Over the last several years, investors have grown curious about the world of professional video gaming. If this were any other sport, one logical thing to do would be to put money into a team. But in esports, it’s not clear what prospective team owners would be buying.
On Thursday, the company behind the world’s biggest esports game— League of Legends — tried to answer that question. Riot Games Inc. laid out a new framework for its ten-team, North American league and set a $10 million price to buy in.
Among gamers, it’s a long-awaited sign that the industry is growing up. To outsiders, it’s an indication that there’s a real business here. The price also signals confidence. Less than two years ago, League of Legends teams typically sold for about $1 million.
In a two-hour conference call Tuesday with existing League of Legends team owners, Riot laid out its new terms. As in traditional sports, the league will have a stable roster of franchises, and teams will share revenue from media deals. There will be a players association. Riot is locating the entire operation in Los Angeles, where it has an esports arena.
Riot will give existing team owners the opportunity to buy a slot in the league for $10 million – a price on par with Major League Soccer expansion fees as recently as a decade ago. Riot will help match interested investors to teams that need backing.
One of Riot’s challenges is to balance attracting deep-pocketed outside investors with its interest in supporting existing teams that have helped grow League of Legends to where it is today. Anyone who doesn’t already own a team will have to pay an additional $3 million fee that will go toward existing teams who get shut out of the new league.
Riot will also blunt the cost of the franchise fee by spreading it out over time. Teams can put in $5 million up front, and then pay $1.5 million out of their portion of the revenue they make from the media deal and merchandising at the end of both 2018 and 2019. The last $2 million comes due at the end of 2020, but could be waived if the league hits certain revenue targets.
“We think this process will actually spur on the old-school esports guys to join forces with new investors to create new organizations that should have the best of both worlds,” said Whalen Rozelle, co-director of esports at Riot, which is owned by the Chinese Internet conglomerate Tencent.
The revenue sharing structure is designed to make sure the players also benefit directly from the league’s financial success. Riot and the team owners will each take 32.5 percent, leaving a slightly larger share — 35 percent — for the players.
For the moment, team owners seem pleased. The new structure creates some stability, and the new league limits the practice of relegating poorly performing teams to a minor league.
“In traditional sports, they’ll sign a player for three or four years, saying this is a great rookie, we’re going to build him up. That doesn’t exist in any way in the relegation system. It’s too risky,” said Jace Hall, the chief executive officer of Echo Fox, which currently competes in Riot’s League Championship Series (LCS). “The franchise model is a healthier scenario.”
Another team, Immortals, has begun building a new facility in Culver City, a neighborhood in L.A. near Riot’s headquarters. "Now that we have more of an anticipated timeline that the model will change we’re comfortable making those moves," said Noah Whinston, the team’s CEO.
Riot’s League of Legends has been one of the biggest esports titles since shortly after its 2009 release. Riot tried to impose some order in 2012 by announcing that it would run leagues in North America and Europe, both called the League of Legends Championship Series, or LCS. In 2015, its largest event drew 36 million unique viewers online.
Compared to other esports ventures, LCS is a model of organization and still everyone involved has long acknowledged it needed an overhaul. Calls for more structure grew in late 2015, as investors from professional sports began buying teams.
Rozelle and Jarred Kennedy, Riot’s co-directors of esports, have been meeting with executives at many of the major sports leagues, including the NBA and MLB. They’re launching a development league, called the Academy League, which they modeled after the NBA’s D-League. They’re also helping fund a players association, similar to NBPA or MLBPA, which they hope will eventually stand on its own. An independent players union is a legal necessity for structure like a salary cap, which Riot says it may consider in the future.
For now, there’s no draft or salary cap, both tactics that leagues use to try to help the worst teams improve. And in Riot’s league, the rich get richer: Teams that perform better will receive a larger share of revenue, which will come largely from the $300 million streaming deal it signed with MLB’s BAMTech last year. Teams that finish ninth or tenth in five of eight consecutive seasons could lose their right to compete.
Most esports teams play in multiple leagues at once, and will have to consider whether the capital needed to join LCS permanently is the best use of their resources. That’s complicated by the fact that no one understands the full lifecycle of an esports title. League of Legends may well stay relevant for a much shorter period of time than, say, the sport of basketball.
"From my perspective, an ideal franchise model is one in which we don’t just become a permanent partner of League of Legends, but we become a permanent partner of Riot itself," said Whinston of Immortals.
Riot says that this is not on the table for now, but the company is ensuring teams that it’s in this for the long run. "This is more like a venture round than an IPO," Kennedy said. "We’re not exiting."
This article was provided by Bloomberg News.
