The Twitch DMCA Crackdown and You

In the past few days a huge number of Twitch streamers have reported getting hit with Digital Millennium Copyright Act (DMCA) claims by the Record Industry Association of America (RIAA) for unlicensed use of music on their channels. Twitch has confirmed that they’ve been subject to a “mass” DMCA claim, the first of its kind they have ever received.

Twitch Repeat Infringer
While until now many streamers got by using copyrighted music without any issues, it looks like the RIAA has gotten more serious about policing this stuff.

It’s not clear why this is happening now, but I like world’s-most-famous-game-lawyer Ryan Morrison’s theory that this all came about because a bunch of music industry lawyers stuck at home during the quarantine heard copyrighted music on Twitch streams their kids were watching.

Morrison Tweet

Whatever the actual reason behind this new crackdown may be, I thought I would put this post together providing some DMCA basics for anyone interested in the legal issues behind the takedown notices, and what they can do in response.

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What is the DMCA?

Legislation passed by the US government 22 years ago governing how copyright works on the internet. The most important thing about it for our purposes is its “safe harbor”  provisions.

These provisions basically protect sites that allow users to upload and share content with others, like Twitch, from liability for copyright infringement. Without these provisions, in theory, whenever someone uploaded infringing content to Twitch, the site could get sued directly for copyright infringement in respect to that content.

Given how much copyright infringing material gets uploaded to Twitch on a daily basis, without these provisions it would take approximately 0.24536 seconds for Twitch to get sued into oblivion, so this safe harbor protection is absolutely crucial in order for Twitch (along with about half of the sites on the internet) to continue functioning.

In order to keep this protection, however, sites like Twitch have to comply with the DMCA’s “notice and take down” system, which basically means responding to DMCA notices from rights holders by removing infringing content, and taking action against ‘repeat infringers.’

That’s basically the TL:DR for the the DMCA safe harbor system, and the ultimate reason why, if you’re a streamer, you may have woken up today with a strike on your account for playing a random 50 Cent song on your stream two years ago.

Is this Twitch’s fault?

Not really. As discussed, Twitch has no real choice in the matter. If they get a takedown notice they have to enforce it or lose their safe harbor DMCA protection.

It’s also worth noting here that Twitch has no role in reviewing a DMCA takedown notice and determining whether it’s legitimate or not. If they get a notice they have to enforce it. Any issue regarding whether the notice is valid is between the rights holder and the uploader (more on that later). The only thing Twitch can do when it gets a DMCA notice is take down the content.

Please keep this in mind when talking to Twitch staff (who I would guess are probably as angry as you right about now about having to deal with this). This stuff is mandated by federal law, it’s not some internal Twitch policy they can waive, so they are not lying to you if they tell you there’s nothing they can do.

So if I get a DMCA notice against my channel what can I do?

You can send a DMCA counter-notice to Twitch. A counter-notice basically requires you to declare, under penalty of perjury, that you have a good faith belief that your content was wrongfully removed. If you send this notice, Twitch has to re-instate the content within 10-14 days … unless the rights holder files a lawsuit against you (that’s a pretty big “unless”).

Filing a counter-notice can be dangerous because it basically puts the rights holder in a position where it has to sue you if it wants to get the content taken down again. I suppose it’s possible that the rights holder may not want to deal with the expense or bad PR of suing you, and will essentially let the matter go, but, generally speaking, trying to play a game of legal chicken against a giant multinational corporation with limitless legal resources can be a very bad idea, so please, PLEASE think carefully and get some legal advice before filing a DMCA counter-notice.

What about fair use?

Unfortunately, just like it doesn’t render fan games legal, fair use isn’t going to be of much practical use to anyone in this situation.

First, while there are some potentially helpful decisions are out there, there’s no case law that I’m aware of that unambiguously establishes that use of copyrighted music on a stream constitutes fair use. Also, if someone is making significant revenue from from the stream at issue, I expect making that argument would be an uphill struggle.

Second, fair use is a legal defense that only comes into play after infringement is established. Thus, the only time it would really become an issue is if you’ve already been sued, and since the RIAA is probably not going to take an enlightened and charitable approach to conceding this kind of issue, if you wanted to establish fair use you would probably have to spend years and God knows how much in legal fees proving it in court. At that point, even if you win….well, google “pyrrhic victory.”

What if I have a license for the song from Spotify?

This doesn’t matter. Licenses from Spotify or other streaming music providers are generally only for personal use. They don’t let you use the song for a commercial purpose or play it for the general public, which means you can’t use it on your stream.

Fun fact: you also don’t have a license to use songs on a game’s actual soundtrack for commercial/streaming purposes. That means that if you play a game on stream you could potentially get a DMCA notice because of the game’s own soundtrack. Such is the world we live in.

But I’m not based in the US, does the DMCA affect me?

Yes it does. The DMCA takedown requests are sent to Twitch, not you, and Twitch is subject to US law. Twitch has to take down the allegedly infringing content regardless of where the owner of the account at issue lives, thus living outside the US basically makes no difference for these purposes.

So there’s not much I can do?

Not really, short of writing your congressman.

A lot of people have written about how the system is flawed and overdue for a rework, especially since it was put into place 22 years ago (basically forever in internet years), but until that happens there’s not much way around its requirements. Unfortunately, in the words of Donald Rumsfeld, you work with the DMCA you have, not the DMCA you want. I guess one thing to keep in mind is that, imperfect as it may be, if someone ever started using your content without your consent, you’d want something like the DMCA in place too.

So what if I want to use music on my streams?

There are lost of services out there that offer fully-licensed, legal music specifically aimed at streamers. These services aren’t going to have the same songs you hear on the radio, but often times the music is a decent selection, and a hell of a lot better than nothing. I’m going to plug Vancouver’s own Monstercat here, who offer a plan letting you use most of their library for streaming purposes for the not-unreasonable sum of $5/month.

DISCLAIMER: Nothing in this article creates a solicitor-client relationship between us or should be interpreted as legal advice. Any legal information provided in this article is a statement of general principles only, and the application of the law to a particular situation is  something that needs to be considered in light of each individual’s specific circumstances.

The LEC “tax scandal” and the distinction between employees and contractors.

Recently a YouTube video by Richard Wells, founder of H2K gaming, talking about a LEC “Tax Scandal” has been making the rounds:

The video opens up with some ominous music and allegations that this would be “the biggest shitstorm of all shitstorms to hit League of Legends,” so I got my popcorn ready expecting to hear hear some shady, shady stuff. Unfortunately, I was a little disappointed. The TL:DR of the video is this:

Back in 2013, when the LEC was just getting off the ground, Riot provided teams joining the league with a template player contract they could elect to use. The template stated the players were independent contractors, not employees. All the teams in the LEC used the template, and thus may have misclassified their players as independent contractors for a few years. As a result, they may now be liable for failing to remit taxes on what they paid the players to the German government.

To understand why this is an issue we need to go into some basics on the distinction between employees and independent contractors. The general idea is that independent contractors are more like ‘outside hired help’ and a company has fewer obligations towards them than they do to their employees. A few of the key differences between the two in most jurisdictions are:

  • Employees are subject to employment standards legislation (covering things like minimum wages, overtime, sick leave, occupational health and safety, etc.). Contractors are not.
  • Employees are generally entitled to participate in any benefit plan the company offers. Contractors are not.
  • Employees are (in some jurisdictions) entitled to severance if they are let go by the company. Contractors are not.

And, most important for our purposes:

  • Companies generally withhold employees’ taxes on each paycheque and remit the taxes (as well as deductions for things like employment insurance, contributions to programs like social security, etc.) directly to the government. With contractors they do not. Companies pay contractors a lump sum for their services, without any deductions, then it’s on the contractor to pay their own taxes and other remittances.

As you might expect, generally companies prefer to hire workers as contractors instead of employees, as doing so places fewer obligations on them. Of course, this is not as simple as just drafting up an agreement that calls someone a contractor (if it was, no one would be an employee). Regardless of what a legal agreement may say, the authorities will generally look at the nature of the actual relationship between a company and a worker to determine if a worker is contractor or an employee. The factors they look at vary from jurisdiction to jurisdiction, but they include things like:

  • how much control the company has over the worker’s activities, and how integrated they are in the company’s operations;
  • whether the worker is financially dependent on the company (i.e. is this their only income source or one of many sources);
  • does the work they perform fall within the scope of work generally performed by the company; and
  • does the worker provide their own equipment or have their own independent chance of profit/risk of loss;

The distinction is not always easy to make. If a company hires a SEO consultant to do a few hours of work a week on their site they’re probably a contractor. If they hire them full-time as the company’s head of marketing, they’re probably an employee.  But what if they hire them to work from home for 20/h a week and they continue to work with other clients on their own time? The answer in situations like these gets a bit murkier. That’s why a lot of the time the issue of whether someone is an employee or a contractor is not clear-cut, and needs to be determined on a case-by-case basis.

So what’s a company to do if it doesn’t know whether a worker should be classified as a contractor or employee? Well, in theory, they should look at the case law and the details of the specific relationship with that worker and try their best to make sure the classification for that worker is correct. In practice, they often err on the side of calling them contractors. After all, there’s no real way to know for sure until the tax authorities come knocking, and often the authorities don’t in fact come knocking in any event, so they take the risk.

What happens if a company is wrong, and classifies a worker as a contractor when they should have been an employee? The laws vary but in many jurisdictions they have to go back and remit everything they failed to pay, including back-taxes, contributions to things like employment insurance, national pension plans like social security, etc, as well as pay some kind of penalty.  It looks like the LEC teams may have, knowingly or unknowingly, taken that risk here, and if the German tax authorities come calling and determine their players were employees they could potentially be looking at some liability in line with the above (though I can’t really give specific info on German law).

With that context out of the way, I had a look at the video and there’s a few points I think are worth making.

1. This kind of thing happens all the time.

As discussed above, companies classifying workers as contractors even though they’re not actually sure they are is not anything new, either in esports or in other fields. Indeed, most esports player contracts I’ve seen classify players as contractors. The obligations associated with hiring someone as an employee are often too onerous, especially for new orgs, and in many cases the relationship between the company and player is defensible as an independent contractor relationship. The issue of whether esports athletes are independent contractors is actually still something that’s being discussed among lawyer-types. The Esports Bar Association even wrote about it in their inaugural journal.

The fact that something is common practice doesn’t make it right, of course, but it’s not like anyone in the LEC was fixing matches, doctoring financial records or sneaking into offices after-hours shredding incriminating documents. Yes, if the teams were wrong about classifying players as contractors they may be looking at some penalties from the German tax authorities, but to me this doesn’t really qualify as some deep, dark secret that would be “talked about only in hushed tones, behind closed doors” as the video states. To be honest with you, I would have been much more surprised if the LEC’s players weren’t classified as independent contractors, at least in the league’s early days.

2. The players’ status is not as clear-cut as the video claims.

The video states pretty unequivocally that if someone works in Germany for 6 months and 30+ hours a week they are considered an employee under German law. While I’m obviously not a German lawyer, that’s not correct as far as I understand. As set out by a memo Richard had his own lawyer put together, the courts in Germany, like the courts in most jurisdictions, take a more holistic approach to determining whether someone is a contractor, looking at a wide number of factors in keeping with the discussion above. It looks like 6 months/30+ hours per week criteria applies to whether someone is a German resident for tax purposes and needs to file taxes in Germany, but this isn’t relevant to whether they’re an employee or a contractor.

This isn’t to say that the LEC players aren’t employees – there’s a good case to be made that they are – but no German government body has made a decision on the issue. Richard has provided a lawyer’s opinion that states that they are, but an opinion is just that – an opinion. I’m sure Riot’s lawyers would be happy to provide an opinion that states the opposite. Until there’s an actual decision on this by a court or administrative body, no one really knows for sure. Thus, the video is overstating things just a weeeeee tiny bit when it states that it’s been “confirmed that the contracts are completely illegal.”

3. Some of the blame for this falls on Riot.

Riot put together the template contract that caused this whole problem, and it appears from the video that when providing it to the teams they didn’t advise them about the finer points of the employer/independent contractor distinction, and the risks associated with designating someone as a contractor.

Of course, the teams could have gotten their own legal advice, but anytime you’re preparing a legal document for someone else to potentially use, even if the document is just for “informational purposes,” that’s a bit of a touchy situation. If the German tax authorities come after the LEC teams for this, I wouldn’t hold it against them if they turn towards Riot and ask them why they’re in this mess because of their contract template. If they do, I don’t know how credible it’s going to be for Riot to say “well, we never meant for you to actually use the things.”

Whether Riot could actually be legally liable to the teams over this I don’t know, but this is certainly not a good look on them. They were the proverbial ‘adults in the room’ when the league was starting up, and had legal resources that dwarfed those of the LEC teams.  If there’s anyone who should have made sure this issue was handled at that time, it’s them.

TL:DR

So is this a big deal? Well it’s potentially a deal – we’ll see if this gets any media attention and if the German tax authorities investigate further as a result. However, it wouldn’t surprise me if this was something they already looked at. Remember, all the players would (or should) be filing individual tax returns with the German government as independent contractors, so it’s not like this is some secret no one but the teams knew about until now.

However, while this may be a problem for the LEC, is it a massive scandal and a “Nuke dropped on the LEC/Riot’s head” as Rich tweeted recently? In my opinion at least, probably not.

 

What gaming influencers need to know about Canada’s new influencer marketing guidelines

Recently the Canadian Competition Bureau announced it would be paying closer attention to enforcement of the Competition Act’s deceptive advertising provisions as their relate to online influencers. If you’re a streamer, Youtuber or other gaming influencer, these laws apply to you, so I put together this quick FAQ to explain the situation:

Wait, so there’s laws about this stuff?

Yup.

Are they new laws?

Nope. The Canadian Competition Act has general provisions against deceptive marketing practices. The laws have been around for decades, but they apply in the context of influencer marketing the same way they do to everything else.

Ok, so what’s changed?

On December 19, 2019 Canada’s Competition Bureau (who enforces the Competition Act) sent around 100 Canadian marketing agencies a letter warning them that they would be monitoring compliance with these laws more closely in the context of influencer marketing.

At the same time, the Competition Bureau also released new guidelines for influencer marketing. These guidelines don’t have the force of law, but they’re a statement about how the Competition Bureau interprets the law, and since it’s the Bureau that will be going after anyone potentially breaching these laws, it’s good to be aware of how they look at things.

Do the laws and guidelines apply to influencers or just ad agencies?

They apply to influencers too. While the Competition Bureau’s letters were sent to advertising agencies, the laws apply to anyone who is involved in promoting a product, including influencers themselves.

Do they apply to me even if I’m a small influencer?

Yup. There is no minimum threshold in terms of views, followers, etc. that someone needs to meet in to be covered by these laws, so even if you’re a small influencer they apply to you. A good rule of thumb is that if someone’s paying you to promote something, you’re big enough to be covered by these laws.

So what do I have to do?

The main purpose of the new guidelines is to make sure that people watching your content are aware that there’s a commercial incentive for you to promote a product, so they can make an informed decision about buying it. In terms what you have to do to comply, it basically boils down to the following:

1. If you’ve got a material connection with a sponsor you need to disclose that. A material connection generally means being paid to promote a product (either in cash, or through free product, discounts, or anything else).  However, it can also mean other relationships that would affect your objectivity, such as you or a family member owning part of the company whose products are being promoted.

2. The disclosure should be clear. Some general principles to keep in mind on this are:

• It should  be prominent. You shouldn’t put the disclosure anywhere that it would be difficult to find, such as burying it somewhere in your bio where people are likely to miss it. Generally speaking, if viewers can access your content without seeing the disclosure, then the disclosure might not be adequate.

• It can’t be ambiguous. While there’s no “magic words” you need to use, it needs to be clear that you have a material connection with your sponsor. It’s not enough to simply link to your sponsor’s site. Generally speaking, examples of what may be compliant are using the “#ad” or “#sponsored” hashtag or giving your sponsor a quick thank you for sponsoring your video when it begins.

• It should to be made in each of your videos/posts, across all platforms. Making the disclosure only in your first video/post for a sponsor, or only on one social media platform, is not enough. You need to disclose each time you post new content for that sponsor, and on every platform you post on.

3. Any testimonials/reviews must be based on experience. While this one’s less likely to apply to gaming influencers, if you do reviews or make any claims about a product, they should be based on your own first-hand experience with the product. You should avoid making general claims about a product that may be suggested by the advertiser if you can’t verify them through your own experience.

Canadian influencer Kripparian will need to disclose that Blizzard gave him that sweet mug stein.

So what happens if I breach these laws?

In theory, fines of up to $750,000 (or $10 million for corporations) and even jail time. In practice, any penalties an influencer gets hit with would likely be well, well below that.

One thing to consider in practice though, is that if the Competition Bureau starts taking an issue with what you’re doing, even if no penalty is ultimately imposed on you, the effort/paperwork (and potential legal expenses) of responding to them are probably not something you want to deal with.

Have any influencers been hit with a fine so far?

Not to my knowledge. At this point the Competition Bureau has just sent letters out as a warning without actually fining or prosecuting anyone. A similar push is under way in the US, where the Federal Trade Commission (who enforces a deceptive marketing regime similar to the Competition Act) has sent multiple warning letters to influencers about their practices, however so far no major fines have been imposed in the US either to my knowledge (though in 2017 the FTC did settle a complaint against two influencers who operated a CS:GO skins betting site for promoting the site without also disclosing that they owned a part of it).

Given the explosive growth of influencer marketing within and outside video games in the last few years, now that the “fair warning” letters have gone out, it’s definitely possible that repeat or serious violations of the guidelines may lead to more direct enforcement action by the Competition Bureau, as it looks to show that it’s being proactive about enforcing this stuff. Thus, these guidelines are worth keeping in mind.

DISCLAIMER: Nothing in this article creates a solicitor-client relationship between us or should be interpreted as legal advice. Any legal information provided in this article is a statement of general principles only, and the application of the law to a particular situation is  something that needs to be considered in light of each individual’s specific circumstances.

I read Astralis’ prospectus so you don’t have to.

Allright I more like skimmed it, but still.

As many of you may know, Danish esports organisation Astralis, primarily known for its Counterstrike team, was (arguably)* the first esports team in the world to do an IPO, listing on a Danish stock exchange on December 9 of 2019.

*[EDIT: Canadian team Luminosity also has a claim to the title of first esports team to go public. Luminosity was acquired by Enthusiast Gaming, another Canadian company that subsequently went public in October, 2019. The difference is that Luminosity went public as part of a larger entity (Enthusiast also has a large content/advertising business) while Astralis represents the first time a team has gone public directly. Your mileage may vary on who should be considered first.]

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Since the IPO the stock hasn’t been doing particularly great. The company went public at 8.95 Danish Krone (DKK) per share (equal to around $1.34 USD). The share price quickly fell by one third to a low of around 6.00 DKK per share a week later. It has since rebounded somewhat , and the company is currently trading at around 7.30 DKK per share, implying a value of 400million DKK/$60 million USD.

As part of the listing, the company had to file a 186-page prospectus giving some details on its financial situation. I had a look through this document, here’s a few things I found interesting:

The team is not profitable, not even close.

For the first 9 months of 2019, the team brought in roughly $4.3 million USD in revenue (all figures are converted to USD from this point on for ease of reading).

Its’ staffing costs (primarily player salaries) alone over that same period exceeded that, at $4.9 million USD. When you factor in all its expenses and depreciation of its assets, the team’s total costs over this period were $9.3 million USD, leaving them with an operating loss of almost $5 million USD over that 9 month period.

Numbers for the last year were not as bad, with the team losing *only* $900k USD on similar revenue numbers. The team hasn’t turned a profit at any time in its history.

The team doesn’t expect to grow through prize money

For the first 9 months of 2019, the team’s revenue broke down as follows:

Sponsorships: $2,175,000 USD (50%)

Prize Money: $1,710,000 USD (40%)

Merchandise: $495,000 USD (10%)

It’s notable that Astralis is not too big on prize money as long-term source of revenue growth, given that prize revenue is inconsistent, and the majority of it goes to the players anyway.  These two quotes from prospectus summarize their approach to the issue:

Prize money is potentially highly volatile as it depends on the performance of the individual team brand. Prize money won is generally offset 50-100% in costs as players have claims to prize money or performance bonuses. Astralis Group is projecting no growth in prize money revenue for the coming years.

With the introduction of structured league formats, like the LEC for League of Legends, the portion of overall revenue dedicated to prize money has been seen to go down. This is due to players and teams alike favouring stable revenue streams, like those deriving from league membership participation, over the potential volatility of prize money tied to performance. Astralis Group thus takes a conservative view of no prize money revenue growth in the next years.

The points above are more than reasonable, and this approach is probably a sensible one.

It’s worth noting here that Astralis is legitimately one of the best CS:GO teams in the world,  and as such probably has a better shot at earing prize money than most teams. The fact that prize money doesn’t really figure into its plans for growth moving forward says a lot about the importance (or lack thereof) of prize money in the esports ecosystem as a whole.

Sponsorships and league revenue sharing payments are the team’s future

So where does the team expect it’s revenue growth to come from? We’ve already covered prize money above. Merchandising revenue is also fairly limited at $500k USD in the first 9 months of 2019, and the team doesn’t expect it to grow like gangbusters anytime soon. Streaming and other more indirect sources of revenue are not even discussed in the prospectus.

With all of the above revenue sources crossed off, that basically leaves the team with two potential areas for growth: (1) sponsorships and (2) revenue sharing payments from participating in leagues. These two revenue streams, which basically boil down to advertising dollars (whether directly through sponsorships, or indirectly through league revenue share payments) are what the team is counting on for future.

The team estimates that in 2020 sponsorship revenue will double, accounting for 70% of its non-prize-money revenue. Revenue sharing payments, through the team’s participation in leagues like the LCS,  are expected to make up the majority of the team’s remaining non-prize-money revenue. The team (maybe optimistically) expects these payments to increase by 40%-100% in the coming year as leagues bring in more money from advertisers and media rights.

TL:DR

The team is losing money, and will probably continue to do so for the foreseeable future, until the cavalry, in the form of advertising dollars, comes to the rescue in sufficient numbers to turn the team into a healthy, profitable enterprise.

Unless, of course, it runs out of money first.

The team’s situation probably more or less mirrors the entire esports industry at this point (publishers excluded). The bet that investors in Astralis (and most likely a lot of other organisations) are being asked to make is that the particular organisation they’re investing in has the resources necessary to survive until the cavalry finally gets here. Whether Astralis will make it or not remains to be seen, put it’s probably a pretty good bet that, in the industry as a whole, not all the current major orgs will live long enough to hear the sound of the trumpets.

Data (Australis financials for the past 3 years):

Marius Adomnica | The Patch Notes

6 Things I Learned From Luminosity’s Financial Statements

Earlier this year, Luminosity Gaming, one of Canada’s largest esports orgs, was acquired by a company affiliated with the Aquilini family (owners of the Overwatch League’s Vancouver Titans, and the new Seattle CoD franchise), as part of a larger transaction pursuant to which Enthusiast Gaming (TSX:V:EGLX), another company affiliated with the Aquilinis, went public on Canada’s TSX Venture stock exchange.

As part of the transaction, Luminosity had to publicly disclose financial information relating to its operations, including audited financial statements for the team, allowing the public a rare look inside the financials of an esports organisation. I’ve had a look through these documents, here’s a few things I found interesting:


1. Luminosity was sold for $21.5 Million (Canadian).

In February of 2019, the 100% owner of Luminosity, Steve Maida, agreed to sell the team for $3.5 million in cash ($2 million of which was deffered), as well as what would become 7.5 million shares in the new Enthusiast Gaming. These shares were deemed to be worth $18 million at the time of the sale (at Enthusiast’s current market price of $2.05 per share they are currently worth about $15 million), meaning he essentially received a total of $21.5 million CAD for the team in cash and stock.

Given that Luminosity was founded in 2015, that’s not bad for four years work by Maida, but well short of the valuations in the hundreds of millions for larger teams in the space on the most recent Forbes list.

It’s also worth noting that this $21.5 million sale price represents about 5.5x Luminosity’s 2018 revenue of $3.8 million. This is much less than the 10x – 20x multipliers used for most of the teams of the Forbes list. Again this indicates that, even accounting for the higher brand value of those orgs, Forbes may be overestimating what the teams on its list would sell for if they actually went on the market.

2. Streaming Can Be a Big Income Earner…

In 2018, streaming was by far the biggest source of cash for the team, accounting for $2.3 million in revenue, or over 60% of the team’s total revenue of $3.8 million.

It’s notable that the 2018 revenue number represented a huge spike over what the team brought in for streaming revenue in 2016 ($300k) and 2017 ($600k). This may have had something to do with the fact that from early 2017 until August 2018 Ninja was on Luminosity’s roster. It makes sense that having the biggest content creator in the world on your roster, right as he was blowing up in late 2017/early 2018, would help your streaming revenue numbers.

The terms of Luminosity’s deal with Ninja are not set out in the financials, and his name doesn’t appear anywhere in the materials released to the public. There is only a cryptic reference to the fact that “The contract from which the streaming revenue is generated expired in Q1 2019 and is currently being renegotiated by the Company.” Whether this means the contract with Ninja (who is reported to have left Luminosity in August 2018) or a completely different contract is unknown.

3. …But Sponsorships and Merch Often Aren’t…

In that same year (2018) sponsorship revenue for Luminosity was a fairly modest $200k, while merch sales were only $14k. These numbers are surprisingly low, especially for an org that had Ninja on its roster, and would be concerning to me if I was an investor in the esports space.

Of course, Luminosity was a relatively small org, and I’d be curious to see what these numbers look like for an org whose strategy is more focused on developing their brand and merch sales, like 100 Thieves.

4. …Except When You Win

In 2016, Luminosity’s CS:GO team won the MLG Columbus Major, a big accomplishment at that time. This caused a huge spike in both sponsorship revenue and merch sales. Sponsorship revenue was $850k in 2016 (compared to $350k for 2017 and $200k for 2018) and merch revenue was $230k in 2016 (compared to $60k in 2017 and $14k in 2018).

Luminosity itself confirmed that the CS:GO victory was behind these spikes, stating in the analysis accompanying the financials that: “The CS:GO team’s victory at the MLG Major Championship in Columbus in 2016 resulted in significantly increased sponsorship revenue for that year/sales of the Company’s merchandise.

It looks like, just like with traditional sports, in esports results on the field of play can drive financial results. Indeed, given that Luminosity was founded in 2015 and was just getting off the ground at the time of its MLG victory, you have to wonder if the team would be where it is now if its’ CS:GO players’ reflexes had been just a little bit slower at that major in 2016.

5. League Fees Can Be Surprisingly Lucrative

In 2018 the team brought in approximately $500k in “League Fees.” As far as I can tell, the only leagues that Luminosity’s teams participated in during 2018 were the ESL Pro League for CS:GO and the CoD World League operated by Activision/MLG. I’m not sure if league fees for ESL or the CoD league have been made public anywhere else, but if they’re on the order of $500k per year then that’s pretty surprising.

6. The Team Was Profitable

The team’s primary costs between 2016 and 2018 were payments to “contractors,” presumably referring to player salaries and other related expenses. These were between $2 million and $3 million per year. Over the three year period from 2016 to 2018, these costs covered just under 75% of Luminosity’s total revenue.

After accounting for these costs, as well as office overhead expenses and travel (which were between $200k and $700k per year), the team earned a profit of $185k in 2018, suffered a small loss of $23k in 2017 and made a larger profit of $846k in 2016 (the year of its MLG victory).

While the team was in the black over this period, you can’t really say it was wildly profitable. If we ignore the spike in profits caused by its MLG victory in 2016, it brought in $160k in profits on $6.5 million in revenue over 2017 and 2018. While just the fact that it was profitable during this period is an accomplishment in itself, those numbers probably aren’t going to make potential investors do backflips, especially given that the team’s revenue wasn’t increasing exponentially over this period or anything like that.

You also have to consider that these numbers would probably have looked a lot worse had the team not had two pretty significant (and not necessarily replicable) strokes of luck during this period, namely (1) having Ninja on its roster as he was becoming the most famous streamer in the world, and (2) winning the 2016 MLG CS:GO major (calling a tournament victory luck may be a bit disingenuous of course, but I think it’s hard to deny that even if you’re the best-prepared and most skilled team in the world, you’re not winning anything 100% of the time, and luck is a significant factor in results).  A similar org without these two “lucky breaks” may have bled money and gone under during this same three-year period, rather than being sold for $21.5 million.

All in all, this is probably more evidence that, despite all the rosy projections for the industry’s future, people are still figuring out how to make money from esports, and this is not an easy business to be in on a day-to-day basis for most orgs (especially the ones that aren’t backed by tens of millions in venture funding) nor it currently the cash cow many expect it to be.

Data:

Selected excerpts from the financials are set out below:

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As well as a pie chart showing the breakdown of the team’s revenue sources for the 2016 to 2018 period:

Should we be talking less about esports and more about streaming?

As I was sitting back eating my popcorn and watching the latest Twitter debate regarding the Tfue/FaZe Clan saga a couple of days ago, this tweet from Tempo Storm owner Reynad caught my eye:

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Reynad was making a point about esports salaries for mediocre players, but what I found interesting was that he used “players with under 50k followers” not “players with X esports accomplishment” as the proxy for what constitutes a mediocre player. The main barometer by which Reynad judged a player’s worth to his organisation wasn’t how many tournament wins they have or how much prize money they bring in, but how many Twitch followers they have.

And you know what, Reynad’s probably right. In a business that runs primarily on sponsorship and advertising dollars, a player’s ability to draw eyeballs on Twitch is probably far more important to a team’s bottom line than that player’s competitive gaming accomplishments.

While being good at the game is an important part of what they do, for a lot of players (or should I say personalities) in gaming, especially the really big names like Ninja and Tfue, competing successfully in an esports setting comes a distant second to building their brand and getting viewers for their streams, where they make their real money.

This is fundamentally different from traditional sports, where on-field success is a pre-requisite to marketing success. LeBron James is the most marketable basketball player in the world because he’s generally acknowledged to be the best basketball player in the world. If he didn’t win a bunch of championships and put up ridiculous stats, he wouldn’t be the marketing juggernaut he is.

That’s not true for someone like Ninja, for instance, who is not by any means the best Fortnite player in the world (don’t get me wrong, he’s very good, but there’s a lot of players out there who are as good or better than him and more accomplished in competitive Fortnite), but is nonetheless by far the most famous and marketable name in pro gaming. Unlike LeBron, guys like Ninja and Tfue didn’t get where they are by succeeding at their chosen (e)sport competitively, but by being good at building their brand and providing an entertainment product to their viewers.

Indeed, aside celebrity pro-am tournaments that help get his name out there, Ninja by his own admission does not participate in esports on at a high level because the practice would interfere with his streaming schedule. Similarly, Tfue recently announced he will no longer be participating in competitive Fortnite because he makes more than enough money in streaming and content creation. If I had to come up with a traditional sports equivalent to this, it would be LeBron James quitting the NBA in order to focus on putting up YouTube videos of himself playing basketball against random people on street courts across the country. Not going to happen.

Indeed, the most successful personalities in gaming today have a lot more in common with talk show hosts or (*sigh*) social media influencers than professional athletes. They provide a nightly entertainment product and try to maximize their audience. Competition, of the kind we associate with traditional sports (or esports), doesn’t figure much into what they do.

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The future looking us in the eyes.

I think this is something that needs to be more widely acknowledged, as it’s key to the direction the industry will be heading in the coming years.

It’s been pretty clear for a while that there’s a lot of people out there who like to watch other people play video games, and we’re basically seeing a new form of entertainment evolve based on this fact. Until recently, though, I think the general assumption has been that the main way people would consume gaming content would be through watching people play competitively in “traditional” esports tournaments and the like.

However it’s looking more and more like that’s not true (for instance, Ninja had three times as many viewer hours watched on his Twitch channel last year as the entire Overwatch League) and that in the future the majority of the viewer hours, and thus money and attention, will go to the streaming and content generation side of the industry, rather than the pure competitive esports side.

All of this is to say is that maybe we should stop talking so much about the esports industry and start talking more about the “digital content creation industry” or some such, of which esports is a subset, as that certainly looks to be the way the wind is blowing. 

Shared Channels – A Solution To Streamer Burnout?

Much like ice cream taste tester and TV watcher, video game streamer is one of those jobs that seems great in theory, but can turn out to be not-so-great in practice. Sure, you get to play video games all day, but when “all day” literally means “all day, every day,” like it does for many streamers, the demands of the job places on your life can start to weigh pretty heavy.

On one hand there’s the health consequences. If sitting is the new smoking, then streamers are probably doing a few packs’ worth of damage to their bodies every day with their lifestyle.  One streamer attributes his heart surgery to damage to his heart incurred through many sedentary years spent working on his streaming and Youtubing career. Several streamers are reported to have suffered heart attacks while streaming. Repetitive stress injuries and severe weight gain are common.

In addition to the physical health issues, streaming all day with no breaks doesn’t really leave you much room to focus on anything else in your life. It can destroy relationships, leave streamers isolated and burnt out, and seriously harm their mental heath.

The bottom line is that sitting in a chair for 10-14 hours a day, 7 days per week, while subsisting mainly energy drinks and junk food is not a healthy way to spend your life, physically or mentally, and not something anyone can expect to do sustainably for years on end, regardless of how young and healthy they may otherwise be. It’s probably fair to say that, for most streamers, the punishing schedule involved is the worst thing about the job.

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Feeling tired?

So why do streamers put themselves through this? The most commonly cited answer is that that’s what it takes to be successful. Being online as much as possible is what’s necessary to build and keep an audience. Taking even one or two days off can lead to significant drops in subscribers and other audience metrics, and make especially smaller streamers trying to grow their channel feeling like they’ve thrown away weeks or months of progress. That’s why “always be streaming” has turned into a well-known, if unfortunate mantra for many streamers. Even larger streamers aren’t immune. Ninja famously lost 40,000 subscribers when he took two days off to go to E3.

So it’s pretty clear what the problem is – streaming places unhealthy, potentially unsustainable pressures on your life. It’s also clear what the reason for the problem is – streamers need to be online as much as possible to be successful.

With these two facts in mind, I’m left wondering why streamers haven’t tried what seems like a reasonable solution: Instead of streaming separately, a few streamers could join together and share a channel and essentially stream in shifts. When one streamer logs off, another logs on. They could  work out a reasonable schedule that would allow them to keep the channel up as much as they want (even 24/7 depending on the number of streamers and their time zones), while at the same time allowing each of them to some flexibility in order to avoid the grueling schedule solo streaming requires.

The synergies involved with multiple streamers may also actually help the channel overall. Fans of one streamer may get introduced to the others on his channel, and become fans of both. Also, given that such a channel could theoretically be on 24/7,  it would have a significant advantage over solo streamers’ channels, as viewers would come to know it as a place they can tune in to catch a stream of their game of choice pretty much anytime.

I’m sure there’s a lot of obstacles to this working –  this setup would become more about the channel than individual streamers, and the streamers involved would have to agree to work together to build the channel’s brand at the expense of their own to some extent. Additionally, many people only want to see one specific streamer, and for them there’s no getting around the fact that this arrangement would result in that streamer casting less.

However, given the fact that solo streaming is pretty much unsustainable as a long-term endeavor, it may be that we’ll see more and more streamers trying this kind of thing. A long, long time from now, 24/7 streaming channels with multiple streamers may even become the standard, the same way we have 24/7 TV channels now. Given the demands streaming can place on  streamers, that may not be such a bad thing.

Is There an Esports Bubble?

There’s no question that the business community is going a bit crazy for esports right now. It’s rare that more than a couple of days pass without some huge esports investment being announced. Last Friday it was Intel announcing it would be putting another $100 million in to the ESL pro league in Europe. A few weeks ago PlayVS raised $30 million for its high school esports platform. Michael Jordan and Drake are now helping teams close $20+ million funding rounds.

Even in the local esports scene here in Vancouver, things have changed in the past few months. Every esports event I’ve been to recently has been packed with unfamiliar faces, most of them people from the financial world who would not have been around if the same event had been held last year. A friend who’s on the executive of the esports program at a university here recently told me he gets multiple calls a week from investors and hedge funds asking to buy him lunch so they can learn more about the industry. Everyone wants to know how they can get involved with the hot new thing.

What the last esports event I went to looked like.

As more and more investors continue pouring ever larger sums of money into esports, the question of whether the these investments are financially sound, based on where the industry is at, is starting to loom larger and larger and larger.

Today, Ben Fisher of Sports Business Journal published an article noting how the revenues of many of these entities aren’t keeping up with the hype, and a “market correction” may be coming (Ben pointedly avoids the word “bubble,” but I have fewer scruples about using clickbaity titles, so bubble it is). In response to Ben’s article, a lot of industry people on Twitter raised similar concerns how they’ve been talking about the same thing internally the past few months.

I think people are right to be concerned. Whenever a new technology or idea  like esports hits the mainstream, there seems to be a bit (or a lot) of irrational exuberance that kicks in as everyone tries to get in on the ground floor, leading people to make decisions they probably shouldn’t.

A lot of what’s happening now reminds me of what happened with cryprocurrency around this time last year, when  blockchain technology finally started getting attention in the media. Crypto events were packed with new faces, people were starting new companies in the space left and right, existing companies were adding “blockchain” to their name and seeing their stock price quadruple overnight, and the price of Bitcoin surged from around $3,500 USD at the start of August to $20,000 USD by December.

Where is crypto now? The hype has dissipated, the price of Bitcoin is back down to around $3,500 USD, and a lot of the people who put money in last year are taking a sober second look at their investment and not liking what they see. That doesn’t mean that blockchain technology isn’t still going to change the world. I’m sure it will. Eventually.  But it certainly hasn’t yet, and there’s no telling whether, when it finally does, the companies people invested in during the rush last year are going to be the ones to do it.

If esports was Bitcoin, I’d say it’s getting close to the $20,000 mark right now. People are excited. They don’t want to miss out. And as a result they seem to be willing to invest large sums of money into the space, even though they may not understand quite what they’re getting themselves into. And just like with crypto, it’s very likely that a year or two down the road a lot of these people will be taking a look at their investment and regretting their decision.

The assumption everyone seems to be going off right now is that esports is destined  to continue growing at its current pace until it reaches the same level as traditional sports (or replaces it). People investing in Cloud9 or Team Liquid probably think they’re bying into the future esports versions of the LA Lakers or Manchester United. That’s a pretty big assumption to make. While esports could certainly reach that level, there’s nothing that guarantees it will. For all we know it could conceivably follow the trajectory of something poker, and flatten out into a niche sport with a limited audience after an initial meteoric rise, or end up somewhere in between.

There’s still a lot of questions that need to be answered before we can say with any certainty that esports will reach the heights people assume it will. Will esports ever be able to meaningfully cross over to a non-gamer audience? Will it ever have success on TV? (and does that matter?) How exactly do you market esports athletes, and will someone like, say, Faker ever be a household name like a Steph Curry? Even if esports succeeds, will the game publishers be the ones reaping all the rewards? None of these questions have answers yet, and I’m not sure that we’re going to be finding out the answer to many of them anytime soon.

Despite all these concerns, I, like most people in the industry am pretty confident that esports will not follow the path of poker, and that it will succeed… in the long term. Whatever other issues esports may be facing, the core, inescapable fact remains that huge numbers of people currently exist who are extremely passionate about it, that the majority of these people are young, and that their numbers are only growing. Just based on that foundation, if nothing else, I have every confidence that in the long run people will figure out how to make massive sums of money off esports, just like I’m pretty sure blockchain technology will eventually change how we all live our lives in some way.

What I’m definitely not sure about is when that will happen, or whether the companies people are putting money into now will necessarily be the ones to make it happen. And if I was an investor today thinking about putting money into an esports team at a +$100 million valuation, or paying $40 million for an Overwatch League franchise, I would definitely take a second, breathe, and look carefully at how I can expect to see a return on that money, beyond platitudes like “well, esports is on its way up.”

The “Gamer Cap” and the Long-Term Growth of Esports

It’s pretty clear that esports is having a moment right now.  Ninja is on the cover of ESPN Magazine, Forbes is doing valuations for esports teams, and everyone from Michael Jordan to Drake to Meg Whitman (!?) is investing large sums of money into the space.

While the current financials of the industry probably don’t support the valuations investors are putting money in at, people are investing not based on where the industry is at now, but based on the assumption that things will continue to grow exponentially into the future.

There’s a big problem with that assumption, however. Right now, the core “gamer” audience for esports is probably close to tapped out. Esports isn’t a novelty anymore. Most gamers are already more than familiar with the concept, and are watching/following esports at the rates they will for the foreseeable future (and those who aren’t by this point probably never will).

If esports is going to continue growing at the rate it has, it’s going to have to attract people outside that core group of gamers – people who aren’t all that interested games and have never played the games they’re watching. In my view, that’s a huge issue, and probably the biggest question mark surrounding the future growth of the industry.

The problem is that in order to enjoy watching most esports titles, you need to have a pretty significant level of familiarity with the game you’re watching. If you’re not familiar with the basic mechanics of the game, you won’t really be able to understand what’s going on and you’re probably not going to turn into a long-term viewer. And with a lot of esports titles, the barrier to entry involved in learning a game is absolutely massive.

Look at DotA or LoL for instance: 100+ heroes, 4+ skills each, all sorts complicated mechanics. Good luck explaining that to someone with no background in video games.  Even basic concepts like leveling, items, etc. are probably going to take some time to learn for people who have no previous concept of them.

This isn’t really stuff you can easily pick up by watching either (I’m sure even a lot of long-time DotA and LoL fans can barely make out what’s going on in a hectic team fight sometimes). If you want to learn a game like DotA or LoL from scratch, you’re going to need to spend a lot of time on Dotabuff or what have you figuring out the heroes, mechanics etc. Most non-gamers probably aren’t going to have the time or inclination to do that, and will therefore probably never turn into long-term viewers.

Try figuring out what’s going on here if you don’t know anything about gaming

Hell, the barrier to entry for a lot of games is pretty high even for other gamers who aren’t familiar with that particular game. I’ll use myself as an example – I’ve played DotA for years and enjoy watching it because of that, but I’ve never watched a game of League in my life because I’ve never played it, don’t know what any of the heroes and items do, and would have no real idea what’s going on. In order to truly enjoy watching the game I’d probably literally need to sit down and spend a few hours learning the heroes and items specifically for that purpose. I don’t really see massive numbers of people doing that.

Ultimately, in order to become a long-term viewer an esports title, someone probably needs to have played that game. That’s the only way they’re going come to know enough about it to understand what’s going on and enjoy it, as most people aren’t going to sit down and spend hours learning a game from scratch otherwise.

The unfortunate conclusion of the above is that most esports titles essentially have a cap on their potential audience, equal to more or less the number of people who have played that game (not necessarily the number of people who are playing it currently, mind you, but the number that have played it at some point in their lives, enough to know what’s going on).

That “gamer cap” may be high – for games like DotA, League or CS it’s in probably the hundreds of millions worldwide –  but it’s still a cap. Once a game reaches this cap, in order to keep growing it will have to deal with the huge barriers to entry associated with teaching that game to non-gamers. Unless its publishers can figure out a way around that barrier, which is a huge challenge, the game will stop growing, or at least substantially slow down.

The implications of this for the industry as a whole are not good, as this would imply that while the industry has seen massive growth recently, that growth will slow down dramatically now that the only way forward is to convert non-gamers.

Admittedly not every game is as complicated as DotA or LoL. In particular, games like Rocket League, sports games, and some shooters like CS:GO and Fortnite can probably be learned just by watching without a significant time investment by the viewer (at the end of the day it’s not that hard to understand the concepts of dudes shooting at each other). These games may have an easier time converting non-gamers, and may have an easier time getting past this “gamer cap.”

However, I think it’s pretty fair to say that for games with a steep learning curve, which includes most other games, this “gamer cap” is a huge issue, and one publishers will need to overcome if they want the industry to keep growing.

 

 

Blizzard Starting to Shut Down Hearthstone Fan Leagues – How Will Community React?

The news recently broke that Blizzard is forcing the United Hearthstone League to shut down. If you haven’t heard of the United Hearthstone League, don’t feel bad, most people haven’t (including me before today). It’s a tiny operation that doesn’t compete with Blizzard’s events in any meaningful way. It has a Discord with 100 members, a Youtube channel with 51 subscribers, and no prizes or sponsors as far as I can tell. It looks like it’s run by a bunch of fans who aren’t making any money off it, and are doing it just because they love Hearthstone.

Nevertheless, the UHL’s commissioner, Mike Lowe, reports receiving a call from Blizzard earlier today letting him know the UHL has to cease operating as a league or using the word “League” in its title (he was informed they can still hold monthly tournaments). Presumably, the overt or implied threat was if the UHL didn’t comply it would face a lawsuit from Blizzard. He was told that no league could operate independently of Blizzard, regardless of whether it’s for profit or not, so anyone else looking to operate a fan league like UHL is basically in the same boat. The story is actually the same a across all Blizzard titles (if you don’t believe me try running any Overwatch event with “League” in the title and see what happens.)

I’ve talked about this before, but this is the direction all esports are heading. Unlike traditional sports, with esports game companies literally own the game being played, and have the ability to legally stop anyone else from doing anything esports-related with their titles. A few years ago, when esports were getting off the ground, the companies were content to let anyone host events or leagues more or less as they wished, because this was good for development of the scene. Now, as esports becomes more established (and more money is involved) that’s starting to change pretty quickly.

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My photoshop skills aren’t great, but you get the point.

I remember talking with this with a friend in the industry a few months ago, and telling him that’s the way things were headed: as more money started being made, game companies would start to monopolize the right to hold all major tournaments, and any independent outfits (like the UHL) would get shut down. His reply was “well no, if they did something like that, the community would go crazy.”

Well, they’re doing it. And for the first time people are noticing (well by people are noticing I mean that Mike Lowe’s tweet about this has been at the top of /r/hearthstone all day with 3,500+ upvotes, and a couple of smaller sites have picked up the story). What I’m curious to see now is what happens next. Will this snowball and become a huge controversy like my buddy predicted, or will the story fade gently into the good night over a couple of days?

My hope is that it’s the former, if only because, as I’ve said before, I think game companies monopolizing everything this way is ultimately bad for esports. What’s Blizzard’s incentive to improve Hearthstone as an esports product if they can literally sue any competitor out of business anyway?  However, as it stands Blizzard has every legal right to do what they’re doing. The only thing that can be reasonably expected to stop them, and affect how they approach this issue in the future, is a nice, loot-box sized controversy. I don’t usually cheer for the reddit ball of hate to crush all in its’ path, but, well, fingers crossed time around.