With plummeting stock prices, fleeing advertisers, spooked investors and sector-wide layoffs, the esports and video game enthusiast sector is in the midst of the most difficult period in its young history.
The number of deals for North America-based targets hit a peak of 13 in 2019 but has trended downwards since, according to Mergermarket data, which excludes acquisitions of video game developers that also have esports businesses.
In 2021 and 2022 there was an uptick - as some players consolidated or sought exits for shareholders that had entered during an investor frenzy in 2015-19 - but 2023 is continuing the slide.
The industry has struggled mightily to right-size in recent years after a bubble that saw investment pour in, esports team values skyrocket and content creator salaries soar.
“Most of that, I think you’ll find, has tailed off,” said Todd Holman, a managing director for technology investment bank Union Square Advisors.
Some of the biggest firms in esports – which includes exhibitions of non-sports titles like Call of Duty and League of Legends – are owned by major technology companies, including Tencent’s Riot Games, Activision Blizzard [NASDAQ:ATVI] and Amazon’s [NASDAQ:AMZN] Twitch.
In many corners of the ecosystem, however, capital has dried up and companies that support teams, tournaments and fan communities have downsized, relocated overseas or shut down altogether.
Outsized expectations
A wave of optimism followed Amazon’s 2014 purchase of game streaming platform Twitch, for just under USD 1bn.
Investors and advertisers grew enthralled by the prospect of a young demographic filling arenas to watch their favorite professional players and tuning in online to follow tournaments and content-creating personalities, market observers explained.
Advertisers hitched their wagons to established teams, fan platforms and non-competitive content creators.
The sector reached its stride in 2018 and 2019, with tournament prize pools regularly in the tens of millions of US dollars and more than USD 300m in North America transactions in each year, Mergermarket data shows.
Major celebrities from Drake to Mark Cuban, Shaquille O’Neal and Mike Tyson joined the frenzy, with investments in teams and betting platforms.
By 2020, however, investment began to wane sharply, as did transactions, amid realization that the populations watching esports weren’t spending as much as expected, market participants said.
One illustrative case study is Faze Clan [NASDAQ:FAZE], a 13-year-old professional esports team and entertainment company that went public via merger with a B. Riley-sponsored SPAC in July 2022.
Despite a partnership with Nike [NYSE:NKE] for a Faze Clan-branded LeBron James basketball shoe that was released this spring, Faze Clan stock closed Tuesday at USD 0.47 per share, down from more than USD 20 last August.
Consolidation underway
Sector participants expect an increase in dealmaking as cash-strapped firms in the sector look for ways to survive to the other side of the downturn.
“There's simply not enough dollars floating around in the space anymore to justify the expansion of teams that's come about over the last couple of years,” Union Square’s Holman said.
In April, GameSquare Esports [NASDAQ:GAME] and Engine Gaming completed a merger of equals aimed at gaining scale and complementary capabilities to accelerate their path to profitability, said Joe Schwartz, president of the new GameSquare.
Raising capital as a sub-scale, growth-oriented public company had become increasingly challenging as the macro environment turned during the past year, he said.
Despite co-owning Complexity – among the best-known professional esports teams, backed by Dallas Cowboys owner Jerry Jones – GameSquare stock is down nearly 60% since the merger.
“There’s just (valuation) compression right now but that’ll turn and when it turns, I think we’ll be rewarded for this transaction,” Schwartz said.
Many esports businesses are struggling to raise capital and GameSquare has ambitions to use the distressed environment to become a consolidator in the space.
In addition to a correction of artificially high prices for esports teams, Schwartz expects to see game publishers step in to play a greater role in supporting the economics for other sector participants.
“Long term, I think we’re seeing the bottom in esports valuations right now,” he said.
