As of this writing, there are two eSports games whose owners are offering franchise rights for competitive leagues – Riot for its North American League of Legends Championships (LCS) and Activision for its Overwatch League (OWL).
We thought it would be interesting to compare the two proposals, as these are the opening moves in a multi-year dance that will shape eSports
Riot has published the details of its franchise plan. Activision has only published a statement contesting claims made in the press about OWL’s progress (this is a link to ESPN coverage of their response, we could not find the actual statement on Activision’s site). So we do not have a complete picture, especially in regards to OWL, but we have culled multiple sources to formulate what we readily concede is just our best estimate as to the terms for both leagues.
Riot NA LCS
Franchise fee: $10 million
Geography: North America
Other fees: TBD
April Game viewership (from NewZoo): 23m hours
Franchise fee: $10 million upfront, $10 million over several years
Revenue Share: not disclosed, not determined yet
Other fees: 25% to Activision for sale of team
April Game viewership (from NewZoo): 2m hours
If we were buying stocks, it would be pretty clear that LCS is a better deal than OWL – lower franchise payments, much higher viewership and clarity on revenue share. However, there are a few other factors that need to be considered. First, OWL is a global system, while Riot is only offering North America, presumably they have plans to expand franchising more broadly in the not-too-distant future. That makes the viewership data slightly less relevant, since it is a global figure. It also means more competition for viewership, as international play is a big part of the League of Legends scene, Second, LCS is a pretty mature event. The series is almost ten years old, and both fans and players have a set of expectations over what the Series should look like. Overwatch is a much newer game that is (probably) growing at a faster clip than League of Legends.
Going back to our stock analogy, LCS is a value stock (albeit one that is also growing quite rapidly), and OWL is a growth stock. To buy OWL, you have to believe in its growth, and quite possibly Activision is telling potential franchisees about how they plan to push the growth of Overwatch and OWL.
For us, the most telling statistic is that 25% sale fee that Activision wants to collect when a team is sold. To be fair, Riot could be asking for something similar, we just do not have enough data to know. Nonetheless, we have heard from several sources now that Activision wants to participate in any team exits. This does not sit right. While some physical sports leagues also ask for a cut on team sales, those fees are all in single digits, nowhere near 25%. Our guess is that this fee will not survive, and will likely be negotiated away as investments are finalized.
That is the most interesting finding we have had about OWL. While Riot is trying to implement a standardized process for all franchises, Activision is approaching OWL franchising in a much more negotiated way. They have engaged a prominent Media investment bank to gin up interest. Bankers love auctions, and much of the public communication around OWL seems intended to create multiple offers. Note how several press reports have said the franchise fee for OWL is $20 million “with certain markets attracting higher prices”. OWL is based on geographic franchises, and the implication is that certain high-density media markets could attract higher bids.
Our take is that negotiations can go both ways. As far as we know, no one has signed a contract for OWL yet. There is plenty of interest, but lengthy negotiations and contract writing has yet to take place. So there is the very real possibility that many franchisees will end up paying less than the $20 million figure in the headlines. Or that payments will be stretched out over a longer period (boosting the NPV of the whole deal).
While these deals are clearly different, we think it is important to take a step back and consider the similarities. In both cases, there is still a lot that is “TBD”. This is not just a lack of data, but rather a general sense that the whole industry is still working out a lot of details.Also left unsaid is what is expected of the teams beyond fielding competitive teams. If we compare eSports events in the US with those in South Korea, there is big gap in terms of local community involvement. The unspoken assumption for both franchises is that the teams are going to have to take a whole host of local organizing – finding competition spaces, organizing local tournaments, generating a loyal fan following.
In both cases, the game publisher is going to own the League. Note that there is no discussion of League governance from Riot, other than around the Player Union. In both cases, there is going to be a fixed number of teams that is determined at the outset, and those teams get right to participate in competitive events for many years. This will effectively create a barrier to entry for future teams. The days of a new team winning its way to the top are over.
To close, we think the importance of these league details is how they position the rest of the industry. These are both Top 5 games in current eSports viewership. We expect other games to move towards franchising if these work out. Other games are going to base their franchise plans with these mental anchors now firmly in place. That is not a bad thing, and Riot and Activision deserve a lot of credit for serving as industry pioneers. That being said, for the existing, ‘endemic’ teams, the writing on the walls should be clear. Deep pockets and serious, professional management are moving into what was once an ‘entrepreneurial’ space.