Evil Geniuses won the Valorant World Championship at The Forum in Los Angeles during the summer of 2023. Over a million people watched in real time. The arena was filled with 11,500 spectators. For a brief moment, it seemed as though everything the esports sector had been promising for years was finally coming to pass. The team’s CEO quit less than a week later. The roster was allegedly asked to accept pay reductions of up to 50% in a matter of months. By year’s end, the company wanted to completely leave the esports industry by selling or merging its remaining assets.
A key aspect of the e-sports winter is captured by that series of events: victory followed almost instantly by financial collapse. It was a gradual collapse that was more difficult to predict due to the industry’s own optimism, rather than an abrupt catastrophe.
At least ten esports organizations were valued at more than $200 million, according to Forbes, at its height in May 2022. At 540 million, TSM was at the top of the list. These were actual figures supported by actual funds and linked to actual investor confidence. Subsequently, interest rates increased, sponsorship budgets became more stringent, and the cryptocurrency exchange FTX, whose ten-year, two-hundred-and-ten-million-dollar naming rights agreement with TSM had appeared to validate an entire industry, collapsed following the arrest of its founder for fraud. In the end, TSM sold its League of Legends franchise slot for $10 million. The same amount it had sold for in 2017.
The amount of this story that was concealed in plain sight is difficult to ignore. Esports companies had developed revenue models based on a structure that was always more limited than it seemed. Teams usually take less than a quarter of the prize money, so it was never going to be enough to keep things running. Sales of tickets and merchandise stayed low in comparison to traditional sports.
As a result, sponsorship now bears the lion’s share of the financial burden; sponsorship revenue fluctuates with the economy, reacts to brand sentiment, and disappears during recessions. Nearly everywhere, the math stopped working when all three of those pressures came at once.
This had been hidden for some time by the pandemic. Gaming filled the void left by traditional sports when viewers were confined to their homes. The number of viewers increased. Investment picked up speed. Instead of viewing that moment as a transient, unique set of circumstances, the industry began to interpret it as proof of a long-term change. The sponsorship market that had made esports appear like a growth story started to demand something it had never really asked for before: quantifiable results, and when the world reopened, attention dispersed once more.
In one version of this tale, the authors are largely innocent. The games continue to be played. The viewers are still present. Naz Aletaha, global head of League of Legends esports at Riot Games, put it simply: the product itself is still viable because millions of people are still watching. The financial architecture that was based on the notion that the size of the audience would unavoidably result in the kind of revenue that supported nine-figure valuations was what stopped functioning.
Perhaps the more fundamental problem is that, without having access to the same financial infrastructure, professional gaming appropriated the aesthetics of traditional sports, including the franchises, arenas, and media rights agreements. Television contracts are a major source of income for traditional leagues. Esports was never able to solve that problem on a large scale. The audiences stream content on platforms with varying monetization dynamics, and they tend to be younger. When investor capital was cheap and brand enthusiasm was high, the discrepancy between the model and reality was manageable. When both of those things changed, it turned into a crisis.
Some organizations are surviving by being more intentional and smaller. The CEO of Team Vitality pointed out that the company had a financial buffer that others did not have thanks to multi-year brand partnerships that were signed prior to the contraction. Alienware has maintained its partnership with Team Liquid, viewing the downturn as an opportunity to determine which companies are truly long-lasting. These businesses, rather than those that chased headlines with franchise fees and naming rights deals that had no floor beneath them, may ultimately define what a sustainable esports business actually looks like.
Competitive gaming does not end with the e-sports winter. It’s likely the end of a certain kind of illusion about what competitive gaming might develop into, when it might happen, and how it would be financed. The audience was never an issue. It turns out that the notion that an audience alone was sufficient to create a billion-dollar company required a closer examination.
