As esports organizations widen their revenue streams, valuation continues to be a challenge

By Alexander Lee

The problem with valuations of esports organizations is that more often than not, they don’t add up. Sky-high valuations on non-profitable businesses are par for the course in the sector. That’s not a great thing to have going into an economic downturn when investors and marketers alike want to know what their investments actually deliver. The concern is that the only return they get from esports investments is uncertainty.

To determine why esports valuations are so opaque, Digiday contacted five experts across the industry, from league managers to organization heads to journalists — including the author of Forbes’ annual valuation report, the closest thing to a definitive valuation in the space.

Growth versus product

Valuation is a tricky proposition for any business, but it is particularly challenging in the media and entertainment industries, where companies’ production costs and profit margins can be less straightforward to ascertain.

Still, most traditional media and entertainment businesses have agreed-upon core products: sports teams, for example, are united by their shared revenue streams of ticket sales, merchandise and media rights.

Esports organizations, on the other hand, simply haven’t figured out what their core product is quite yet. Media rights, a major revenue source for traditional sports teams, are not a factor in an industry whose audiences are accustomed to watching esports broadcasts free of charge on platforms like Twitch, while live events remain a relatively untested (but promising) revenue source. Merchandise is a proven revenue stream for organizations such as 100 Thieves, but the lower margins of these commercial models are less enticing to potential investors.

“It’s really hard to value pre-product companies — and a lot of esports teams are still ideas, they’re not yet to that sort of product stage,” said esports journalist and longtime industry watchdog Jacob Wolf. “But the hype and FOMO around the industry over the past few years was so high that even though the companies necessarily were in that early stage, they started being valued like they were middle-stage companies.” (This Digiday reporter is a friend and former colleague of Wolf).

Reality eventually caught up. And now that it has, those esports companies are under more pressure to make money. They can’t drop tens of millions on a creator house and say they’re growing with millions of fans worldwide. A culture of spending and asking for permission later no longer sits well with esports’ bankrollers.

Building the funnel

Esports organizations often speak about their business successes in terms of growth: more acquisitions, more fans, more advertising inventory and so on. But the industry is now decades old, and investors are starting to tap their fingers. These days, outside observers are beginning to care much more about revenue streams and actual profits — and Forbes, a publication that serves many of those observers, has taken note. The methodology of its first annual ranking of esports valuations, in 2018, was largely cribbed from Forbes’ longstanding annual valuation of traditional sports teams. These days, it’s become clear that esports valuations are an entirely …read more

Source:: Digiday