Group Created with Sketch.
Volume 22 No. 2
  • Created with Sketch.
  • Created with Sketch.
  • Created with Sketch.

Riot to sell $10 million ‘League of Legends’ franchises

Move intended to shed Wild West nature of esports organizations

Riot Games announced plans last week 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 2018, teams in the North American League Championship Series will no longer face the threat of relegation and also will receive a share of league-based revenue, such as Riot’s $300 million streaming and tech partnership with BAMTech and team-branded digital purchases within the game.

Riot is valuing the franchise spots at $10 million, to be paid by the franchisees over a period of three years. Under the current system, the previous known high-water mark for an LCS spot sold on the open market was $1.8 million, when Milwaukee Bucks owner Wes Edens acquired a spot for his new team FlyQuest in December.

The $10 million price was set lower than Riot might have gotten on the open market, executives suggested.

“The teams are buying a piece of league revenue going forward, so there’s an economic value associated with that, between the media deal we did and the sponsorship we’re building,” said Jarred Kennedy, Riot co-head of esports. “And another piece: We didn’t want it to be so expensive that the right partners were priced out. We didn’t want it to be only the people who could write the biggest check and be super mercenary, and didn’t have their intentions aligned with ours.”

Riot’s decision around who receives permanent franchises carries extraordinarily high stakes. Several industry experts said the enterprise value of the organizations that secure one of the spots will rapidly escalate, given the game’s proven track record and potential to add league revenue quickly through the BAM deal and other opportunities.

“I think the value goes up astronomically,” said Bryce Blum, an esports lawyer and consultant at Catalyst Sports & Media. “The biggest knock you have on esports team valuation to date … 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.”

“League of Legends” tournaments have shown the ability to fill arenas like Staples Center.
Photo by: GETTY IMAGES

The franchises will be fully transferable, subject to league approval. Riot is soliciting owners with intentions to hold their assets for the long term but could not yet say whether that would be part of the contract or a proof point in the vetting process.

Esports organizations that don’t secure a franchise, on the other hand, 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 ninth or 10th in five out of eight seasons rather than the routine relegation-promotion system of today.

The revenue sharing, while not explained in great detail by Riot at press time, also plays into the expected escalation. In other American 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 Don Cornwell, partner at PJT Partners. “With relegation and performance-based membership, that isn’t necessarily the case, and valuation often reflects it.”

In a process expected to be completed by December at the latest, Riot will seek detailed applications from teams interested in the slots and conduct intensive inquiries into the owners’ finances, credit and background. 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 Edens’ team, FlyQuest; Philadelphia 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’s 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 early investor in and chairman 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.

Another interesting wrinkle: Riot executives said that “League of Legends” teams currently competing outside the U.S. could conceivably secure a franchise in the U.S., though their lower brand awareness here might be held against their application. But, for instance, if several top European clubs like Fnatic, G2 and Splyce all joined the new American league, that could be a problem.

“A mass migration from one league to another is in no way or shape healthy, but let’s remember there are only 10 spots,” said Whalen Rozelle, Riot esports co-head. “We’re not going to take half of Korea and half of Europe.”

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 $20 million 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.

“League of Legends,” on the other hand, is by far the world’s most popular esports title, having sold out major arenas such as Madison Square Garden and Staples Center for championship events. The game is free to play, but Riot booked $1.6 billion in in-game purchase revenue in 2015, according to SuperData Research, and its BAMTech deal ensures media revenue not yet present in other games.

Blum said both the Overwatch League and the “League of Legends” transition will make the esports world more palatable to investors, but they shouldn’t 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.”

Scott O’Neil, CEO of the 76ers, which owns Dignitas, said: “Riot has built the largest and most successful esports league in the world.”