League of Legends: Pay to Play

In March 2018, G2 Esports raised more than $17 million in a Series A financing placing the organization’s estimated total value at approximately $105 million.  The financing involved professional investment groups and tech entrepreneurs signaling mainstream adoption in the industry. This financing signifies “mainstream” adoption of Esports. G2 has stated that the proceeds from the raise will be used for a variety of purposes including: expanding into North America, paying franchise fees for various leagues, and increasing its operational capacity.  The organization will also be moving from Spain to Germany, and will build a new facility to serve as a home base for its League of Legends team.  Events for fans will be held at this hub to increase community engagement, which will hopefully attract more sponsorship dollars.  Riot Games, the creator of League of Legends, charged a $10 million franchise fee to all members of the League of Legends European Championship and paying this large amount probably influenced G2 Esports raise funds through a financing.

A major departure from the relegation system that preceded it, franchising systems allow teams in a given region to become permanent partners of Riot Games for a specific fee, with member teams being afforded the opportunity to compete in each regular season split held in their region in perpetuity regardless of their individual performance. Previously, the worst performing teams each year had to defeat the best rising teams to keep their spot.  Now, in several regions, teams buy their spot from Riot Games instead of earning it.  Immortals, one of the top North American teams historically, was not given the option to purchase a spot in the first round of League Championship Series (LCS) franchising. Riot Games cited two reasons for Immortals exclusion from further competitive play: first, Riot Games was uncomfortable with Immortals participation in the Overwatch League (the franchised competitive league associated with Activision-Blizzard’s Overwatch title), one of League of Legends biggest competitors; and second, Riot Games was concerned about Immortal’s finances and the team’s ability to pay a $10 million franchise fee.  Instead of trying to find a solution that would allow a popular team that was talented enough to qualify for World’s in 2017 to continue competing professionally, Riot Games simply forced them out of the LCS.

The teams lucky enough to be offered a coveted franchise spot theoretically receive many benefits in return for their $10 million investment.  First and foremost, the teams will share a revenue pool with Riot Games that includes proceeds from media deals, team-branded digital goods, sponsorships, and merchandise sales.  Specifically, LCS teams will be entitled to 32.5% of the league’s revenues and 50% of this pool will be distributed evenly among the teams – the other 50% will be allocated to teams based on their performance in the season and their levels of fan engagement.  This revenue sharing model addresses one of the biggest concerns about League of Legends; other Esports frequently offer higher prize pools than League of Legends with Dota 2 offering the highest prize pool game historically. The second major benefit franchising provides to teams and their fans is stability.  Teams do not have to worry about the possibility of spending years building positive relationships with fans, only to get relegated after a bad split (similar to what transpired with Team Dignitas).  Another major concern that is somewhat addressed by franchising is the hesitance of investors to put large amounts of money into a team that might not exist next year.  This mitigation of risk incentivizes investors to make larger investments than they may otherwise have pursued, as increased stability can help to address concerns around erratic returns.

Teams and their management are not the only stakeholders affected by the increasing commercialization of League of Legends.  The professional players who form the basis of the league will also be directly impacted by these changes. LCS players will be now be guaranteed a minimum wage of $75,000 yearly; this guarantee helps to compensate players for the many educational and professional opportunities they forego when they elect to dedicate themselves to the game.  Most players in the LCS are in their late teens or early twenties, prime years for pursuing a college degree in the United States, something that is often vital for the pursuit of more conventional job opportunities.  Additionally, all professional players are extremely talented at video games, and could use their skills to earn money through different avenues such as streaming content on Twitch or similar platforms.  In particular, Michael “Imaqtpie” Santana is a former professional League of Legends player who quit competitive play to begin a streaming career.  Imaqtpie now streams League of Legends on Twitch and uploads additional video content to YouTube, with Gamebyte.com estimating that he earned upwards of $2 million in 2016 through his streaming efforts. While this may be an outlier case, Imaqtpie’s success proves that pro players’ talents could potentially be more profitable if applied elsewhere.

Furthermore, it is Riot Games’ hope that the changes associated with franchising will improve professional players working conditions beyond pure economics.  In particular, Riot Games is setting up and funding a Player’s Association that will provide resources to competitors such as legal advice and financial planning.  This is in stark contrast to Riot Games historical approach towards player support and mediation. For example, the management of XDG Gaming made several controversial choices that the players on the team disagreed with and, upon voicing their concerns, were ultimately ignored.  This was revealed by Lyubomir “BloodWater” Spasov in a Reddit thread in which he also revealed that he was fired because he “was not dedicated enough according to the management and owner of XDG.”  Despite accusations of nepotism, extremely large fan backlash, player complaints, and decreasing performance, Riot Games did not step in to address the issues of XDG Gaming.  Riot Games seemed content to let the relegation system handle XDG Gaming.  In light of the transition away from a promotion/relegation-oriented league, Riot Games will have to take a more proactive approach toward player and team mediation moving forward.

The question at the heart of franchising in League of Legends (and more broadly, across all titles evaluating a franchise model) is who benefits the most from the increasing commercialization of the title in question.   In the future, it is unlikely that teams like G2 Esports will be founded and managed solely by League of Legend players and insiders.  Commercial backers and investors will undoubtedly become more involved in the running of these teams, which many life-long fans of the title often view as “selling out”. One of the biggest concerns for fans (and Riot Games itself) is that teams that were once good may lose their incentive to stay sharp without the fear of relegation; this could lead to an overall decline in the competitiveness of play and result in fans and players pursuing opportunities in other, more competitive titles. However, an increasing number of professionally run teams can also have the effect of providing better infrastructure and conditions for the players who are the face of the game.

How can we help?

Teknos Associates is uniquely positioned to identify and analyze the current and anticipated trends within the Esports and gaming industry. From our significant knowledge of how the Esports and gaming industries have developed, to our first-hand experience providing advisory services to organizations at all stages of development and growth, our team is ready to help brands capitalize on the myriad of opportunities available in the Esports and gaming industries. Our vast experience includes providing valuations, offering structural guidance, and delivering strategic analyses. To learn more, contact Teknos Associates at info@teknosassociates.com .

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