It was only in the past decade however, that a wave of technological innovation transformed the entire industry from an underground niche into a billion-dollar mainstream phenomenon. Today, the nascent esports industry competes with some of the biggest sports leagues in the U.S., while global tech giants hastily invest billions of dollars to make their mark in what many consider to be the future of sports and entertainment. How did it evolve into the industry we know today—and more importantly, will it maintain its furious pace of growth?
The History of Esports
Electronic sports (or esports), are organized, multiplayer video game competitions commonly played by professional gamers. Since its inception, the industry has continued to exceed expectations and reach new milestones every decade. Note: The timeline of events are an abridged version of major achievements in the industry.
1970s: The Birth of Esports
The earliest known video game competition—the Intergalactic Spacewar Olympics—took place in 1972 at Stanford University. The winner of the event received an annual subscription to Rolling Stone magazine. While it was a modest first prize for the industry, it would set a foundation for future prize pools in the millions of dollars.
1980s: More Gaming Options
The 1980s ushered in better consoles for esports. The Nintendo Entertainment System (NES) took graphics, controls, gameplay, and video game accessibility to the next level. Five years later, the Sega Genesis console was released in the U.S. and Japan to compete with Nintendo—which held a 95% market monopoly at the time.
1990s: The First Tournaments
Nintendo increased its commitment to esports by hosting the Nintendo World Championships. After touring 30 cities in the U.S., the finals challenged players to games like Super Mario Bros. and Tetris, with a 40-inch TV awarded to the winner. Developers and gaming entrepreneurs created a flurry of leagues, including QuakeCon in 1996, followed by both the Cyberathlete Professional League (CPL) and the Professional Gamers League (PGL) in 1997. In just a few years, these competitions helped esports gain significant traction.
2000s: The Explosion of Esports
In 2019, Google followed suit with its Stadia streaming service. The cloud-based video game platform aims to eliminate the need for hardware, allowing Google to aggressively compete in the esports space.
A Snapshot of Esports Today
The increasing involvement of developers and global tech giants has not only increased the audience size of esports—it has also led to bigger prize pools, and larger scale competitions across the world.
Demographics: 50% of esports viewership now comes from Asia. Engagement: 6 billion hours were dedicated to watching esports in 2018, and will continue to grow to 9 billion by 2021. Buy-in: The price of one of the 12 Overwatch League teams for sale in 2017 was $20 million. Incentives: The Fortnite competition prize pool for the 2018 season was $100 million—equal to the entire esports prize pool in 2017.
It’s clear that esports continues to attract rapidly growing audiences at an unprecedented rate. However, there are still significant barriers inhibiting the industry from reaching its full potential.
The Future of esports
In order to maintain its furious pace of growth, the esports industry must first address five key challenges:
Diversity of game genres: The industry will need to produce more game genres in order to appeal to a wider audience outside of its current player base. Geographic expansion of leagues: esports will need to expand to national, regional, and global levels if it wants to tap into bigger advertising budgets. However, while esports gains attention from global media, local events are more difficult to organize. Regulation of competitions: With multimillion-dollar prize pools at stake, new rules and regulations are needed to combat cheating and match fixing. Ownership of media rights: Content rights have not been a focus for publishers, as fan-generated content has served as free advertising for their games. Media alignment: Traditional media brands are still reluctant to associate themselves with esports, as prejudices against competitive gaming still exist. For example, gaming culture is viewed as a harmful distraction, rather than a legitimate sport.
In less than 50 years, esports has evolved into a dominant form of entertainment today, eclipsing film and music industries by a wide margin. With an increasingly mainstream audience, the industry’s popularity and profitability shows no signs of slowing down—despite the challenges it faces. on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
