In my last post, I discussed whether or not esports is facing an economic bubble. In it I called out a few bad actors in the industry, but also argued that it wasn’t fair to lump every competitive title together and that, as a result, there was more resiliency in the system than many seem to believe. I only briefly touched on the elephant in the room with esports, League of Legends, because there was so much to say on the subject it deserved its own post.
First, some background information about League of Legends as an esport in the West. Riot Games, League of Legends’ publisher, has been supporting a competitive circuit since 2011 but League esports didn’t really come into its own until the following year. In 2012, Riot made an effort to grow the scope and legitimacy of their third party tournament circuit, ending with the World Championship held at L.A. Live produced by Riot themselves. The following year, Riot was the first company to abandon the open tournament circuit in favor of ongoing regional leagues modeled after European soccer, with a fixed number of top tier teams and a promotion/relegation system to replace struggling teams with up and coming talent. Just recently, they led the industry again by being the first to create franchise teams, eliminating their promotion/relegation system, and rebranding each Western regional league with their own identities: League of Legends Championship Series (LCS) for North America and League of Legends European Championship (LEC) for Europe.
League of Legends’ reach is global, as is their competitive scene, with players and professional teams in an amazing array of foreign markets, including China, Korea, Brazil, and many others. Each year, each of these regions send their best team(s) to two big international events, the second of which acts as the World Championship.
On its face, this all seems great. Tons of regional exposure, huge international tournaments, stable leagues that encourage investment, what more could one ask for? But do these upsides translate into financial success for either the teams or the league? It is very possible that, despite the questionable economics behind Overwatch League’s ridiculous franchise fees and CWL’s low viewer numbers I discussed in the last post, the real culprit for run away spending, starry-eyed investors, and unsustainable league structures may well be League of Legends and the many team organizations for whom League of Legends is a central pillar of their business.
Not that it should come as a surprise, but neither the teams nor Riot are willing to provide any pertinent economic details about the profitability of the LCS, LEC, or their participant teams. What we do have is publicly available information, such as viewer numbers, and rumors reported by reputable journalists who cover the scene. Live attendance for the Western domestic leagues is low and capped by the size of their broadcast studio venues: a few hundred. Online viewership is larger, in the hundreds of thousands, but not the staggeringly large numbers for international events that garner all the press attention. This leads many to question whether Riot is throwing truck loads of their money into a giant pit called esports and metaphorically lighting it on fire.
There are tales, which appear in articles on sites like Kotaku, where sources associated with Riot respond to questions of profitability in League of Legends esports by simply laughing. This, on its face, seems quite damning. However, as I discussed in a post several years ago titled “Monetizing Esports in the West,” for Riot profitability is not the goal of the competitive scene. Exposure is. Riot forgoes almost all traditional advertising. Instead, it has a cornucopia of experiential marketing programs such as featured content creators and cosplayers, partnered streamers on Twitch, and their esports leagues. It should not matter to Riot if the LCS and LEC make money as they can essentially write them off as part of their advertising budget. What matters is that the esports division reminds players to play and encourages them to make in-game purchases of champions, cosmetics, and more. It seems to be working. According to SuperData, a division of Neilson, League of Legends is the highest grossing PC game in the world, according to their May 2019 rankings. With that in mind, our concern should shift to the economic viability of the teams.
While the top Western teams, such as Team Liquid, grab headlines for valuations over $200 million dollars and year over year growth in the 400+% range, there are plenty of organizations that don’t have anything close to that kind of success. Team Liquid, after all, is a multi-team organization with world championship contenders in Dota 2, League of Legends, and CounterStrike: Global Offensive, three sports with among the highest prize pools in competitive video gaming. They also have tournament winners, serious contenders, and popular personalities in Super Smash Brothers, Fortnight, Starcraft II, PlayerUnkown’s Battlegrounds (PUBG), and more. On the other hand, there are teams like Clutch Gaming. Born out of the desire by the Houston Rockets ownership group to enter esports, they have only one team, compete exclusively in the LCS, and get average to below average results.
As far as I’m aware, no esports team, whether in League of Legends or not, is a publicly traded company. As such, there is very little publicly available information on the expense to revenue ratios that teams like Clutch are facing. It is considered an ill kept secret that many, if not all, of the teams in the LCS and LEC run heavily in the red and only stay afloat because of investors eager to buy into what they see as the next big thing in sports entertainment. Some may fairly argue that Twitter, and other similar tech companies, have been running this game plan for years, but eventually every company reaches a point where it must either become revenue positive or die. Even Twitter. On the other hand, since the financials of these teams are a well kept secret, I can’t say with any certainty whether rumors of team managers burning through venture capital at unsustainable rates are really true or pure fan speculation.
Frequently mentioned in conjunction with the topic of teams overspending is the belief that players are being paid too well. Again, we face the problem that these numbers aren’t made public as there are no rules, such as a salary cap, that force teams to announce their player’s compensation packages. Like for European soccer, we must turn to the rumor mill to construct a rudimentary understanding of player salaries. Before franchising, players in the LCS reportedly made an average salary in the low six figures. After franchising, the average salary supposedly rose sharply, with rumors of pay for the typical player doubling and top players taking in high six or even low seven figure salaries. These may seem like big numbers, but when we consider them within the context of what traditional sports pay their athletes, based on a metric like audience engagement, we get something a bit more nuanced. To illustrate this point, let’s look at the numbers for the NBA and LCS normalized around viewership.
The NBA garners 1.5 million viewers for a typical regular season game. Players in the NBA make an average of $3.75 million, according to a Business Insider article in 2016, and top players make $30-40 million, which is public knowledge thanks to the NBA’s salary cap rules. The regular season has 82 games. Therefore, the average player makes $45,731 per game. Some quick math gives us a ratio of average pay to average number of concurrent viewers for a regular season game of 3:100 for the NBA. We can estimate this ratio for LCS players post franchising as well. A season for League of Legends is split into two halves, each of which is 18 games long. Given that a typical LCS or LEC game has around 180,000 total viewers across multiple platforms, based on data from The Esports Observer, and a typical player salary is around $300,000, according to insider leaks reported by Forbes from May of last year, we get a ratio of average pay to average number of concurrent viewers of 4:100. A bit higher. Repeated for the top end, NBA superstars have a pay to average concurrent viewer ratio of 28:100, and the same ratio for top LCS players is 15:100. Much lower. When controlling for market size, as well as audience impressions using number of games played, we can see that while the average LCS player is slightly overpaid, the top stars are actually much cheaper than their NBA counterparts.
This is all based on a direct comparison between the NBA and the LCS, which some might claim is unfair. I would argue that the NBA and the LCS are actually similar in a few key ways, especially in regards to the economics of their labor markets. Both have small teams, especially compared to sports like baseball, football, or soccer. Basketball has five players on the court, with another seven to ten as substitutes and alternates. LCS teams have five players on the digital playing field, with up to another five as alternates. Where large rosters drive the average price of players down, as seen in the NFL, the extremely limited number of player spots in the NBA drive the value of each player up. The same ought to be true for esports. There are other ways they are similar: their demographics skew younger, player personality is a key driver of engagement, and ownership groups with long term financial goals are more common than a single individual, or family, who owns the team as a vanity investment rather than a strategic one. For all these reasons, I believe the comparison between the NBA and LCS/LEC is useful.
Considering this analysis, it strikes me that, on balance, the players are actually being fairly compensated relative to the reach of the league. However, that doesn’t mean that the teams they play for aren’t losing money and that player salaries aren’t part of the equation. A key difference is that the teams in esports don’t have access to the same methods of capitalization that teams in traditional sports do.
In traditional sports, there are a multitude of different ways that teams can leverage their fan base, and the league’s popularity as a whole, into profits. There are the obvious things, such as merchandising and ticket sales. There are the less obvious things, like their portion of the overall broadcasting rights for the league or the naming rights for stadiums. There are even sources that people rarely think about, like exclusivity deals with video game companies like EA for officially branded sports games. Most of these income opportunities are not available for esports teams. Brand deals can be signed to adorn player uniforms, but the player uniforms are only seen during post game interviews. While any medium or close up of a traditional sports player on the pitch, or the sidelines, gives the viewer an eyeful of the team’s sponsor’s logo, I wouldn’t see that Counter Logic Gaming is sponsored by Omen unless they win and get interviewed after a match. League of Legends teams don’t have home stadiums. This eliminates a number of revenue opportunities. Naming rights can be given, but only for training centers and content houses. Liquid has the Alienware training center and 100 Thieves has the Rocket Mortgage team house but unless I am already invested enough to follow those teams beyond game day, I might not know these naming rights were ever sold. There are no tickets sales for “home games” to provide a consistent revenue stream. There aren’t stadium advertisements like the side boards around a soccer field, constantly reminding you to fly Emirates Air or buy a Kia.
A lot of these weaknesses are supposed to be covered by permanent partnerships, Riot’s name for their franchising system. The idea is that Riot can make money in ways only available to the broadcast side of the league, and then spread that revenue around per the franchising agreement. On an episode of the Freakonomics podcast, where the topic was professional sports, it was mentioned by the general manager of an NBA franchise that a surprising number of teams would lose money if it weren’t for revenue sharing, so this kind of arrangement is not unprecedented.
The most lucrative profit avenue for any league, as a single entity, is typically the sale of broadcasting rights. This is the holy grail of American sports money that underpins everything from Major League Soccer to college basketball’s March Madness. It was well reported that Riot was in talks to ink a deal with BAMtech, Major League Baseball’s streaming service provider, that would have netted Riot esports $350 million and created a source for League of Legends content away from passive partners like Twitch and YouTube. The deal never went through. Both parties have been tight lipped about why it fell apart, but the details as to why aren’t important. What’s more relevant is that each team in the LCS lost out on millions of dollars of steady income that would have helped to seriously offset their operating costs. Stuck with Twitch and YouTube, where untold amounts of money are lost to tech savvy viewers using ad blockers, the league and its teams are severely hindered in their ability to generate operating capital, especially compared to traditional sports.
Riot is trying to make some of that money back by selling sponsor integrations. They have brought in companies like Coca Cola, MasterCard, and Jersey Mikes as league sponsors, as well as selling season long naming rights to certain segments, as they did with the State Farm analyst desk and Acer Predator replays. Similar to how the broadcast money would have been handled, this money should be spread around the teams via their revenue sharing agreement. However, the return on investment (ROI) with this kind of deal is tricky for the sponsors.
The really big numbers for Riot’s tournaments are found in the international events, not the domestic leagues. While sponsors won’t necessarily turn their noses up at live viewer numbers that are roughly the equivalent of a televised MLS game, there is no guarantee that those 100,000 to 200,000 viewers are actually in their target demo. The games are broadcast on internet platforms that are accessible in basically any country. While it is a somewhat reasonable bet that many Europeans watch the European LEC and many North Americans watch the American LCS, there is a rich and surprisingly deep history to many of these teams, and their players, that creates a sizable amount of out of region viewership. As a result, if Jersey Mikes is sponsoring the league expecting to advertise to 100,000 U.S. residents, they may find themselves actually advertising to 60,000 U.S. residents, 20,000 Canadians, 10,000 from a mixture of European countries, and a handful of Brazilian, Russian, Turkish, Korean, and Japanese fans. I unfortunately don’t have specific numbers to go on, but are probably a decent number of LCS viewers who couldn’t eat a Jersey Mikes sandwich even if they wanted to; there are no Jersey Mikes locations within a thousand miles of them.
This problem is even more apparent, both for event and team sponsors, when you look at the biggest international events. The final series of the most recent League of Legends World Championship is reported to have had over 200 million concurrent viewers. That is twice as many as the Super Bowl. However, that number is massively inflated by Chinese viewership on their regional streaming sites. In an article on The Game Haus, they cite data that suggests only about 2 million of the 200 million were viewers from outside China. What good is reaching 198 million Chinese viewers if your main brand sponsors have no market outside the United States, such as AT&T and the United States Air Force, two big sponsors of the team Cloud 9? The same goes for the percentage of the remaining 2 million that are from countries like Korea, Vietnam, Taiwan, Turkey, and much of Europe. This is obviously the most extreme case, since a Chinese team was playing in the finals, but the same holds true for the matches earlier in the tournament too.
In one particularly noteworthy anecdote from a couple of years ago, a weekend of international show matches was being broadcast out of the North American studio and, per their sponsorship agreement, the casters kept plugging State Farm every time they cut back to the analyst desk to discuss each game as it ended. In the many Reddit threads about the event, Europeans posted to ask what the hell State Farm even was and to complain about how it was “so American” to have so much branded content as part of the broadcast. Considering how European soccer broadcasts are monetized, I wouldn’t consider this type of sponsorship uniquely American, but it does provide a stellar example of how money spent on marketing can be wasted when the audience hails from all around the world.
On the other hand, maybe the sponsors have already accounted for these issues when negotiating their involvement in the league, or with specific teams. To reiterate, we don’t know how much these sponsorship deals cost. What we can observe, from the outside, is that certain sponsors, especially endemic brands like Acer, Alienware (Dell), Omen (HP), AMD, and more come back year after year, often increasing their commitments. These are savvy companies in mature markets who aren’t going to reinvest if they aren’t seeing good ROI. Even non endemic brands like Red Bull, Honda, and Audi have started sponsored League of Legends teams in North America and Europe.
However, teams may have trouble translating the interest these brands have shown into lucrative team sponsorship deals. In late 2018 on the now defunct podcast Beyond the Rift, hosted by two former League of Legends pro players turned Twitch streamers, William “Scarra” Li explained: “Everyone competes for the same sponsors. People undercut each other all the time. And there’s no figure at the top saying, ‘Stop.’” This is a place where Riot could step in, as the equivalent of a league commissioner, but so far it seems they prefer a more hands off approach.
The original hope, I believe, was that a growing league would lead to more lucrative sponsorship deals, which would eventually catch up to (inflated) team expenditures. The problem is that viewer numbers, while growing for international events, are largely stagnant in the Western domestic leagues. Despite Riot’s best efforts, including esports themed landing pages on the League of Legends client, special rewards for watching games, and other promotions, the conversion of players to watchers has stalled. Given that viewership is stagnant, the other way to boost revenue is by finding new ways to leverage the current audience for more money.
Starting this year, Riot began trying new ways to bring in revenue other than sponsorships. Central to this strategy is the rollout of esports themed items from the in-game store. The first test was with limited edition items tied to the major global events, to help bolster their prize pools. Then, it was modified and brought to the local leagues as well In the LCS and LEC, it came in the form of Team Passes that offered fans special in-game goodies tied to their favorite LCS or LEC teams which, to quote Riot, “will be available in the League of Legends in-game store … and 50% of revenues will support teams in those leagues” Critically, we don’t know how the revenue from these sales are shared. In the NFL, for example, profits from merchandising are shared equally, regardless of which team logo is on the item purchased. Is this how the Team Pass money will be distributed? Or will it be more like NFL ticket sales, where the team gets to keep 60% of the gate and must share the remaining 40%? Or will it be like baseball, where the full amount of each Team Pass sold goes directly to the team (after Riot takes their cut)? My concern is that they chose the latter, which only serves to accentuate the top heavy nature of the league. Either way, leveraging the existing audience for more money can work, as it has in other esports like Dota 2 and Rainbow 6, so with any luck it will be successful in the League of Legends world as well.
Teams are also looking for inventive ways to increase their revenues beyond sponsorship deals. 100 Thieves is the perfect example of this in the LCS. Their strategy is to position 100 Thieves as a lifestyle brand for professional video gaming, a la Tap Out for MMA or Everlast for boxing. With success, the brand will take on a life of its own, with pro-gaming in its roots for legitimacy and authenticity. This formula has been used by companies like Nike, with their line of pro player endorsed sneakers, for decades. If 100 Thieves can leverage its place in gaming culture, acquired through success in ventures like the LCS, to be the esports equivalent of Air Jordans then it will surely be worth the investment being made now to operate the team.
So what does any of that mean? Are teams losing money or not? Most probably are. However, this actually doesn’t bode as poorly for the league as you might initially think. While there is plenty of doom and gloom on sites like Reddit, when discussing esports and a possible bubble, most people believe League of Legends is one of the titles that would survive a crash. Riot is very successful at building the plane as they fly and their esports division certainly hasn’t been complacent when it comes to finding ways to bring positive cash flow to the esport. That being said, league earnings are top heavy at the moment, so the real test will be if they can find a way to bring the bottom teams up. This is very similar to what’s happening in the NBA at the moment, with fourteen of thirty teams in the red. That hasn’t stopped it from being the fastest growing traditional sport in America. Perhaps this is why there is so much NBA money in the LCS, with investments from the owners of the Milwaukee Bucks, Golden State Warriors, 76ers, Houston Rockets, New York Knicks, and Cleveland Cavaliers. These organizations know how to navigate this kind of environment.
The best wisdom I’ve found on all of this comes from Tomi Kovanen. Kovanen is a former CSGO pro player, under the nickname lurppis; co-founder of the Finnish esports organization ENCE; spent two years as an investment banking analyst at J.P. Morgan; and is currently a senior vice president at Immortals Esports Club. In other words, if anyone has a perfect Venn diagram of expertise to understand how finance and esports mix, it is Kovanen. He took to Twitter to discuss the Kotaku article on the esports bubble and, after acknowledging his own bias towards esports’ success, he shared a few tidbits from behind the curtain about how the business operates.
Most investors in esports are high net worth individuals and strategic investors. Venture capital is a relatively small portion of the market and private equity is essentially non existent. Valuations in the hundreds of millions for teams like Liquid may be high, but NBA and NHL teams are similarly valued at several multiples over their annual revenue, with similar or worse projected growth. Investors in both traditional sports and esports are focused on the long term. The best organizations are multi-team so as long as esports is growing, they are growing, even if any given team/title is stagnating or even failing. The play here isn’t for an Overwatch team or a League team, it is for a presence in esports. This also lets investors look at this period as a time of growth, even if one or two leagues are stalled, justifying their expenditures in a way they couldn’t if they were focused on only one arena.
What does this mean for the specifics of League of Legends? While the teams may seem like they are struggling now, their investors are in it for the long haul. As long as the league sustains, which it likely will as long as Riot sees it as a valuable marketing tool, most organizations will continue to see their team in the LCS or LEC as a valuable element of their esports strategy, even without a growing scene. This may mean smaller organizations that have failed to diversify will not make it, as they are tied to a title that isn’t growing rather than a broader market that is, but maybe Riot’s efforts towards improving league revenue will bail them out.
How dangerous it is to put money into a Western League team is a matter of strategy and perspective. If you are thinking about it in terms of a 5-year commitment to a single league, I think it is a bad investment. If an LCS team is one part of a diversified portfolio of esports teams, I think the popularity of the LCS and LEC provide a stability on which to base investments in infrastructure, like Team Liquid and their training center, and brand development, like 100 Thieves and their lifestyle brand, that can carry over from sport to sport as the broader esports market develops. For those kinds of investors, it is just a nice bonus if Riot succeeds at finding new ways to grow the financial opportunities, if not the viewership, of their leagues. Hell, if the MLS can be a success, paying its top players multi-million dollar contracts, with similar viewership for regular season games, and less games in the regular season (approximately 20), why not League of Legends?