Riot Franchising Redux: EU LCS 2018
Riot announced the details of their EU LCS franchising process (again, we ignore the legal distinctions between franchises and permanent partnerships and simply call them franchises) this past week. The straw poll in the Catalyst office taken last month correctly predicted the pricing; namely, that the cost of an EU LCS franchise mirrors the NA LCS entry fees assessed by Riot last summer. The other details released by the LoL publisher also take cues from NA LCS, with the conspicuous absence of a player’s association funded by the game publisher. With the specifics confirmed, the application process officially opened this week and part 1 of their 3-phased process will continue through the fall.
With all the demand surrounding the NA LCS application process, it will be interesting to speculate whether Riot will receive as much interest for its EU slots. The challenges around building a brand on the continent are certainly not peculiar to esports or even sport generally; there are micro-audiences to target when marketing to a territory so replete with differences in language, habits, sensibilities and affluence, not to mention a couple millennia of history that often exacerbates those differences.
The early whispers seem to indicate a profoundly muted interest on behalf of European football clubs in both EU LCS and OWL’s planned European expansion. If this is the case, and given there are only 2 truly tier-1 endemic brands in EU LCS, I would not be surprised to see Riot struggle to fill the slots (at the current price tag) with the caliber of new entrants that entered NA LCS last summer. Riot’s NA LCS has lagged behind OWL in terms of commercialization and most models used to underwrite the hefty valuations underpinning NA LCS organizations overestimated, at least in year 1, revenue generated from media rights and sponsorship.
While surely some demand will spill over from those groups shut out of a successful bid in 2017, the economics of LCS in general, and particularly in EU, should make a decision to put forth an EU LCS bid a tough one for many groups.
Comparing NA and EU Esports Franchised Leagues
On the heels of Riot Games’ announcement that the EULCS will be franchised this year, we wanted to assess each franchised (or franchising) league and their relative value proposition.
We’ll analyze each league across a few different metrics:
- Non-Financial Performance to Date
- Financial Performance to Date
- Business Model Efficacy
- Market Size & Product Uniqueness
1. Non-Financial Performance to Date – viewership, engagement, major existing stakeholders.
Undoubtedly the marquee franchised esports league. Incredibly popular professional teams and superstar caliber players. Tier-1 traditional sports & media ownership groups include Peter Guber (Team Liquid), Madison Square Garden (CLG), and The Golden State Warriors (Golden Guardians) . Established, polished media product with superb live event component. The only negative we see is a plateaued — if not declining — viewership for the 9 year old game. Regardless, NALCS viewership still handily outnumbers that in the other franchised leagues.
The broadcast, production, and live event operation in EULCS is tip-top making it — relative to most other esports leagues — a worthwhile investment. That is why major entities such as Schalke, and Paris St. Germain have purchased in. That said, the EULCS lacks the competitive depth that NA has. The top two teams — FNATIC and G2 — represents a disproportionate swath of the league’s fan following and many of their most talented prospects graduate to NA for improved salaries and increased notoriety. Similar to its NA brother, year over year viewership is flat’ multi-language broadcasts, though, provide enticing opportunities for regional partners.
The new kid on the block proved to be a worthwhile contender which many industry insiders admittedly overlooked. Bobby Kotick’s promotion of the league yielded major traditional sports investors such as Robert Kraft (Uprising), Fred Wilpon (Excelsior), and Stan Kroenke (Gladiators); the league’s acceptance of traditional esports entities — from Immortals (Valiant) to C9 (Spitfire), Optic (Outlaws), and Envy (Fuel) — shows their humility to orgs with experience. While Season 1 viewership surprised many, it sits roughly on par with EULCS numbers. In just their first season, the capable social media, broadcast, live event, and production teams have proven they are worthy of praise. Activision Blizzard has invested a lot here, and it shows.
2. Financial Performance to Date – sponsorships, media rights, and other methods of monetization.
With an impressive media rights deal and the beginning trickle of non-endemic partners, NALCS is on the path to actualizing its full potential. In 2016 the league announced a $300 million streaming with BAMTech, MLB Advanced Media’s streaming product (no release announcement or date yet). Starting at Worlds 2016 — and ensuing from then on a global level — ACER has been the official monitor partner of League esports. This year the NA league added State Farm to their sponsors list. With permanent partnerships and revenue sharing in place we expect the number of partners to grow this year.
It’s still unclear if the BAMTech media deal will stretch globally — and the financial implications that it might have on each individual league — but what is clear is that EULCS is beginning to prioritize partnerships. The league recently brought on Alban Dechelotte as Head of Sponsorships & BD: Dechelotte previously led Coca-Cola’s European music and gaming related marketing initiatives. Apart from a brief stint with BMW for the 2017 EULCS Summer Finals in Paris and the global ACER deal, the league doesn’t have other sponsors but the forthcoming franchising might change that.
By consciously making monetization a focus of year one, Overwatch League has surpassed expectations from a partnership perspective. The league kicked off their inaugural season with five blue-chip partners — three of which are non-endemic — showing their ability to selll. Its two-year, $90 million Twitch deal which includes in-client promotion and in-game loot drops, rivals Riot’s BAMTech deal from an annual dollar perspective. The hiring of three senior executives from the NBA, the New Jersey Devils, and NBCUniversal to run their esports leagues division shows exactly how serious they are.
3. Business Model Efficacy – return on investment, sustainability, and growth.
The hot-button word when NALCS created permanent partnerships was ‘sustainability’. With a league slot secured — common knowledge indicated — team owners would be able to build a brand with legacy players, sponsors, and staff that will last the test of time, growing the overall league ecosystem. While that is mostly true — we have seen new sponsors, new competitive approaches, and new marketing ideas since franchising — the $10 million price tag is steep; investors will need to continue seeing more sponsor/media rights dollars captured to have their investments pay off.
EU is having their go this year and with North America’s seeming success it should end up great, right? With roughly the same price tag (€8M = ~$10M) EU has to prove to potential franchise buyers that monetization — and therefore the buyers’ returns — can be of equal or greater value to NA. And seeing EU’s lack of monetization until this point, its declining viewership, and less-than-spicy competitive storylines, this writer thinks that will be a tough sell.
While total viewership for year one has been above expectations, without significant YoY growth across viewership, sponsorships, and live events the pre-launch $20M buy in might be hard to justify. When Season 2 OWL debuts, we’ll be really interested in seeing how many fans tune in and if the league shows strong growth across the board, this writer is optimistic about each franchisees future prospects. That said, if non-esports Overwatch stream viewership data is any indication, the game has declined in relative popularity over the last 18 months. Not a great sign for a league still in its infancy.
4. Market Size & Product Uniqueness – number of fans & their likelihood to spend, product differentiation.
America! The land of the free and the home of … consumers! The NALCS has seen consistent viewership, the teams in the league have had relative success finding corporate sponsors, and there’s no shortage of large-enough media markets for regionalization – if the league gets to that point. And even though NALCS has to compete with the 12 other Riot-run regional leagues in the world, I’d venture to guess that most of the live viewership is coming from right here in the good ol’ U-S-of-A — a promising sign for league sponsors and team owners alike.
A large market and a large player base are two major positives but without a defined regional model (EULCS announced and then reneged on this proposal) that allows for city or country specific teams, organizations and the league as a whole might have an uphill battle trying to get inter-regional marketing teams to align and spend. To counter that point, different language broadcasts can be viewed as an opportunity to sell market specific partnerships and media deals which could theoretically out-value the single-market model here in the States.
Being the only Overwatch league in the world is a massive benefit but I’m still struggling with the question: ‘what if few people globally want to watch your game at all’? The regionalized approach from the get-go — with each team representing a global city — has proven impressive in terms of enticing investors, yet its efficacy from a live event perspective has yet to be proven. In simple terms: I’d be surprised if the current 13 teams in the league are able to consistently sell even just 1,000 tickets to “home” games in the near future, but I’m hoping to be proven wrong.
Disagree with us? Think we’re missing something? Are you an investor that’s struggled with these issues? Drop us a line – we’d love to chat.
Traditional Sports teams' and the esports franchising landscape
Last Monday, Riot Games announced plans for the EU LCS to follow in the footsteps of their North American and Chinese counterparts by launching a franchise-like system that will establish permanent partnerships with teams and eliminate the controversial promotion-relegation system. This comes shortly on the heels of statements made by Overwatch League Commissioner Nate Nanzer on a Blizzard-Activision quarterly earnings call, where he highlighted OWL’s focus on Europe and Asia for the league’s upcoming expansion. With no stated plans to expand the NA LCS, it seems clear that the overwhelming majority of new franchising opportunities will be outside of the US this year.
Franchising has had a profound impact on the esports team investment landscape. By their very nature, much of the value of a team is transient. Player contracts, endorsement deals, and even team management can change significantly year over year, which can impact the team’s brand and value. But with the advent of franchising in esports, some teams now possess assets that are permanent, relatively scarce, and that have the potential to massively appreciate over time. Major sports teams and their owners have been coming into esports for a few years now, but there is a reason the floodgates opened in the middle of last year—franchises are a game changer for how team investments are viewed by the heavy hitters in the traditional sports, media, and entertainment world.
This makes the nature of the opportunity in 2018 extremely interesting. Since there are 10 EU LCS and approximately 6-8 OWL slots open, it’s safe to assume we’ll have several new faces at the table by the time the year is over. Many of these new ownership groups will have ties to European sports teams, and we can expect some marriages akin to the Madison Square Garden Company’s investment in Counter Logic Gaming, bringing together a powerhouse brand and business from traditional sports with their esports equivalent. Perhaps even more interestingly, the fact that the opportunity resides almost exclusively in Europe puts the teams that already hold NA franchise rights in the driver’s seat for their next investment rounds. NA team valuations have been growing at astronomical rates over the past few years, and the 2018 franchising landscape virtually ensures that trend will continue this year. By the end of 2018, the top esports teams in NA will be valued in excess of $300M.