FaZe Firesale Reflects Reality Esports Teams Fighting for Scraps
FaZe Firesale Reflects Reality Esports Teams Fighting for Scraps
GameSquare Holdings, Inc. (NASDAQ: GAME) recently acquired FaZe Holdings Inc. (NASDAQ: FAZE) in an all-stock deal that valued the one time esports unicorn at just $18.5 million.
Accusations of sexism and homophobia inside the organization, crypto’s latest winter, and rising interest rates all contributed to FaZe’s decline over the last 14 months.
“More importantly, extremely unrealistic projections that valued the business at a magnitude more than it was really worth [are to blame],” Mario Stefanidis (research analyst, Aldora) said.
Well, that and widespread acceptance that esports organizations are largely lifestyle and culture brands with limited monetization opportunities.
“There are no media rights deals [to be had] right now. Twitch and YouTube are not spending,” esports consultant Rod ‘Slasher’ Breslau said. “[These teams] can’t make a lot of money on skin sales and [in-game purchases] because of the developers, and selling merchandise is not a huge part of the [total] revenue pie.”
Presumably, GameSquare believes the additional scale and cost savings will lead to profitability, and ultimately a re-rating. But that may be wishful thinking.
“The overarching issues with the industry are hampering all these organizations,” Breslau said. “The developers and publishers own the ecosystem. They own the IP. They own the video games. [The teams and gaming organizations are] fighting for scraps.”
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FaZe went public with a $725 million SPAC merger in July ’22, just months after Forbes valued it at $400 million. Shares rose to more than $24 in August ’22 giving the company a market cap north of $1 billion.
But it’s hard to suggest FaZe's fast rise was based on strong business fundamentals.
“It was really just pure [meme stock investor] speculation and post-COVID euphoria,” Stefanidis said.
That and a lack of investor scrutiny. FaZe’s ’21 investor deck projected it would grow revenues at a 90% CAGR and reach profitability on an EBITDA basis in 2023.
The company, along with Newzoo, “was at the forefront of pushing the bullshit that esports was going to be the NFL within a couple of years,” Breslau said.
Instead, company revenues grew far slower than the projected and its losses have accelerated.
“If they didn’t get acquired, and we actually had financials for the whole fiscal year ’23, they would have done less revenue this year than in ’21. [And] this would have been their highest loss year ever,” Stefanidis said. “Basically, everything that they said did not come to fruition and [many of those projections now appear to] border on unethical.”
Of course, that statement comes with the benefit of hindsight. The industry now realizes the challenges associated with monetizing esports fandoms due to the power game publishers wield.
While money can be made on the brand side, the pool of potential partners –and thus available sponsor dollars– has shrunk from when FaZe put out those projections too.
“All of the crypto firms that went insolvent within the last year were a huge blow to the sponsorship side of the industry,” Stefanidis said (see: FTX’s deals with Riot Games and TSM).
FaZe made mistakes along the way too.
“What made FaZe such a big company to begin with is that they had such a loyal and strong fan base,” Breslau said. “That was all ruined by removing the ex-founders and the people who created the organization to begin with [prior to the SPAC IPO process].”
Those installed made the FaZe OGs a lot of money. But the regime led by former CEO Lee Trink largely failed to understand or connect with fans.
“So, not only did they not do a good job of running it as a business in terms of making money, but they lost a huge part of the dedicated fandom, which is why the brand and organization got really big to begin with,” Breslau said.
Of course, several of those individuals were involved in controversies that made their continued employment problematic.
The controversy did not abate when those individuals left the organization, further sapping investor confidence.
“Grace Van Dien from Stranger Things was onboarded as a content creator earlier this year and there were a lot of uncouth remarks made about her,” Stefanidis said. “Some of the [remaining] FaZe OGs were saying she was not fit [to represent the brand].”
The irony is that the well-known star may have contributed more to the top line than most of the highly paid players.
“The only thing that makes these esports teams worth anything is the content side of the business,” Stefanidis said.
The competition side brings in relatively little revenue–and could account for less moving forward.
“Look at the prize pool for the International. This was the premier esports tournament with a ~$40 million prize pool in ’21,” Stefanidis. This year “it looks like the prize pool is going to be less than $10 million, maybe even closer to $5 million.”
GameSquare has faced many of the same challenges over the last year. The esports holding company’s shares are down ~80% and its market cap prior to acquiring FaZe was less than half of what it paid for Complexity Gaming in ’21 ($27 million).
“Esports as a cohort is just unprofitable,” Stefanidis said.
The FaZe acquisition gives GameSquare additional reach and scale. The organization has ~260 million social followers across platforms.
“Although Complexity has a longstanding esports organization, they’ve never gotten to the heights of fandom FaZe has,” Breslau said.
But it’s fair to wonder if having a massive fan base will be enough. Esports teams have not proven capable of converting reach into revenue.
“FaZe’s deck shows that the NBA, NFL, and MLB monetize [fans] at $50 or more and they show FaZe [was monetizing] at $.40 per viewer. We were expected to believe esports revenues were going to [rise to] what a traditional sports team [or league] garners and there’s just no reason to believe that [will be the case] right now,” Stefanidis said.
GameSquare may not have to grow customer lifetime values for this deal to net out. Management expects the run-rate cost savings from the tie-up to be worth $18 million (nearly as much as it paid).
“And [that alone] might be enough to make the combined Complexity-FaZe entity pretty profitable,” Stefanidis said. “We need multiple quarters of earnings to see if what they’re projecting is going to happen.”
A re-rating, at least one materially higher, is unlikely to come before it occurs.
In the meantime, Cowboys owner Jerry Jones and some of the company’s other backers have offered to buy $10 million of stock in a private placement. The hope is their commitment will prevent GameSquare from going to $0 in the interim.
FaZe supporters are likely disappointed with the sale price. The fact it’s an all-stock deal is another ‘kick in the teeth’ for sizable shareholders (they’ll get .14 shares of GAME for their shares).
“Good luck exiting that position with any sort of liquidity,” Stefanidis said.
Then again, FaZe’s options were limited.
“And for a business that probably would have gone under in a years’ time, I think it’s fair,” Stefanidis said.
GameSquare presents a stable home for FaZe. The company has deep pocketed investors and other investments across the esports landscape. It also has two of the biggest content creators in the industry (Ninja, TimtheTatman).
And bringing back the company’s founders should help FaZe rebuild its fan foundation.
Richard ‘Faze Banks’ Bengtson has been tabbed to lead the organization moving. Two other FaZe ‘OGs’ (Thomas ‘FaZe Temperrr’ Oliveira and Yousef “FaZe Apex” Abdelfattah) have been named president and COO, respectively.
But esports’ core issues remain. And unless the industry comes together and figures out how teams can profit from competition that is unlikely to change.
“We will see more [M&A] in the next year or two,” Breslau said. “That is definitely going to happen because there isn’t enough [sponsorship] revenue to go around for all these [teams] to make money. They have to merge….GameSquare might even buy more organizations at this rate.”
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