Is There an Esports Bubble?

There’s no question that the business community is going a bit crazy for esports right now. It’s rare that more than a couple of days pass without some huge esports investment being announced. Last Friday it was Intel announcing it would be putting another $100 million in to the ESL pro league in Europe. A few weeks ago PlayVS raised $30 million for its high school esports platform. Michael Jordan and Drake are now helping teams close $20+ million funding rounds.

Even in the local esports scene here in Vancouver, things have changed in the past few months. Every esports event I’ve been to recently has been packed with unfamiliar faces, most of them people from the financial world who would not have been around if the same event had been held last year. A friend who’s on the executive of the esports program at a university here recently told me he gets multiple calls a week from investors and hedge funds asking to buy him lunch so they can learn more about the industry. Everyone wants to know how they can get involved with the hot new thing.

What the last esports event I went to looked like.

As more and more investors continue pouring ever larger sums of money into esports, the question of whether the these investments are financially sound, based on where the industry is at, is starting to loom larger and larger and larger.

Today, Ben Fisher of Sports Business Journal published an article noting how the revenues of many of these entities aren’t keeping up with the hype, and a “market correction” may be coming (Ben pointedly avoids the word “bubble,” but I have fewer scruples about using clickbaity titles, so bubble it is). In response to Ben’s article, a lot of industry people on Twitter raised similar concerns how they’ve been talking about the same thing internally the past few months.

I think people are right to be concerned. Whenever a new technology or idea  like esports hits the mainstream, there seems to be a bit (or a lot) of irrational exuberance that kicks in as everyone tries to get in on the ground floor, leading people to make decisions they probably shouldn’t.

A lot of what’s happening now reminds me of what happened with cryprocurrency around this time last year, when  blockchain technology finally started getting attention in the media. Crypto events were packed with new faces, people were starting new companies in the space left and right, existing companies were adding “blockchain” to their name and seeing their stock price quadruple overnight, and the price of Bitcoin surged from around $3,500 USD at the start of August to $20,000 USD by December.

Where is crypto now? The hype has dissipated, the price of Bitcoin is back down to around $3,500 USD, and a lot of the people who put money in last year are taking a sober second look at their investment and not liking what they see. That doesn’t mean that blockchain technology isn’t still going to change the world. I’m sure it will. Eventually.  But it certainly hasn’t yet, and there’s no telling whether, when it finally does, the companies people invested in during the rush last year are going to be the ones to do it.

If esports was Bitcoin, I’d say it’s getting close to the $20,000 mark right now. People are excited. They don’t want to miss out. And as a result they seem to be willing to invest large sums of money into the space, even though they may not understand quite what they’re getting themselves into. And just like with crypto, it’s very likely that a year or two down the road a lot of these people will be taking a look at their investment and regretting their decision.

The assumption everyone seems to be going off right now is that esports is destined  to continue growing at its current pace until it reaches the same level as traditional sports (or replaces it). People investing in Cloud9 or Team Liquid probably think they’re bying into the future esports versions of the LA Lakers or Manchester United. That’s a pretty big assumption to make. While esports could certainly reach that level, there’s nothing that guarantees it will. For all we know it could conceivably follow the trajectory of something poker, and flatten out into a niche sport with a limited audience after an initial meteoric rise, or end up somewhere in between.

There’s still a lot of questions that need to be answered before we can say with any certainty that esports will reach the heights people assume it will. Will esports ever be able to meaningfully cross over to a non-gamer audience? Will it ever have success on TV? (and does that matter?) How exactly do you market esports athletes, and will someone like, say, Faker ever be a household name like a Steph Curry? Even if esports succeeds, will the game publishers be the ones reaping all the rewards? None of these questions have answers yet, and I’m not sure that we’re going to be finding out the answer to many of them anytime soon.

Despite all these concerns, I, like most people in the industry am pretty confident that esports will not follow the path of poker, and that it will succeed… in the long term. Whatever other issues esports may be facing, the core, inescapable fact remains that huge numbers of people currently exist who are extremely passionate about it, that the majority of these people are young, and that their numbers are only growing. Just based on that foundation, if nothing else, I have every confidence that in the long run people will figure out how to make massive sums of money off esports, just like I’m pretty sure blockchain technology will eventually change how we all live our lives in some way.

What I’m definitely not sure about is when that will happen, or whether the companies people are putting money into now will necessarily be the ones to make it happen. And if I was an investor today thinking about putting money into an esports team at a +$100 million valuation, or paying $40 million for an Overwatch League franchise, I would definitely take a second, breathe, and look carefully at how I can expect to see a return on that money, beyond platitudes like “well, esports is on its way up.”

The “Gamer Cap” and the Long-Term Growth of Esports

It’s pretty clear that esports is having a moment right now.  Ninja is on the cover of ESPN Magazine, Forbes is doing valuations for esports teams, and everyone from Michael Jordan to Drake to Meg Whitman (!?) is investing large sums of money into the space.

While the current financials of the industry probably don’t support the valuations investors are putting money in at, people are investing not based on where the industry is at now, but based on the assumption that things will continue to grow exponentially into the future.

There’s a big problem with that assumption, however. Right now, the core “gamer” audience for esports is probably close to tapped out. Esports isn’t a novelty anymore. Most gamers are already more than familiar with the concept, and are watching/following esports at the rates they will for the foreseeable future (and those who aren’t by this point probably never will).

If esports is going to continue growing at the rate it has, it’s going to have to attract people outside that core group of gamers – people who aren’t all that interested games and have never played the games they’re watching. In my view, that’s a huge issue, and probably the biggest question mark surrounding the future growth of the industry.

The problem is that in order to enjoy watching most esports titles, you need to have a pretty significant level of familiarity with the game you’re watching. If you’re not familiar with the basic mechanics of the game, you won’t really be able to understand what’s going on and you’re probably not going to turn into a long-term viewer. And with a lot of esports titles, the barrier to entry involved in learning a game is absolutely massive.

Look at DotA or LoL for instance: 100+ heroes, 4+ skills each, all sorts complicated mechanics. Good luck explaining that to someone with no background in video games.  Even basic concepts like leveling, items, etc. are probably going to take some time to learn for people who have no previous concept of them.

This isn’t really stuff you can easily pick up by watching either (I’m sure even a lot of long-time DotA and LoL fans can barely make out what’s going on in a hectic team fight sometimes). If you want to learn a game like DotA or LoL from scratch, you’re going to need to spend a lot of time on Dotabuff or what have you figuring out the heroes, mechanics etc. Most non-gamers probably aren’t going to have the time or inclination to do that, and will therefore probably never turn into long-term viewers.

Try figuring out what’s going on here if you don’t know anything about gaming

Hell, the barrier to entry for a lot of games is pretty high even for other gamers who aren’t familiar with that particular game. I’ll use myself as an example – I’ve played DotA for years and enjoy watching it because of that, but I’ve never watched a game of League in my life because I’ve never played it, don’t know what any of the heroes and items do, and would have no real idea what’s going on. In order to truly enjoy watching the game I’d probably literally need to sit down and spend a few hours learning the heroes and items specifically for that purpose. I don’t really see massive numbers of people doing that.

Ultimately, in order to become a long-term viewer an esports title, someone probably needs to have played that game. That’s the only way they’re going come to know enough about it to understand what’s going on and enjoy it, as most people aren’t going to sit down and spend hours learning a game from scratch otherwise.

The unfortunate conclusion of the above is that most esports titles essentially have a cap on their potential audience, equal to more or less the number of people who have played that game (not necessarily the number of people who are playing it currently, mind you, but the number that have played it at some point in their lives, enough to know what’s going on).

That “gamer cap” may be high – for games like DotA, League or CS it’s in probably the hundreds of millions worldwide –  but it’s still a cap. Once a game reaches this cap, in order to keep growing it will have to deal with the huge barriers to entry associated with teaching that game to non-gamers. Unless its publishers can figure out a way around that barrier, which is a huge challenge, the game will stop growing, or at least substantially slow down.

The implications of this for the industry as a whole are not good, as this would imply that while the industry has seen massive growth recently, that growth will slow down dramatically now that the only way forward is to convert non-gamers.

Admittedly not every game is as complicated as DotA or LoL. In particular, games like Rocket League, sports games, and some shooters like CS:GO and Fortnite can probably be learned just by watching without a significant time investment by the viewer (at the end of the day it’s not that hard to understand the concepts of dudes shooting at each other). These games may have an easier time converting non-gamers, and may have an easier time getting past this “gamer cap.”

However, I think it’s pretty fair to say that for games with a steep learning curve, which includes most other games, this “gamer cap” is a huge issue, and one publishers will need to overcome if they want the industry to keep growing.