In my previous blog posts, I talked about the misconceptions about esports and how many esports teams or organizations do not profit, resulting in them folding or merging. Everyone keeps resorting to doing the same thing, thinking throwing more money into the mix will solve the problem.
However, I have spoken to many people, that know about the esports industry, that think esports orgs are profitable. They talk about multi-million-dollar prize pools and sponsorships, but what people often do not remember is that sports leagues that profit get their primary revenue from TV rights. TV rights happen to be something the esports industry does not have access to.
I have developed a theory on how esports can become more profitable. It will not make the owner rich, at least not to begin with. Professional sports teams lost money for a long time before becoming profitable and making the owners millions of dollars a year.
My idea is to have an esports organization that is profitable, even if it is just making three dollars a year. That way the organization is still making money, even if it is not a lot until the industry gets to the point where teams make a lot of money. Again, this is my theory. It is not a proven or tested concept.
The Current Esports (Failed) Business Model
Esports organizations have large overheads. From paying staff (players and nonplayers) to expensive team houses and training facilities. Most teams get involved in 5-10 games. They hire players, team managers, and coaches for each game, as well as staff in charge of the business aspects, such as marketing and finance. That is a high payroll, and it eats into the runway quickly.
Winning tournaments brings in a lot of income for organizations and their players, but there are not enough tournaments with high enough prize pools to compete in. Even if there were enough tournaments, that would mean that your team would have to win all the tournaments they compete in. To do that, you need the best players, and the best players get paid more, so that means an even higher payroll. In addition, most esports competitors must travel, which means spending money on gas, flights, hotels, and food. Just the cost of sending a team to the event would be most of the prize money they won from a tournament.
Sponsorships are the primary revenue stream for professional esports organizations, which means sponsors get to control what the teams do. Sponsorships also run out, and if the company is not getting the return it is looking for or it is not doing well financially, the company will not sponsor again. Many organizations are being negatively affected by crypto companies going bust, making them lose sponsorships.
Selling merchandise is another way esports organizations can bring in revenue. The organization 100 Thieves is known for doing this and has even been referred to as a “hoodie org”. I think selling merchandise is a good source of revenue for esports teams, but it should not be the primary source of revenue. If apparel is the primary source of revenue, the esports team becomes a marketing strategy.
Take Red Bull, for example. They sponsor a lot of sports, teams, and parties and have become a Master of Marketing by being unique and different. I do not think there is any problem with that business model, but Red Bull is not an esports organization or sports team.
Running tournaments is another approach that I see smaller organizations attempt. There are two reasons for this: making money and national brand recognition.
Here at North Carolina Esports Academy, we stopped running tournaments because the planning takes so many resources: time, money, etc., and the income we generated was not worth the time we put in. There are several factors that made tournament organizing a pain, such as:
- Strict Rules from gaming publishers
- Marketing to teams on a national basis and hoping they do not have conflicting competition
- Teams having to travel and hoping they want to
- Costly production if you want out-of-town teams to actually come to your event
- Profitability of tournaments
To attract teams, you need a prize pool, production, and a quality event space. This can all get quite pricey and only so many funds can be raised consistently through team passes, spectator passes, concessions, and sponsorships.
Content Creation through YouTube and Streamers
Organizations often have their own YouTube channel that they hope to get to the point of monetization. To make this possible, the people being paid to run the video filming, content, etc., would have to be in the top 5% of creators to turn a profit. Many organizations pay streamers to be under their umbrella, yet they must pay said streamers a salary that is more than what they take from the streamer’s earnings. If they did not pay that much, the streamer wouldn’t agree to it.
Copying Other Esports Organizations
Lower-level professional, semi-pro, and amateur esports organizations will look at higher-level organizations like TSM, 100 Thieves, and Faze Clan and attempt to copy what they do with their budget, which is much smaller. Now, this model does not achieve profitability regardless of the budget.
I will often hear organizations say, “We get players to play for free, and then tell them they can keep all their tournament winnings. We can sell merch and get sponsorships, and the community will support us because we are esports.” This model has been a flop every single time.
People, including kids, do not care about esports as much as you might think.
On a Thursday, 4 days after the FNCS 2022, I was a guest speaker at a career fair for a local middle school. I decided to ask every group that came by what the last esports event that happened in Raleigh was. Out of the hundreds of 10-14-year-olds I spoke to, not even one could say.
My Theory: How to Build and Have a Profitable Esports Organization
Focus on the Community
Focus on being involved in the community. Find players that the community will love instead of finding players that can win games.
As we previously discussed, winning tournaments is not a profitable business model. So how can an esports organization make money and become profitable? My answer? Focus on the community.
Focus on having players that the community (including schools, nonprofits, and local businesses) loves, and build your team that way. Parents and schools will be glad to see players who have a great influence on the youth, and local businesses will be open to sponsorships because they will be representing them on a local level in the community.
It makes zero sense for companies to represent players in another state when 90% of their customers are within a 20-mile radius. If you are like me and you own a local LAN center, then you will be able to offer sponsorships that include the gaming center, as well as the professional organization. This is also great because it will keep overhead low. You can offer a training facility at no additional cost! If you do not have a LAN center, find a partner that has a local one.
Selling merchandise, winning tournaments, and content creation will become revenue add-ons, not the primary sources of revenue. These are all good sources of revenue, but we will not be relying on them to help the business reach its revenue goals. For example, at TEA, we sell snacks and drinks, which bring in revenue, but not enough to reach revenue goals.
Now let us discuss initial funding for the esports organization. Unless you have the initial funding to get started, you will need to raise capital. Keep in mind, this is all my opinion. I am not giving financial advice; as I mentioned earlier, this is a theory that I have developed with the information at hand.
A great option for raising capital is crowdfunding through your local community. People approach me all the time about professional esports organizations, and after I speak with them, they are no longer interested when I inform them of how much money organizations lose.
Through crowdfunding, however, minimums of as low as $100 are allowed. Many people care more about having ownership of an esports organization than they care about getting their money back. This also allows someone to test the model before raising large amounts of capital and to find out if large amounts are even needed.
With crowdfunding, you are 100% in control of the terms set, and you do not have to offer a board spot. This helps keep control and ensure the organization is running correctly. In addition, your investors will become fans of the organization, making them want to support and promote it.
As I keep saying, this is a theory and I have yet to test it. As with any theory, there will be flaws, trial & error, research, and development. Overall, I believe this is a good base and starting point for anyone looking to create a successful, profitable, community-driven esports organization, with the potential to make it big in the future.
As an old saying goes,
“Rome wasn’t built in a day.”