This is a heavily truncated extract from this week’s post on my Future Proof newsletter. It is cross-posted here due to the generous support of my paid subscribers there! Please join those good folk, by subscribing for as little as £2.50 a month!
Last week, it was announced that FaZe Clan, the biggest esports organisation with rosters stretching across every major competitive video game, would go public as part of a SPAC with a valuation of some $725m. This was down, significantly, on their intended valuation of $1bn but, all the same, the stock price dropped 30% on its first day and hasn’t recovered since. So what went wrong? Or is this just teething problems for an industry not used to big-money deals?
One thing’s for sure: if FaZe can’t make it work, nobody can. They are the first, and perhaps only, esports organisation to create brand recognition that goes beyond individual creators. FaZe is the Manchester United of esports. The issue, however is that esports, as an industry, is in a mess. Video games, generally, might be worth $200bn or so, but esports has more problems than Jay-Z. Here are five key issues that I think need to be solved before esports can go stratospheric:
1) Prize pools. In 2019, Fortnite held their first World Cup event at the Arthur Ashe stadium in New York City. This was intended to be an annual gathering, but covid intervened. The prize pool that weekend was $30m, with $3m going to the solos winner, making it the biggest prize in esports history. But that didn’t represent the start of a lucrative new career path — prize pools have steadily decreased, and now it’s basically accepted that nobody can make a living based on earnings alone. So participating in major competitions is only a means of brand development for players and teams, so that they can make real money through streaming or YouTube revenue, or merch sales and similar.
2) Professionalisation. FaZe has, I think it’s fair to say, been questioned a number of times over the years about how professional its approach is. It was owned and run by a bunch of gamers and streamers, who’ve come under criticism for exactly the sort of things you’d expect: now knowing how to run a multimillion dollar business with zero experience. Things began to change, with an eye to going public, with Lee Trink, a former GM of Virgin Records America, coming in as CEO and Zach Katz, also a former record industry exec, joining as COO and President. But this has been a late shift of approach from FaZe and is very atypical in the industry. Generally, these things are still run like a frat house, with unenforceable contracts and bad working conditions.
3) Competitions. It’s all well and good starting a billion dollar esports org, but what the industry really needs is a billion dollar esports competition. What is football without the Premiership? Tennis without Wimbledon? Formula 1 without, er, Formula 1? FaZe’s teams play across a wide array of different competitions, some operated by the games (or gaming companies themselves), others by third parties. But what the industry currently lacks is a coherent competitive brand. The Fortnite World Cup did that, to some extent, and perhaps there could’ve been a Call of Duty World Cup and a Minecraft World Cup. But the reality is that these games are made by different developers who have very little incentive for collaboration. So we are left with an atomised set of competitions of hugely variable quality and prize pool.
4) Talent. There are two types of professional gamer: the gamers who make their money from esports orgs and competitive gaming, and the gamers who make their money from streaming, YouTube and other gaming commentary. Here’s the issue with that: the former are the best gamers and will, inevitably, rise to the top in any meritocratic competitive environment, just as a freakishly good tennis player will always end up as the top seed. The latter group, however, have the following and the charisma to carry an esports org. If I love watching high quality Valorant, say, then I’m offered the choice between watching some near-mute, faceless teenager destroying people at the very height of the game, or watching funny, attractive media personalities playing the game at a much lower level. There have been various one-off Pro-Am tournaments (competitions that pair a pro-fessional and an am-ateur together) but there needs to be a more coherent strategy for combining these two types of gamer. In Australia, YouTuber Lachlan Power (real name) has started an org called PWR which probably comes closest to doing this. But, once again, it’s perhaps on the competitions, rather than the orgs, to solve this issue.
5) Publishers. I’ve alluded to it already, but part of the issue is that if you’re playing Rocket League or Fortnite, you’re playing a ‘sport’ that is the total intellectual property of Epic Games. If you’re playing Valorant, it’s Riot Games; Warzone, it’s Activision. This is not just something you can pick up in the playground, throwing a couple of jumpers on the ground as posts — this is a complicated piece of software and very specific IP. So ultimately, all of esports is in the hands of the video games publishers. These are companies that have made more and more money in recent years, and, increasingly, been snapped up by the biggest tech players in the world, but which don’t have any real expertise as sports franchisers as well as software developers. It’s like asking WholeFoods to suddenly start manufacturing tandem bicycles. But we are never going to arrive in a world where the biggest video games are royalty free or open source, so we have to deal with the fact that each game is a business unto itself, and esports might not figure as part of its agenda.
If I were running FaZe Clan (disclaimer: I’m not) then I would be very concerned by the lack of competition amongst other orgs. Think of it this way: Real Madrid are strengthened by the presence of Barcelona in La Liga, just as Manchester United are aided by the existence of Liverpool and Man City in the Premiership. PSG, on the other hand, despite having Lionel Messi, Neymar and Kylian Mbappe in their squad, are, notionally, less valuable that any of those clubs, because the French league lacks competition (and Ligue 1, in itself, is not a well-respected prize internationally). FaZe needs a not-FaZe to emerge, and FaZe needs a not-FaZe competition to emerge. Instead, what has happened is they’ve gone public as an extremely overpriced constituent part of an industry that doesn’t yet exist. And the plummeting stock price is what they get in return.