How is the E-Sports Revenue Pie Going to Be Split?

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Yes, I got lazy with the picture, but you try finding something that matches “e-sports revenue pie”

I recently did a podcast with local game developer Christian Sears, and a really interesting question came up and I thought I’d write a post about it, as it’s probably one of the most interesting issues to follow as the e-sports industry develops. The question comes down to this: as e-sports, and in particular e-sports leagues, become more established, how are revenues they earn going to be split?

One good starting point for an answer to this question is probably traditional sports. In most traditional pro sports leagues like the NBA and NHL, revenue is generally split roughly 50/50 between owners and players. Each league has arrived at that split after years of hard-nosed labour negotiations, including lockouts, strikes and countless melodramatic press conferences, so maybe there’s something about that number, and we can expect that in e-sports revenue will also end up being shared along those same lines.

Of course, with e-sports you have a third power group that doesn’t really exist in traditional sports: the companies that make the games. While no one “owns” basketball or hockey, someone does own games like Overwatch, League of Legends and DotA. Anyone who wants to operate an e-sports event needs the game maker’s consent, which means the game maker is going to get a piece of the pie. For this reason, I think the key issue regarding how revenue will be allocated in e-sports leagues is not the split between players and owners, like in traditional sports, but the split between the game companies and everyone else.

That seems to be the direction things are heading for a lot existing sports leagues. For instance, the League of Legends North America League Championship Series (NALCS) recently unveiled an overhauled revenue sharing model that states revenue will essentially be split three ways with Riot Games, the company behind LoL, getting 32.5% of league revenues, teams getting 32.5% and players getting 35%. In Blizzard’s upcoming Overwatch league, the split is apparently going to be 50/50 between Blizzard and the teams (with no details regarding how much of the teams’ share will go to the players).

While 32.5% and 50% are already significant numbers, if I had to guess, I would say that as things continue to shake out, the revenue going to the game companies is only going to increase. This is because, as discussed above, they’re literally the only game in town, and have all the bargaining power.

Say for example Blizzard goes to the owners and players in the Overwatch league a few years from now and asks for 70% of revenue instead of the current 50%. Even if all the owners and players were united against Blizzard’s demands, they can’t exactly tell Blizzard to f*** off and start their own league, because, as discussed Blizzard literally owns the game their league is based on and can prevent them from doing that. Instead, the owners and players would have essentially two choices: (1) take the 30%, or (2) stop operating and make nothing.

Blizzard, on the other hand, could always find more teams and players to replace the ones sitting out. They probably prefer not to go through the effort, but if the league is making money hand over fist and that extra 20% of revenue works out to a lot of cash, the effort may be worth it to them. Plus, if the league is doing well financially, there will probably be no shortage of new teams and players looking to sign up, even if they’re only getting 30% of revenues instead of 50%.

The bottom line is that Blizzard can always find more teams and players. The teams and players can’t find another Overwatch league.

Right now, the owners and players in e-sports leagues are basically in the same situation baseball players were before unrestricted free agency came along. They’re basically at the mercy of the game companies, who can pay them the minimum they’ll accept to continue operating and no more, then keep all the remaining profit for themselves.

I may be overstating things here of course. There’s obviously PR aspects to this I haven’t really considered. As EA has learned recently, the gaming community can get petty worked up by things they perceive as unfair. This would also take a certain cold bloodedness from the game companies that we haven’t really seen yet, nor would I expect to see anytime soon given that a lot of these e-sports leagues are just getting off the ground, no one knows how successful they’ll be, and everyone is in the “let’s all get together and make this thing work” phase.

However, and as e-sports gets more established and the amount of money at stake increases, that phase might start to give way to a more business-minded approach by the game companies (it’s worth noting, for instance, that Blizzard has essentially spent the year essentially shutting out independent Overwatch tournaments, harming the Overwatch scene in the process, in order to prepare for the roll out of the Overwatch league), and lead to the kind of negotiations you see in traditional sports. If that does happen, I can tell you right now who’s probably going to win, and it’s not going to be the teams or players.

Would You Pay $10,000,000 for a League of Legends Team?

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Riot Games has recently announced some major changes to the way it’s North America League of Legends Championship Series functions, in an attempt to move the NALCS into a more structured format that more closely mirrors the way major traditional sports leagues like the NFL or NBA currently operate.

Starting 2018, teams will no longer have to qualify for the NALCS through competing in a series of lower-level tournaments, nor will they face the immediate prospect of relegation if they don’t do well. Instead, ten teams will be more-or-less guaranteed spots in the league indefinitely. All the teams will share in the league’s revenues, with performance incentives for teams that place better. There’s even talk of a player’s union, as well as a minimum player salary of $75,000.

The most noteworthy aspect of this, however, is the price that Riot is reportedly asking for a franchise. Reports are that a franchise in the new-and-improved NALCS will cost a cool $10 million, around 5-10 times what LoL teams are currently reported to be going for. At this sky-high price, it’s more than likely that the majority of the teams currently in the NALCS will not be able to come up with that kind of money. Blizzard, which announced its own plans for a similar Overwatch league a few months ago, and is reportedly asking a similarly high figure $20 million per franchise, has run into some problems recently as multiple existing e-sports organisations balked at putting together teams for the league due in large part due to the high cost of entry.

Maybe the slack will be picked up by new outside investors or traditional sports franchises, who are willing to put up that kind of money in order to get in on the ground floor of the e-Sports business. Indeed, that seems to be the direction Blizzard has been heading with its Overwatch league, as the company reportedly focuses on attracting these investors at the expense of teams in the existing Overwatch e-sports ecosystem. However, unless Riot can show these investors a credible plan for how they are going to make their money back, it remains to be seen whether enough of them will come through to support a full roster of teams for the NACLS.

It may be that Riot is putting the cart before the horse here. If all goes well I have no doubt that 10 years from now a NALCS team (or whatever the NALCS equivalent is then) will be worth $10 million or more. However at this point it’s hard to believe that the economics of the (e-)sport justify paying this much for a franchise. By asking for this kind of buy-in fee, Riot risks pricing out and alienating the teams and players that have built LoL as an e-Sport from the ground up in the first place. Whether this is going to have a positive effect on LoL as an e-sport in the long term is an open question.

Riot is set to announce the 10-team roster for its league in November, 2017. It will be interesting to see whether Riot manages to put together a 10-team roster at the reported $10 million buy-in fee by that deadline.