Those who live near forests know that control burns are essential. From Native American practices long before the arrival of Europeans to modern day fire control, control burns remove dead brush and leave an area healthier than it was before.
Recessions and economic slowdowns work in a similar way.
Whether these periods are caused by the Federal Reserve raising interest rates or the economy undergoing a slight downturn, recessions burn away poorly performing business.
The current downturn is forcing companies (mainly in tech) to lay mass numbers of people off because they realize that they have been over hiring for years. While news outlets have focused on Google, Facebook, Amazon, and other companies laying people off, the economic downturn has also hit esports.
As Jordan Fragen wrote for VentureBeat, “esports organizations and publishers are feeling the pain, but the layoffs and crunch are not happening uniformly across the industry.” Though larger companies are surviving, it appears that “the middle class of esports is on the precipice of a mass extinction event.”
Esports is currently struggling for five main reasons.
One, esports teams are actually more expensive than most understand. Esports teams are often depicted as being filled gamers packed into someone’s basement. However, as discussed by industry leaders such as MoistCritikal and Disguised Toast, esports teams require a lot of money upfront and often run at a loss.
This isn’t a huge problem. Startups frequently run at a loss for years. However, this happens because they have venture capitalists backing them. And this brings us to the next reason.
Two, venture capitalist funding is drying up. “In 2022, global venture funding totaled $445 billion,” Emerging Tech Brew’s Dan McCarthy reported. “That’s a 35% year-over-year decline from the $681 billion startups raised in 2021, representing a steeper pullback than was experienced after the 2008 financial crisis or dot-com bubble.”
In regards to esports, VCs are disappointed by the money (or lack thereof) generated by esports companies. And with FaZe Clan’s stock value dropping more than 90% in value, the free market has made it clear that even the biggest esports brands are overvalued.
The third reason esports brands are folding is that ad rates have plummeted. Though it varies from team to team, a significant portion of an esports team’s revenue comes from sponsorships and ad revenue. There are three main causes for decreasing ad spending. As Vox’s Peter Kafka argues, this space has been hit hard by Apple’s new digital tracking rules (that have negatively hurt ad-supported platforms), cheap money from crypto companies evaporating, and general economic uncertainty.
The fourth and final reason why esports companies are struggling is that the industry remains a shadow of traditional sports. Despite all the hype surrounding esports, it is nowhere close to the values or popularities of traditional sports. As RockWater’s Kevn He wrote, “the global sports market makes between $300 billion to $600 billion a year in revenue. In comparison, the global eSports market generates less than one percent of that revenue annually.”
Overall, esports – like most tech sectors over the last decade – largely grew because of cheap money. Now with the increased interest rates killing off cheap loans and investors finally wanting companies to generate net profits, the economic downturn is burning away esports businesses that never had a chance of survival.
