League of Legends – Poster boy for esports franchising

Posted in eSports Corporate M&A and securities Employment, labor and pensions Governance, anti-bribery and corruption

With thanks to vacation scheme student Seth Lim for his assistance in preparing this blogpost.

Author: Ethan Dodd

The League of Legends (LoL) Championship Series (LCS), hosted by Riot Games, is North America’s top tier League of Legends competition. However, in 2016, teams participating in the North American (NA) LCS faced a crisis due to the unstable environment resulting from its relegation structure.

The relegation structure led to a number of serious problems, including:

  1. Lack of job security and fair compensation for players;
  2. Inability of teams to invest in players;
  3. Weak relationship between fans and the LCS;
  4. Sponsors wary of sponsoring teams that may fade into obscurity as the scene shifts;
  5. Disincentives for junior players to become professional due to uncertainty of the career path; and
  6. Losses incurred by teams caused by insufficient compensation paid by the LCS.

Under this structure, revenue for esports teams came almost exclusively from limited sponsorship deals. Without a reliable source of income from broadcasting rights or a revenue share deal with Riot Games, the game’s publisher, almost all esports teams reported losses.

Turning the game around

In 2018, Riot Games made the decision to franchise the league after a series of complaints from both esports teams and professional players themselves. Teams that participate in the NA LCS are now permanent partners selected from an application process and no longer have to face relegation. Teams that wished to partner with Riot Games paid a flat buy-in fee of US$10 million for selected teams, with US$5 million paid up front and the rest deferred.[1]

These teams entered into a revenue-sharing partnership with Riot Games with a structure consisting of a league revenue pool (LRP) that all parties contribute to and benefit from. NA LCS shares revenues from sponsorships and media rights and in turn, esports teams share a portion of their sponsorship and merchandise revenues.

Breakdown of Distribution of League Revenue Pool (LRP) [1]

  • Teams are entitled to 32.5 percent share of the LRP, with 50 percent of this pool shared equally between each team, and the other 50 percent allocated based on competition results and their contribution to viewership / fan engagement.
  • Players are entitled to 35 percent of the LRP. This pays for contracted player salaries. If NA LCS performs well, and the player portion is above their combined salaries, the difference will be shared with players.
  • Riot Games is entitled to the remaining 32.5 percent for broadcast production, live events and running the league.

A fair model

1. esports teams’ profitability

The franchising model has brought benefits for teams and the league by introducing transparency in to the inner workings of the league. This transparency was a key step for the overall growth of the LCS with esports teams investing heavily into their infrastructure and high profile sponsors signing deals with an eye on long-term success. This also led to Riot Games finalizing numerous multi-year partnerships for the LCS that have significant amounts attached. Consequently, this injection of cash transformed the LCS into a fully-fledged industry with a degree of stability that is built to last.

2. Players’ salary and development

In the relegation model, the average NA LCS salaries hovered at US$105,000 in 2017. After the big shift in the league structure when franchising occurred, player salaries more than doubled on average shooting up to US$320,000, with over 70 percent of the players performing on multi-year contracts.[2]

In addition, Riot Games has started a player development platform in the form of an Academy league to groom developing junior players. Under the relegation system, aspiring professional players were placed in an incredibly difficult and stressful environment. If the player did not win at a high level within the first few months, it was hard to find the financial support needed to continue to stay competitive and improve. Under the franchising model, the path to a viable and sustainable career as a professional player is clearly set out so that professionals can grow into star players and ultimately build a strong bond with the esports team brand.

3. Player protection – employment contracts

As part of the new franchising model, Riot Games introduced minimum contract requirements for professional players aimed to provide professional players and team organizations with long-term security and outline the requirements for both parties. Riot Games remains the most active of the major esports developers in developing protection for players.

a. Maximum contract length of three years

Riot Games’ first requirement is that no player contracts are to last for more than three years. They state this is a long enough time for teams to fairly lock down their star players, but not so long as to unfairly deprive them of moving teams or renegotiating terms, especially when teams have no responsibility to pay players or keep them on an active roster.

b. No 'non-compete' clauses

Riot Games’ second requirement is an express prohibition on ‘non-compete’ clauses. A non-compete clause normally prevents a player from joining another team once his/her contract with the old team expires or is terminated, usually for a limited time period. In the esports context, this potentially stops star players from taking strategies built by their esports team to competitors, thus depriving the original team of a competitive advantage. Riot Games takes the view that restricting players from joining another team once their contract expires is unfair and risks the player missing on key months of their career. This is a strong move in favor of players who often would not have the resources to appoint lawyers to advise on the relevance of such clauses in their contracts.

c. More termination rights for players

Riot Games allows players to terminate their contract if their esports team has broken the rules of the LCS. If a team is removed from the LCS because of rule violation, they now cannot block their players from joining other teams. This gives greater protection to players by preventing them from being locked into contracts for teams that cannot compete in the league.

Conclusion

Franchising is designed to create longevity. It may be argued that this is a system where poor performance isn’t punished, but in the case of LoL, it has benefited both esports teams and players. The top LoL leagues in Europe and China have followed this approach in hopes of achieving the same result.

The franchising model, however, is not without its drawbacks – the US$10 million franchise price tag could be a barrier to entry for many organisations and the EG NALCS has been criticised for some heavy handed rulings in the past (e.g. Echo Fox’s outright dismissal from the NALCS this year).  It is also by no means the only means of running a successful esports league, Data 2 and CS GO’s relegation models work as well.  However, some companies looking to become esports investors or sponsors may find comfort and security in its stability.

For more information on esports please contact Alex Wills.

 

[1] https://liquipedia.net/leagueoflegends/NA_LCS_Franchising#Announcement

[2] https://www.forbes.com/sites/darrenheitner/2018/05/02/a-look-inside-riot-games-from-320000-player-salaries-to-using-esports-as-a-catalyst-for-sales/#44cb10752c6a

[1] https://esportsobserver.com/na-lcs-franchising-plans/

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