CS:GO Weekly: The profitability problem


Profitability. Coming into 2020, the biggest question for Counter-Strike: Global Offensive teams was: how do you turn a profit? In the second-highest viewed esports game in the world, very few teams have broken even, with salary costs rising exponentially since 2016 and teams heavily relying on multiple funding rounds to recruit the best players in the world.

Lack of return on investment isn't particularly new in esports. Despite what some may want you to think -- that esports is a thriving billion-dollar industry (true, but missing context) or that it's the next big gold mine in sports and entertainment (possibly true, but certainly not yet) -- esports teams have outkicked their coverage on profit and loss margins. Some have done so fatally, without putting much thought into how they'll recoup costs, while others have taken more measured approaches and made smaller bets. Being in the red isn't always a negative thing, but the real question is: how long will they stay there?

2020 was supposed to be a big year for Counter-Strike in helping answer that question. In two different trains of thoughts, 21 teams split into two leagues with varying models but a similar goal: to work towards breaking even. 13 of those would partner with ESL for the reworked ESL Pro League, while eight others would do their own thing in Flashpoint, a wholly team-owned league championed by mostly North American owners. Both leagues would provide new access to revenue sharing in their own ways and with the opportunity to create unique offline experiences both made promises of improving the profit-loss margins in the ecosystem.

But then the novel coronavirus hit the West.

"COVID-19 has led to a significant decrease in consumer spending and advertising globally, and it is likely to take some time for revenue opportunities for any sporting league, esports or traditional, to get back to the pre-crisis levels," Immortals Gaming Club senior vice president of finance and business development and Flashpoint board member Tomi "lurppis" Kovanen told ESPN. "However, given we're currently in a slower sales period in the year, it's hard to quantify the impact until we see how the rest of the year unfolds, and that will depend on how the recovery develops."

When COVID-19 outbreaks sputtered across the Western part of the world in March, both ESL Pro League and Flashpoint had to pivot -- with ESL Pro League foregoing plans to move teams temporarily to Malta, an island south of Italy, and Flashpoint withdrawing teams from their Los Angeles studio after their first week of competition.

The opportunity for sponsorships and advertising quickly changed as the leagues moved online, but both Kovanen and Jason Lake, the CEO of ESL Pro League participant Complexity Gaming, said they feel they're closer to breaking even after a season of both leagues than they were before.

"COVID is going to delay it," Lake said. "Projections need to be moved back on the spreadsheets in terms of what month those breakevens are coming, but I'm really bullish on esports, I'm really bullish on Counter-Strike. I'm very confident we can get to break even and then to profitability."

"Pre-COVID-19, every team was better off thanks to Flashpoint," Kovanen said. "Prior to Flashpoint being launched, the best offer from ESL for all Pro League participants was significantly weaker because ESL did not need to offer better terms because there was no competition.

"Everyone involved now has better terms (whether in guaranteed money from ESL, or in higher upside through Flashpoint), so the net-effect of Flashpoint is hugely positive for teams in CS:GO. However, COVID-19 has likely had a negative impact larger than the benefit from FP, meaning the net from January may still be worse, for external reasons."

Why profits are such a big question mark right now in Counter-Strike and why leagues like Pro League and Flashpoint are moving to this model is because unlike some other top esports, such as Riot's League of Legends and Activision Blizzard's Overwatch, Counter-Strike leagues are not run by their developer, Valve.

Access to in-game item revenues only happen twice a year -- during the Majors, when team logos are designed into stickers that can be placed on virtual weapons -- but that revenue opportunity has gone out the window this year. The ESL One Rio Major, originally scheduled for May, was postponed until November. As COVID-19 continues to devastate the world, many executives and players in Counter-Strike question whether the Rio Major will even happen at all.

But given how Counter-Strike's audience has continued to grow the past few years, holding on firmly to the second position in the industry in terms of audience size, behind only League of Legends, salaries have become comparative. When SK Gaming signed the major-winning players of Luminosity in the summer of 2016 for $10,000 per month in salary, Counter-Strike fans were taken aback. Now, Lake says, that number has in many cases doubled or tripled, but he doesn't argue that it's as much of a problem as some of his peers might behind closed doors.

"There has been a lot of investment pumped into the scene and the team owners are very competitive," Lake said. "When you go out and get that investment, part of the agreement you have is you're going to build a compelling, exciting brand with lots of fans. How do you do that? One of the ways you do that is to win.

"So now I've got X number of millions of dollars from my investors and I need to go spend it on a compelling team. Because if I have to go into my boardroom with these investors who have trusted me with their capital and my team is horrible, they're going to be asking 'why?' and I'm going to be sweating. A lot of that has gone on that's raised player salaries."

If you attend any conference or listen to any podcast about esports, the statement always exists about the opportunity for successful business in the space. The demographic is something most modern sports do not touch -- 18 to 30-year-olds with a global reach and high consumer spending -- but no one has figured out how to turn that into actual money.

"We're missing something. I don't know what it is," Lake said. "I pray all the time. There is a key and there is a lock and I need to find them both, because I know we're missing something as an esports industry that could take us to the next level."

ESL Pro League Season 12 is set to kick off Sep. 2, in just over two months, with the goal of competing online. Lake said he's optimistic about offline events coming back, but aware of the reality of COVID-19 affecting travel. The European Union, of which Malta is a member, said Tuesday that their reopening plan will bar Americans from entering member countries. The initial Pro League model would bring all of their teams to Malta to compete, instead of splitting into two regions, as they did for online competition this spring.

Flashpoint hasn't announced their next Counter-Strike plans at this time. But if their home base remains as Los Angeles, then it's very unlikely they'll be able to resume offline competition anytime soon either.

There's a prevailing thought though in Counter-Strike and esports as a whole right now -- that the absence of traditional sports, with the MLB, NBA and NHL delaying their seasons has made esports higher profile and that the industry will benefit from that. Whether that's just a theory, much like other thoughts in esports, or whether that'll be true after the pandemic ends, remains to be seen.

"Many leading indicators appear promising (e.g., higher engagement, increased media coverage, etc.), which may make brands more comfortable around esports in general post-COVID-19. In addition, because the esports tournaments and leagues could still take place online (unlike traditional sports), esports may be seen as a safer place to spend in that sense until COVID-19 is gone," Kovanen said. "Given how large of an impact COVID-19 has had on the economy and consumer spending, the net-impact has been negative so far, but we would expect there to be an uptick in spending as the economy starts recovering and we get past the pandemic."