signs of encouragement: yes, the gaming market is expected to contract this year, but like traditional sports, gaming – along with esports – serves as a form of entertainment and escape from the stress that many people experience. felt in difficult times. Indeed, as long as players continue to play, viewers engage, and friends participate in the culture, it all translates into impressions and time spent. Slowdown or not, attention like this is like catnip to marketers.

“The average esports fan doesn’t necessarily travel to Barclays Center to watch the live event, and I think that’s reflected in industry revenue; this is not how the industry survives,” Lee said. “They survive on sponsorship deals, and those don’t go away.”

Change the game

The modern esports industry took shape long after 2008, which means most esports organizations have never had to deal with a real downturn. Even during the financial downturn of the first COVID-19 pandemic, esports revenues surged as homebound consumers ramped up their gaming activity. “There’s a whole generation of people running businesses right now. moment and who started their career in the early 2010s, who believe that only good things happen,” Dawalibi said. “Money keeps flowing, valuations keep rising.”

This lack of recession experience could be one of the reasons why more esports organizations have not significantly cut spending as the threat of a recession grows. But the first signs are there. As investors clamor for growth, publicly traded esports organizations could feel the pressure first; public esports companies such as Guild Esports and Enthusiast Gaming have already started to make layoffs and cut unprofitable companies to balance the books.

As economically savvy esports organizations begin to cut spending, content production budgets might be the first thing to go. After all, esports itself is just content, and organizations’ polished, highly-produced YouTube documentaries tend to attract far fewer viewers than lesser content such as esports streams or online streams. direct from individual players and influencers. “You basically take content fliers and then bring advertisers down the road as you build an audience,” Rymer said. “I think budgets to produce original content that isn’t necessarily branded or sponsored need to come down – don’t expect to see fighter jets taking off in our videos anytime soon.”

Ultimately, the esports industry’s greatest benefit during the coming downturn may be something that’s largely beyond the control of esports companies themselves: younger esports audiences. The average esports fan is 26, a demographic that is largely unencumbered by expenses such as mortgages or children’s school fees.

“When you’re talking about 18 to 35 year olds, who aren’t necessarily in the grip of all these big things yet, and they’re still in gainful employment – I’m just not sure we’re going to see big changes in behavior expense of this group,” Rymer said.

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