There have been rumblings about esports being a bubble for a while. Investors are starting to put pressure on organisations to show returns, which are beginning to broaden their appeal. Two esports organizations backed by sports clubs were either shut down or struggling. I earlier wrote about how esports organisations can be the perfect hybrid, and it might be that it is necessary for them to be, to be economically successful.
A bit earlier this summer Schalke 04, has departed the LEC and sold their spot for a record-breaking €26 million. This is a significant increase of reported €8 million the spot in the league cost during its initiation. While Schalke 04 was not necessarily the top team in the LEC, they were not the worst-performing team either. With the LEC being a franchise league, there was no danger to dropping out of the league and losing that maximum level of exposure. Yet, no one was surprised by the move.
While there were initial denials from the Schalke 04 esports divisions leadership about the sale, it has been rumoured since the beginning of the year. Schalke’s 04 mother clubs football division has been struggling with mounting financial trouble in recent years, culminating in a record loss of over €53 million in 2020.
With the relegation of the football division to the second Bundesliga in 2021, the financial pressure on the club was increasing, and the fate of Schalke 04 Esports in the LEC was sealed. Selling the spot cut costs for Schalke and brought in a large sum of need quick cash.
Schalke 04 esports situation has many similarities to the now decrepit esports club Norths demise. They ceased operations partially due to a continuous underperformance on a competitive level, but ultimately because of financial troubles of their mother company Parken Sport&Entertainment, the owner of Nordisk Film and the Danish football club FC København. They stressed that it would require substantial further investments to make the team profitable and that they were not able or willing to do this at this point.
The industry’s expected growth of more than 16% did not happen in 2020, and growth has been plateauing since. Early investors who have rumoured invested more than 4.8 billion USD into the scene have been increasingly pressuring esports organisations to deliver financial results. The money flow has maybe slowed down, but most definitely not stopped, and many smaller and less known organizations are still attracting investors, so why is it that both North and Schalke 04 closed down either completely or the majority of their esports operations?
While both Norths and Schalke 04 cases have slightly different situations, they have striking similarities: Both Teams or divisions were majorly backed or owned by “traditional” sports clubs, and both ceased or extremely reduced operations when their traditional sport parent clubs or companies hit financial hardships. It might just be that traditional sports clubs are not a very good vehicle to start successful esports organizations from, even though it may seem like a natural and logical match. I believe it comes down to three major reasons why traditional sports clubs are not great at esports.
Top 3 reasons why sports clubs fail as esports organizations
1) Esport organisations have a very different income commercial structure than traditional sports. The vast majority of revenue in football is created through broadcasting rights, with ticket sales, sponsorships and jerseys coming in after. This is not the case in esports. I believe that it is a lack of understanding on how to utilise esports teams true financial superpower, the ability to monetize their dedicated and specific audiences, which leads to the wrong assumption that esports is just not as profitable as traditional sorts.
2) Sports and esports audiences are not the same. Even esports audiences and esports audiences are the same. Just because someone is a football club fan does not mean that they will automatically become fans or support their esports team. While there might be overlap in the audiences, it is nothing teams can bank on.
3) I am under the impression that sports clubs see esports as something experimental and new, that they try to stay relevant with the kids, but once challenges hit, they lack the commitment to follow up on esports. There are still people outside of the industry that believe esports is nothing more than a fad.
How do financially successful esports organizations different:
The financially most successful esports organizations understand the space and the unique nature of the esports ecosystem, most importantly knowing: It’s not just sports played online. TSM, Cloud 9 and Team Liquid are all organizations founded from within the scene. Yes, they sought out investment to grow their operations. However, all of these teams were still started from either the audience and active participants in usually one or two niche games, expanding to multiple discipline organizations.
All of them are more than just competitive teams, having signed multiple gaming content creators, taping into the wider audience of gaming fans, selling the audiences of those to brands for campaigns without having to monetize their esports audience directly. Gaming and esports is the theme that binds everything they are doing together, but it is not the only thing they do. They all combine and merge lifestyle, gaming, apparel and entertainment into one deliciously profitable cocktail.
No matter how big their backing, teams and organisations that cannot transform themselves into multifaceted organizations with their fingers in all the pots will get left behind and will ultimately cease to exist in the esports and gaming space.
