Riot Games announced plans today to award 10 permanent franchise spots in the North American circuit of the blockbuster esports game "League of Legends," a move designed to shed the unpredictable “Wild West” element that has kept some investors at bay. When the reconstituted league starts play in '18, the teams in the North American LCS will no longer face the threat of relegation, and will also receive a share of league-based revenue, such as Riot’s $300M streaming and tech partnership with BAM Tech and team-branded digital purchases within the game. Teams will receive 32.5% of all revenue, and 35% would go to players. Riot is valuing the franchise spots at $10M, to be paid by the franchisees over a period of three years, though teams new to the league would have to pay an additional $3M fee. Under the current system, the previous known high water mark for an LCS spot sold on the open market was $1.8M, when Bucks co-Owner Wes Edens acquired a spot for his new team FlyQuest in December. Riot’s decision around who receives these permanent franchises carry extraordinarily high stakes. Several industry experts said the enterprise value of the organizations that secure one of the spots will rapidly escalate, given LoL’s proven track record and potential to add league revenue quickly through the BAM deal and other opportunities. "The value goes up astronomically,” said Catalyst Sports & Media consultant Bryce Blum. "The biggest knock you have on a esports team valuation to date -- and this is in a world where teams have raised at significant valuations already -- is that they don’t own an asset in the same way that a traditional sports team owns an asset. They don’t have a permanent right to compete in a marquee league, and therefore they don’t have that value of scarcity."
PLAYING BY THE NEW RULES: Esports organizations that do not win a franchise would effectively be shut out of the North American "LoL" circuit indefinitely, though opportunities would exist in Europe. According to Riot, teams could still lose a spot in the new league, but only if they finish 9th or 10th in five out of eight seasons rather than the routine relegation-promotion system of today. The revenue sharing, while not explained, also plays into the expected escalation. In other U.S. pro sports leagues, even the smallest markets with the least competitive teams have seen their valuations soar along with their sports’ ascendency. "With a franchise, as the league goes up in value so does the franchise and both parties enjoy the 'rising tide lifts all boats' effect given the revenue sharing element,” said PJT Partners' Don Cornwell. "With relegation and performance-based membership, that isn't necessarily the case and valuation often reflects it."
LOOKING FOR THE RIGHT FITS: Riot will seek detailed applications from teams interested in the slots and conduct intensive inquiries into the owners’ finances, credit and backgrounds. In a blog post today, Riot execs said, “We’re looking for organizations that will be stable, professional, well-funded and committed to creating a rewarding environment for the pro players that work for them.” There is no minimum capital requirement to apply, but the financial wherewithal of a would-be ownership group will be a key factor, Riot said. The industry will be closely watching how teams currently competing in the LCS fare under this open application process, a group that includes FlyQuest, the 76ers-owned Team Dignitas and Team Liquid, owned by a group led by Ted Leonsis and Peter Guber, among others. They are not promised anything in this process, though their proven ability to operate an LCS squad will be seen favorably by Riot. It is possible that one or more of the spots could be awarded to an entirely new ownership group, bringing deep pockets and acquired talent to the table. CrossCut Ventures Managing Director Clinton Foy, an investor in and Chair of current LCS squad Immortals, thinks the existing teams should have a leg up. “If you’re thinking long-term and judge teams and applications based on their actions, I think certain existing teams that have built that brand and built that trust, with the esports fans and communities, should have an advantage,” Foy said, who counts among his co-investors Grizzlies Owner Steve Kaplan and Lionsgate.
DIFFERENT PATH THAN OVERWATCH: Riot is now the second video game publisher to attempt to build a league structured like the big four North American pro sports leagues, following behind Activision Blizzard’s ongoing sales process for franchises in its Overwatch title. Activision Blizzard CEO Bobby Kotick and his team have been seeking prices of up to $20M for spots in the league for Overwatch, with no confirmed buyers yet. While the game has been popular with casual gamers, it has yet to develop a major worldwide spectator base. "LoL" is by far the world’s most popular esport title, having sold out major arenas like MSG and Staples Center for championship events. The game is free to play, but Riot booked $1.6B in in-game purchase revenue in '15, according to SuperData Research, and its BAM Tech deal ensures media revenue not yet present in other games. In the new league, teams will earn payouts based directly on their final ranking each season as well. Blum said both the Overwatch League and the "LoL" transition will make the esports world more palatable to investors, but they should not be seen as equals. "The LCS is the more proven opportunity, right?” Blum said. “It's a league that’s been around much longer, and has proven to be stable, in terms of viewership and economic generation has already been proven." 76ers CEO Scott O’Neil: “Riot has built the largest and most successful esports league in the world."'
MORE CHANGES TO LOOK FOR: Other changes to the "LoL" competition structure include the current Challenger Series, which currently promotes its winners to replace relegated teams in the LCS, becoming a developmental league for players controlled by the permanent LCS members. For current LCS and Challenger teams that are left out of the reconstituted league next year, they will receive cash payouts funded by a one-time $3M fee charged to new teams joining the LCS in '18. To qualify, those teams must sell or release all player contracts by Nov. 20. Also, Riot said it will fund a players’ association that would be involved in tri-party negotiations, with teams and the publisher, on issues of key importance, and have access to “vetted” agents, lawyers and financial advisors. Riot will fund the organization for now, but said it will support the association if it seeks to separate itself. "It is Riot’s hope and expectation that players will eventually assume full financial control over the organization,” the blog post reads.
