United States: eSports Leagues Set To Level Up With Permanent Franchises

If you open the history books, you'll see that nascent eSports leagues are not unlike the early Big Four North American leagues, which were volatile places where commercially viable teams were here one day, but gone the next. For example, when the Basketball Association of America and the National Basketball League merged to form the NBA in 1949, the league had 16 teams, but only eight of those were still around in 1955. Original NFL franchises also came and went in the 1920s, as the early league found its footing, and the NHL barely survived its first year, when one of its four teams (the Montreal Wanderers) disbanded after their arena burned down.

What gave the leagues stability, and helped them grow into the mammoth enterprises they are today are a host of changes that fueled profitability, aligned the owners' interests and helped them run their business in a predictable manner, on the field and on the balance sheet.

Riot Games and Activision Blizzard ATVI -1.72% are making similar changes to their nascent eSports leagues, by adding permanent franchises, revenue sharing agreements, player-centric features and other tried and true elements of their traditional sports brethren. Taken together, the changes are a massive leap forward for eSports, which will result in a much more predictable ecosystem for game publishers, owners, players, sponsors and other industry participants.

Activision Blizzard aims to have at least 28 international, city-based Overwatch League teams at a reported franchise fee of $20 million, while Riot Games is planning on having ten permanent franchises in its North American League of Legends Championship Series (NA LCS), at a cost of $10 million for existing team owners, and $13 million for new ones. Some of the details of the Overwatch and NA LCS franchises are still being hammered out, but we know many NBA, NFL, MLB and NHL owners are in a prime position to secure franchises.

League of Legends has reportedly received franchise applications from all of its existing teams, which include Rick Fox's Echo Fox, the Philadelphia 76ers' Team Dignitas, Milwaukee Bucks owner Wesley Edens' FlyQuest, and Team Liquid, which is owned by aXiomatic, an eSports company with star-studded investors including Tampa Bay Lightning owner Jeff Vinik. For its part, Overwatch has already announced nine franchises, including a Boston team owned by New England Patriots owner Robert Kraft, a New York team led by New York Mets COO Jeff Wilpon, a Los Angeles team owned by Stan and Josh Kroenke, and a San Francisco team led by Andy Miller and Mark Mastrov, co-owners of the Sacramento Kings.

Here are five issues likely considered as potential owners reviewed their bids and the leagues' governing documents.

Sports investors are masters of eSports' key revenue drivers

Existing team owners find eSports compelling because of their mastery of the industry's five main revenue streams – sponsorships, advertising, merchandise, tickets and media rights. Many synergies exist within those areas. For instance, eSports caters to a desirable, content-hungry youth demographic that advertisers find appealing, and professional sports franchises have deep relationships with major corporations.

Owners also know that eSports is a powerful drawing card to fill arenas. Past NA LCS and Overwatch World Cup events attracted crowds comparable to NBA and NHL games. As the market grows, NBA and NHL owners will benefit from events that can fill up their arenas on off-days.

MLB and NFL owners with larger stadiums probably view the immediate venue synergies as more of an open proposition, albeit one with tremendous potential. Could eSports events fill up massive U.S. stadiums? Consider the League of Legends 2014 World Final in Seoul's Sangram Stadium – a Super Bowl-esque event with 45,000 fans and a performance by the rock band Imagine Dragons. There's also the potential to develop eSports-specific venues, which are taking hold in many U.S. cities. Given their familiarity with building arenas and stadiums in their home cities, owners will have another option at their disposal.

Finally, owners know how to produce engaging content, and they have strong relationships with broadcasters and over-the-top distributors, both of which are important when you consider the staggering international eyeballs for eSports content. Last December, Riot Games struck a six-year, $300 million deal with MLB's BAMTech to stream and distribute League of Legends content, and in June, Activision Blizzard signed a two-year streaming deal with Amazon's Twitch. The revenue from both will flow to them through their respective revenue sharing agreements, and owners will have many other opportunities to strike new media rights deals that benefit their individual bottom line, and the league's collective pot.

NA LCS and Overwatch League are somewhat unlike traditional sports leagues

An important difference between traditional sports leagues and eSports leagues is their structure and the rights of franchise owners. Traditional sports leagues are controlled by the principal owners of the league's franchises. For example, Major League Baseball is an unincorporated association led by Commissioner Rob Manfred, who is hired by the 30 principal owners and exclusively represents their interests. Simply put, the owners are in the driver's seat. If they want to admit a new team, approve an ownership transfer or make a major rule change, they vote on it.

On the other hand, Riot Games and Activision Blizzard are private and public companies, respectively, and both ultimately serve the interests of their shareholders. Both also own their intellectual property and can control how the game is played and presented. Consequently, franchise owners will be their business partners, but they won't control the league itself.

How will eSports leagues evolve?

When Maurice Podoloff became the first NBA commissioner in 1949, he would have been hard-pressed to imagine what the modern game would look like. Players like Kyrie Irving and Russell Westbrook are unlike 1950s titans George Mikan and Dolph Schayes, and basketball has evolved to include three-point shots, dunking, in-game entertainment and other fan-friendly elements. The same goes for the hockey, football and baseball, which have evolved significantly over the past century.

On the other hand, the NA LCS was created in 2012, and Overwatch League is just over a year old. How well the game publishers, owners and players come together will dictate how fast the leagues realize their immense potential. In that regard, the fine details in the franchise agreements are points that sports investors have dealt with frequently. For instance, are owners given a proper voice on the rules committees? And if that committee votes to implement or decline game patches, would its vote be binding, or subject to final approval by the game publisher? Minor details like these will probably be negotiated, and the way the leagues are governed will likely reflect the owners' considerable expertise and bargaining clout.

Will the NA LCS and Overwatch League endure?

Another question to consider is whether today's top eSports games can endure as long as traditional sports. When viewed in the context of the near-term potential, a $10 million to $20 million franchise fee is reasonable. But if you look back at the history of video games, you'll see that technology has evolved quickly, and only a handful of games from the 1980s or 90s are still part of the gaming culture.

Top games like DOTA 2, CS:GO, League of Legends and Overwatch are not guaranteed to be popular in ten or twenty years. They could be supplanted by a new hit game or new technology such as virtual reality could render the entire way we play games obsolete. Investors should consider the possibilities and plan accordingly.

What if a game publisher decides to phase out one league and introduce another, based on a more popular game? Would existing owners automatically get the rights to a new franchise? If not, would they get the right of first refusal, or a most favored nation clause that lets them buy in at the best price any other franchise owner receives? Investors buying into the NFL don't have to wrestle with these questions, but eSports investors might.

Players have more stability, but there's more work to do

Players associations exist to increase the income and enhance the welfare of the players they represent, and they are a powerful force in sports today. But the four major leagues didn't have players associations until the MLB Players Association was created in 1954; a move followed in the next decade by players in the NFL, NHL and NBA. Due to their efforts, player salaries have risen dramatically, as have free agency rights, health and medical coverage and the share of league-wide revenue that flows to players.

Game publishers and eSports owners understand that players will play a central role in what's to come, so both leagues are implementing player-centric changes. For its part, Riot Games is creating and funding a players association which will later be turned over to the players. Unlike the players associations in the major North American leagues, the NA LCS Players Association will not be a union, at least not in the beginning. Activision Blizzard hasn't announced a players association, but it will require Overwatch teams to pay players a minimum of $50,000 a year and provide health insurance, a retirement-savings plan, housing and a practice facility.

Both Overwatch League and the NA LCS have taken positive steps that will improve stability and reward players, but the history of sports is littered with player lockouts, strikes and Curt Flood scenarios – any of which could stunt the growth of the fledgling leagues. Balancing the interests of game publishers, owners and players won't be easy, but the good news is that all parties involved are aware of the opportunity ahead, and seem to be motivated to forge an environment where they can prosper. It will take some time to see these changes play out in competition, but all signs point to permanent franchises scoring big points with fans, and bringing consistency to the entire eSports ecosystem.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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