eSports is broke
Professional esports vs. English football in financial viability
The viability of esports right now as a business is questionable, though the whole industry is seeing a rapid growth in revenues and the creation of new, special esports jobs. In finance, there are a bunch of different tools analysts use to understand how well a company is performing and basically if a company is making enough money to pay off debts and stay in business. To better understand professional esports as a business, we’ll look at
- the debt ratio,
- the current ratio,
- the asset coverage ratio, and
- the cash ratio
for the Astralis Group and for Fnatic versus those for the best and worst teams of professional English football (Premier League, EFL Championship, EFL League One, and EFL League Two) for 2018. From Premier League, we’ll look at Man City and Huddersfield Town; from EFL Championship, Norwich City and Ipswich Town; from EFL League One, Luton Town and Bradford City; and from EFL League Two, Lincoln City and Yeovil Town. We’ll also look at Apple’s 2018 ratios for comparison between the sports entertainment industry and the traditional world (*roughly, very very roughly).
The debt ratio.
First, let’s look at each team’s debt ratio, which shows everything a company owes to other people (total liabilities) as a percent of everything it owns (total assets). This ratio lets us know how likely a company is to pay off all its debts with everything it has. The higher the number, the greater the difference between total liabilities and total assets (higher is bad, .5 is reasonable).
total liabilities / total assets
As is shown to the left, Astralis (1.583) and Fnatic (1.359) are keeping a relatively high debt ratio compared to professional English football teams and fall well above the 75th percentile (but not above the upper bound). Against Apple (.707), half of the professional English football scene is underperforming as are Astralis and Fnatic, albeit to a much greater extent.
That Astralis and Fnatic are highly leveraged (have a lot of debt) is not totally a surprise, however. Top competitors in an emerging global entertainment market based largely on skills and luck are of course going to cost a lot of money for orgs. So long as Astralis and Fnatic remain well within the bounds—and so long as other ratios are favorably positioned against football teams—leverage alone shouldn’t be a huge concern right now (though it could very well drive current businesses into extinction). What this ratio points to is an overall lack of monetization by professional esports orgs combined with a high cost of doing business and significant reliance on brand (logos, names, etc.) for positive valuation.
What’s interesting about the football teams in particular is that, as the performance of the team decreases across leagues, so too does the difference in debt ratios between the top and worst performing teams. This indicates that the cost of athletes is a significant factor for these teams’ financial performance, and it’s reasonable that professional esports is similar in this way (to be seen once more finances are made public).
The current ratio.
Next, let’s look at each team’s current ratio, which describes how well a company can pay off liabilities with its assets all within one year. It’s basically the same as the debt ratio but specifically focuses on paying off debts owed for this year with assets that can be sold for cash within one year. The higher the number, the more assets that will be left over after paying current liabilities (numbers greater than 1 are good, 1.5 is reasonable).
current assets / current liabilities
As is shown to the left, Astralis (.252) is underperforming and Fnatic (.730) is performing average against the professional English football scene for the current ratio. Against Apple (1.124), English professional football, Astralis, and Fnatic are all underperforming, though this likely points to an industrial difference in current ratio norms than to any concerning, systemic problems with current-ratio finances for sports entertainment (though Astralis’ and Fnatic’s high ratios are suspicious should other ratios be unfavorable).
The overall trends for both the debt and current ratios are basically the same for professional English football teams, Astralis, and Fnatic. The current ratio for these groups just shows that there are some very real concerns about their ability to pay debts in the short term, though the exact cause is unclear (but probably comes from the high cost of good talent mixed with poor monetization and a reliance on brand for positive company valuation).
The asset coverage ratio.
Now, let’s look at each team’s asset coverage ratio, which is a way to see how well a company can pay off all its total liabilities with its total assets minus intangibles (logos, names, etc.) once current liabilities minus short-term debts (debts that need to be paid within one year) are paid. This ratio provides a better understanding of the long-term viability of a company’s current situation than can the previous ratios and better gets to the heart of the company’s operations and strategy (numbers above 1 are good).
((total assets — intangibles) — (current liabilities — short term debt)) / total liabilities
As is shown to the left, Astralis (.170) is underperforming and Fnatic (.732) is performing just above the 25th percentile for asset coverage. Against Apple (1.009), both Astralis and Fnatic are underperforming and half the professional English football scene is performing at par with Apple and at least at the reasonable minimum.
The general trend in professional English football for asset coverage is that top-ranking teams regardless of league perform above 1, while low-ranking teams perform less favorably. The degree to which low-ranking teams perform poorly, however, is inversely correlated to league—as league prestige decreases, asset coverage increases.
While Fnatic is performing within the ballpark of Apple, Astralis is woefully underperforming and is cause for great concern, especially since they’re now a publicly-traded company. An important question to ask at this point, then, is why the upper percentiles of professional English football teams are retaining so many assets and whether these assets might be better used to further the competitive quality and branding of the teams (while asset coverage is important, it shouldn’t come at the expense of positive growth).
There’s also an apparent trend that as league prestige decreases, the difference between ratios for the top- and bottom-ranking teams of each league decreases, with the low-ranking team eventually outperforming the top-ranking of lower leagues. It’ll be interesting to see if this kind of trend exists for professional and upper-tier semi-professional teams.
The cash ratio.
So far we’ve looked at teams’ abilities to pay off debts with basically everything they own, but in reality people don’t normally sell everything they own to pay someone back—they just use cash. The final ratio we’ll look at for these teams is the cash ratio, which is a way to show the ability of a company to pay off its current liabilities with the cash it has on hand and the cash it can make from selling assets within a few days or so (these are called cash equivalents) (.5 is a reasonable minimum).
cash and cash equivalents / current liabilities
As is shown to the left, Astralis (.027) and Fnatic (.056) are both underperforming the median cash ratio for professional English football teams. Against Apple (.567), Astralis, Fnatic, and professional English football are all vastly underperforming and additionally underperform against the .5 minimally-acceptable ratio.
While the other ratios indicate some sort of general trend across teams and leagues, the cash ratio doesn’t show this, though the confounding ratios for some teams may just be outliers that this whole investigation can’t detect. It might also be the case that there is a significant industrial difference in cash ratio that’s at play here.
The only reasonable and useful takeaway from the results for this ratio is that, while there seems to be a different view of holding cash by sports teams versus that by traditional companies, using professional English football as a benchmark, Astralis and Fnatic are underperforming.
tl;dr
Takeaways are always difficult, and for esports especially so.
If we assume that the sustainable future of esports that benefits everyone involved—players, management, leagues, businesses, and (of course) fans—looks like what soccer does internationally, then comparing the professional teams in esports to the professional teams in international soccer is not only a fair thing to do, but is something that must be done to understand esports business better than people currently do.
What we can understand from the back-of-the-envelope work done here is that professional esports is infantile and requires a concerted effort before it can be taken seriously as a business opportunity. It is important that we understand that esports business will be done differently than other business when it matures, but it is equally important that we now take seriously the enormous amount of debt professional orgs are taking on in order to compete without first having any reasonable way to repay it on their own.
The first person to establish a sustainable business model for esports will be a multi-billionaire and run the scene for a long, long time.
~ eliot, Managing Partner for Business and Strategy
