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The other side of esports

You may have seen the press release from Washtenaw Community College last week promoting its esports arena. Undeniably, esports are popular among young people, but esports also have a seedy underbelly that students should know about.

The value of esports as an industry has grown worldwide. Experts predict that by 2025, the sector may generate as much as $2B in revenues. While that sounds like a large number and promotes a “sky’s the limit” attitude, is the esports industry really all that?

Because of its relative newness, the esports industry has a significant funding connection to both venture capital and cryptocurrency. VCs are known for their money, but not so much for their patience, and the preceding 12 months haven’t been kind to cryptocurrency. Those predicting unchecked growth in the marketplace ignore the fact that esports leagues – particularly those in North America – are contracting.

For example, the number of teams in the League of Legends championship series (LCS), which is North America’s League of Legends esports league. For the 2024 season, the once 10-team league has dwindled to 8. Counter Logic Gaming (CLG), a founding team of the LCS, ceased operations in all esports, and sold its LCS franchise mid-way through the 2023 season to NRG Esports. Evil Geniuses (EG), which acquired Echo Fox’s LCS franchise for a reported $30M, exited the space just after four years. In addition, EG eliminated some of their other esports ventures, like their Dota 2 team.

TSM’s exit from LoL esports tied to FTX scandal

Team SoloMid (TSM) made a major splash by signing a $210M sponsorship deal in 2021. Unfortunately, TSM made its blockbuster deal with FTX, the third-largest cryptocurrency exchange in the world. Less than a year later, FTX collapsed spectacularly amid charges of gross financial mismanagement. The now-defunct exchange didn’t just self-immolate. It also destabilized other large cryptocurrency exchanges worldwide and exposed serious flaws in the cryptocurrency sector.

Shortly after FTX imploded, TSM, which still maintains teams in Counter-Strike 2, Apex Legends, and Super Smash Bros, assured Riot Games that the FTX sponsorship flameout would not significantly affect the team. Yet, it made plans to pull out of the LCS in early 2023 and transfer its LoL operations to another regional league. TSM followed up by doing half of that – pulling out of the LCS – in September by selling its LCS slot to Shopify Rebellion for a slim $10M. As of this writing, TSM has not landed a spot in another LoL league. TSM has also “temporarily” withdrawn its Valorant Championship Tour team.

The recent road for TSM hasn’t been easy. They began competing in LoL in 2011 and proved to be a dominant player in the sport, qualifying for Worlds and claiming third place in their first year. They went on to qualify for Worlds in seven consecutive seasons. However, over six years starting in 2017, TSM’s viewership in terms of hours and peak viewership dropped by 90% from nearly 40M to just 4M. That’s meaningful, given that TSM was one of the LCS founding teams.

The FTX sponsorship failure shows both how important external cash is to the success of an individual team, and how little it takes to destabilize an esports team, even one that has an established following.

TSM is not the only struggling team

Two other strong players also disbanded without warning at the end of the 2023 season. In addition to Evil Geniuses, the Golden Guardians, which were owned by the NBA’s Golden State Warriors, also exited the League. Unlike CLG and TSM, which sold their LoL slots to new teams, EG and Golden Guardians returned their franchise slots to the LCS.

Earlier this year, reports indicated that Riot Games had suspended the franchise fees it collected from participating teams largely because the teams had stopped paying the fees amid steep revenue losses. Riot Games did not expect to reinstate the franchise fee payments for a year or more in an effort to keep the LCS operational. Riot Games later extended the option to defer franchise fee payments to all franchisees in all LoL leagues to promote parity.

Instead of starting the 2024 season with 10 teams, the LCS will start with just eight teams. This eliminates 10 roster spots for professional players in the LCS. As of this writing, not one of the players on the Golden Guardians’ 2023 roster has been signed by another team in the LCS, and just two of the members of EG’s final roster have landed a spot on a LCS team. A third EG player has been signed to an “academy” squad (the minor leagues), for another LCS team.

Tomorrow, I will look at the extraordinary economic challenges that esports teams and leagues face in the crowded entertainment space.

Photo Credit: Chris Yunker, via Flickr