Six years ago, the Madison Square Garden Company, a group that includes James Dolan, owner of the New York Knicks and New York Rangers, announced a triumphant entry into the new sport: a professional video game league.
The New York investors spent more than $10 million to buy a controlling stake in Counter Logic Gaming, an e-sports team, saying professional video gaming is “now on the cusp of massive change, which we believe has the potential to significant growth.”
Instead, that growth has stagnated. When esports revenue fell short of expectations and investors became skeptical about the industry, the owners of Madison Square Garden tried to find a way out last year by selling their large team.
After years of fanfare, e-sports in the United States are giving way to economic reality. Unable to make a profit, team owners cut costs by laying off employees and terminating contracts with star players. In some cases, they sell their teams and sometimes at a loss, offering a blunt reality check to people who believed e-sports could be the next big thing in entertainment.
The most disturbing thing is that some viewers seem to lose interest. They watched 14.8 million hours of the 2023 spring season of the League Championships Series, America’s largest esports competition, down 13 percent from a year earlier and 32 percent down from 2021, according to estimates from the data company Esports Charts.
“We’re at a point where everyone needs to do a lot of soul-searching,” said Rod Breslau, a gaming and e-sports analyst. “There’s been way too much hype and too little real value.”
Just like in traditional sports, star players in esports can earn seven-figure salaries and compete for championships, attracting sponsors and fans. Investors have bought shares in teams participating in professional leagues for games such as League of Legends, Overwatch and Call of Duty over the past decade.
The largest of these is the League Championship Series, a 10-team league founded in 2013 and run by Riot Games, the company that founded League of Legends. In the league, teams compete in League of Legends, a fantasy-themed game, in matches that can draw millions of viewers and fill stadiums.
But the leagues are struggling to make money. Partnerships to broadcast esports tournaments on sites like YouTube and Twitch are gone, sponsors are slashing their advertising budgets, and owners are allowing teams to operate at a loss while paying huge salaries to esports players.
Some esports teams, such as Evil Geniuses, have parted ways with many of their expensive League of Legends players. Others, like 100 Thieves, fire employees and senior executives.
The share price of FaZe Clan, an esports group that went public last year, has fallen to just 50 cents a share. In March, FaZe received a notice from the Nasdaq, warning that it could be delisted if its shares did not rise above $1 again. And on Friday, FaZe said it would lay off about 40 percent of its employees, following a round of cuts in February. The news was previously reported by Digiday.
Jack Etienne, the CEO of Cloud 9, an esports group, said he cut costs by withdrawing from nearly half of the esports competitions his organization participated in, now eight of about 15.
TSM, one of the most valuable esports organizations, said on Saturday it was selling its place in the League Championship Series. It’s a major blow to the league, akin to a major franchise leaving the NBA or NFL, as TSM is one of the oldest and most prominent brands in North American esports.
TSM began talking to interested groups about three weeks ago, according to a person with knowledge of the discussions, and has whittled down its list of potential buyers to about a dozen entities, mostly in the media and traditional sports worlds. The asking price is in the range of $20 million, the person said.
Andy Dinh, CEO of TSM, said in an interview that his departure from the American league was related to his desire to compete for a world championship rather than economic problems. Most of the top League of Legends teams come from places like South Korea or China, and the North American region is way behind those areas in terms of competitiveness.
Mr Dinh said he intended to buy a spot in one of the top League of Legends leagues elsewhere in the world after selling his slot in the United States.
Riot Games is now under pressure. League of Legends has generated billions of dollars in sales throughout its history, but the e-sports competition surrounding the title has long lost money. That worked out great for Riot, owned by the Chinese internet giant Tencent, because Riot can use the competition to generate interest in the game.
But that formula has increasingly put it at odds with the owners of the e-sports teams, who paid Riot at least $10 million for a place in the league and were promised they would eventually turn a profit. This month, after teams requested it, Riot agreed to remove a requirement that teams participate in a League of Legends developmental league — one step down from the League Championship Series — that could help teams save money.
Last month, Riot published a lengthy blog post admitting its missteps and trying to reassure investors. Esports optimists point to two major positives: the youth of esports viewers, which appeals to advertisers, and the promise to monetize selling in-game items themed to esports events. Last year, sales of such items in another Riot game, Valorant, generated $42 million, half of which went to teams participating in the Valorant e-sports league, Riot said.
John Needham, Riot’s president of esports, acknowledged that the industry was in trouble.
“A big part of what we’re selling is the dream, it’s the long-term future of esports. And if we lose a team and they can’t generate investment based on that dream, we consider that a failure,” Mr Needham said in an interview. “So we’re definitely feeling the pressure.”
For Madison Square Garden, the sale of Counter Logic Gaming, the e-sports team, was an effort to cut losses. But the company could not find a buyer for the team who would pay enough to recoup the costs, four people with knowledge of the situation said.
Instead, the Madison Square Garden group laid off several dozen Counter Logic Gaming employees and last month struck a deal to merge its remaining asset — the League of Legends team — with NRG Esports, another esports organization.
Madison Square Garden received no cash payment from the deal. Instead, the NRG paid several million dollars to cover the costs of the CLG facilities and the salaries of the remaining 25 employees, three people familiar with the transaction said. Some aspects of the deal were previously reported by The Jacob Wolf Report, an esports news outlet.
The Madison Square Garden group did get a minority stake in NRG’s parent company, called Hard Carry Gaming, which allowed it to maintain a foothold in esports. Dan Fleeter, a senior vice president at Madison Square Garden Company, was also named to Hard Carry Gaming’s board of directors as part of the deal, the people said.
David Hopkinson, the president of Madison Square Garden Sports, said in a statement announcing the deal that it would “allow the company to continue to be a significant investor in the e-sports industry.”
Some see the exodus as an opportunity. Andy Miller, the chairman of NRG Esports – which bought Madison Square Garden’s League of Legends team – said he saw an opening in the industry as big names leave.
“It’s a tough time, but this is our time,” said Mr. Miller, a former technology executive and co-owner of the NBA’s Sacramento Kings. “I think there’s an opportunity to steal a bunch of existing fans.”
