Gaming and esports companies’ cheery earnings reports belie the industry’s profitability challenges

By Alexander Lee

As their quarterly earnings rolled out last month, publicly-traded gaming and esports companies highlighted growing revenues and expanding audiences as evidence of their continued success. But these declarations ignored the fact that the majority of gaming and esports companies still haven’t figured out how to turn a profit — a source of mounting concern for investors who entered the space looking for a quick buck.

After a period of stunning growth during the early days of the COVID-19 pandemic, the gaming and esports market has undergone a significant correction in recent months. It’s been a difficult time for esports investors, both of the public and private varieties. Investors in Enthusiast Gaming, the publicly traded Canadian gaming and esports company, are currently campaigning to replace the company’s board after an extended decline in its stock price; Allied Esports, which has traded on Nasdaq since 2019, recently received a warning from the exchange after missing the filing deadline on its last two quarterly earnings reports; and the public offering of the wildly popular esports organization FaZe Clan, previously slated for the first quarter of 2022, might be dead in the water after the company underperformed financially in 2021.

WHAT IS ESPORTS’ PLAY?

Focus on revenue and audience growth; Develop tangible revenue streams (ex. live events); Adopt holding company model; Shrink dependence on esports itself.

Despite these ominous signs, the earnings calls of prominent publicly-traded esports organizations continue to have a conspicuously upbeat tone. This is intentional, of course; it’s the CEO’s job to develop and sustain a positive narrative around the company, and there is perhaps no industry more defined by narrative-weaving than gaming and esports.

“Our focus remains on our core business and executing the fundamentals central to our strategy,” said Chris Overholt, the president and CEO of OverActive Media, which owns franchises in major esports leagues such as the Overwatch League, Call of Duty League and League of Legends European Championship, during the company’s latest earnings call, pointing out that OverActive’s revenues were “primarily driven by our strategic marketing partnerships business.”

The key word was and is “growth.” OverActive Media’s revenues certainly grew year-over-year — by 62%, no less — but the word “profit” was not mentioned once during the call, and the company reported a $15.4 million net loss in 2021. Enthusiast Gaming similarly stressed its growth, using the word 24 times over the course of its 40-minute Q1 2022 earnings call.

“We’re confident that the trends we are seeing will allow us to meet profitability objectives in the short term,” said Enthusiast CEO Adrian Montgomery.

While brand partnerships are most esports teams’ primary source of revenue, they do not represent an actual product that the companies can own or manufacture, and esports orgs often keep the financial details of their partnerships close to the vest. As investors crank up their scrutiny of esports companies such as OverActive Media, the companies are under pressure to develop more tangible revenue streams, such as live events. The …read more

Source:: Digiday