Let’s talk economic theory.
It is the flavor of the month to say that the esports bubble has popped. Yet understanding what a bubble is, why it popped and the repercussions of said pop has somewhat floated under the radar.
The League of Legends Championship Series (LCS) is currently witnessing a potential fire sale with several organizations including TSM, 100 Thieves and Dignitas (along with the recently sold Counter Logic Gaming) looking to exit the franchised league for various reasons. The panicked craze over the future of the esport is palpable with fans worried about the future of their beloved team.
Yet in many ways, when understood, a bubble can be less frightening. Then again, in an industry that continues to struggle with public relations, it may be difficult to communicate what is actually going on. This is an attempt at doing so.
Here’s a simplified explanation of the economic term. An economic bubble represents a period of time when an asset greatly exceeds its estimated value. An item that is viewed, sold at $20 is actually only worth $1. There are two examples every business class is taught: the “dot-com” bubble and the “Tulip mania.”
Tulip mania dates back to the 1660s where the price of tulips skyrocketed to a point where people simply couldn’t afford them anymore. People continued to push the price of tulips to the point where buyers could no longer pay the high price and the market collapsed.
The “dot-com” bubble of the late 1990s, and early 2000s represents the period of time when internet companies became the hottest thing on the market. Valuations for the companies would skyrocket alongside the rise in the adoption of the internet. However, these companies simply weren’t making money, struggling to monetize. Suddenly, companies were out of business and venture capitalists were out of their investments.
A bubble is often times the misunderstanding of safety. Below is a once again very simplified yet pretty easy-to-understand example.
Because the bubble protects the person from the lava, there is this idea that the person won’t fall in. Yet the bubble itself may not be as structurally sound as one may think. Think about digging down in the game Minecraft. You may hear lava but you still see that you have one block underneath you. What could possibly go wrong?
A key thing to note is that like Minecraft, this doesn’t mean immediate death if you fall into lava — as long as you are prepared. Or, if you’re not playing “Hardcore Mode,” you may have the ability to reset.
Most organizations rely on two separate streams of money to survive: sponsorships and a blank check from venture capitalists to save them. This is very much a “coffee and cocaine” diet.
Despite a potential large bag, sponsorships are heavily reliant on market conditions and continued success — whether it be the success of the team or the success of the campaign. And sometimes, a sponsorship may dissipate. Sponsorships are currently not at the level organizations need. This isn’t to say that it isn’t still a lot of money, it is a multi-level problem.
Problem #1: Organizations spending more than they are bringing in.
Problem #2: Marketing budgets are decreasing with current economic fluctuations.
Problem #3: Return on a marketing campaign can vary.
Esports in fact nearly faced this same issue just a year ago. The popularity of streaming was dying down as people adjusted to the “new normal” way of living. People were going outside once again — terrible news for companies that rely on internet addiction. If it wasn’t for cryptocurrency saving the day, arguably at the last second, we might have been having this conversation earlier.
But this helps explain the recent change in business models.
100 Thieves has begun to move on from content creators — unable to match the expected salaries. We have also seen them transform their organizational structure — unfortunately meaning the departure of a large percentage of their staff. The Guard experienced a massive lay-off, completely stripping the company down to its nuts and bolts as they look to adjust to their new earning potential. Misfits completely exited esports, instead looking to solely focus on investing in content creators.
But this doesn’t necessarily mean they are the right decisions.
Venture capitalists that once took a hands-off approach are beginning to step in. The people that can analyze the finances are doing so and are making quick decisions. The lack of profitability in the LCS — which has been inflated for years thanks to poor actors and misinterpretations of market value — has finally taken its toll.
It has led to this need for a “reset” button, a return to square one. For some organizations, what that looks like is different. A company like Counter Logic Gaming — who may not have lucrative revenue streams — is taken to a scrapyard. A similar thing likely will take place with Dignitas once sold. But a company like 100 Thieves or TSM will be able to get the much-needed factory reset.
Most organizations will be back to a level playing field. This is good for the industry.
This also creates an opportunity for new competitors to jump into the fray as the previous obstruction of market entry is no longer as tall.
But do not get this twisted, market bubbles are not good. Lives are dramatically impacted thanks to the lack of competency from trusted figures. While a reset can still be a blessing in disguise, it should be on the players in the market to appropriately reflect what the market is saying rather than continue to drive up value with their greed.