'No layups': Where is the next place to spend in esports?
The question now facing anyone searching for a prominent role in esports is simple: Now what?
With Riot Games’ selection of 10 franchise partners, the first wave of esports mega-investment is complete. Twenty organizations have spots in either Riot’s League of Legends circuit or Activision Blizzard’s Overwatch League, well-funded properties that have promised revenue sharing and long-term stability.
Everyone else — including the scores of groups that Riot rejected — is left looking for the next big thing. That’s likely to come in Europe, where Riot is beginning to head down a similar path of franchising, or possibly in an entirely new game. Activision Blizzard has taken some preliminary steps toward creating a Call of Duty league like in Overwatch.
But those aren’t imminent, and the 100-plus groups that unsuccessfully pursued LCS slots from Riot or other top-tier options this year are left with smaller deals to choose from and a more complicated path to success.
“There is nothing comparable to ‘League of Legends’ or ‘Overwatch’ in that regard,” said Avi Bhuiyan, executive vice president at Catalyst Sports & Media. “And that was the reason this was such an important moment. That doesn’t mean there are no great opportunities left, but there are no layups at the moment.”
The only tier-one esports organization in the U.S. to have not taken significant outside capital in the last 18 months is Team SoloMid, a six-time NA LCS champion founded by Andy Dinh in 2009. All others have just recently closed funding deals, and while they may raise money again, the next round of investors will pay much higher prices for smaller shares of the team than were previously available.
Overwatch League says it wants to continue expanding to up to 28 teams globally, but the results of the first season, set to begin Jan. 10, will be an important variable before as that process proceeds. Riot says it does not intend to expand the American LCS, but the spots sold are not as permanent as they appear. Riot’s contracts include a clause that allows for relegation if a team consistently fails to compete over a multiyear period, and the agreements include a four-year renewal window, though Riot says they are intended to be long-term deals. The new LCS starts Jan. 20.
With the biggest esports deals in the rear view mirror, experts now believe M&A will shift to the second tier of teams, comprising organizations that have established brands in some key esports titles but aren’t in “League of Legends” or “Overwatch,” or otherwise lack a comprehensive footprint. The elite team organizations traded at valuations in the mid-to-high eight figures. Second-tier teams will clearly be much cheaper, but the market has not really developed at that level.
Demand for those smaller organizations is not entirely clear. Not all of the groups that pursued Riot’s LCS spots will necessarily look for other deals. But most experts believe there is still substantial, yet unfulfilled, demand from sports organizations.
One second-tier esports organization sold recently to a major buyer, when Jerry Jones and real estate investor John Goff acquired compLexity Gaming in early November.
CompLexity, which dates to 2003 but isn’t in “Overwatch” or “League of Legends,” will continue to develop its teams in “Counter-Strike: Global Offensive” and “Dota 2,” and explore rising games like “Rocket League” and “PlayerUnknown’s Battlegrounds,” founder Jason Lake said. The latter two still offer low barriers to entry because player salaries have not exploded as they have in the first two.
“Our outlook is this is a long game,” Lake said. “I have absolutely zero fear of missing out. I’m playing a 10- or 20-year business model. So as these current franchises enter the marketplace, we’ll see whether they’re successful or not. There’s no saying we might not buy into them in the future.” Lake predicted something entirely new will emerge in 2018: Entities will try to create franchises that would cover multiple games, which would give buyers both long-term security and insulation from the boom-and-bust risk that “Overwatch” buyers face.
“Dota 2” and “Counter-Strike,” both published by Valve, present a dilemma for investors. The games are both in the top tier of games by global audience along with “League of Legends,” carrying large prize purses and big attendance figures at events. But Valve has shown zero interest in organizing those games into more investor-friendly leagues with shared revenue, long-term scheduling certainty and intense promotional efforts.
Without that, investing in those teams is akin to backing a prize fighter: You’re negotiating over a split of cash prizes that are entirely performance-based with no assurances of future competitions, while salaries keep escalating. “For us, just operating a team in those games isn’t good enough,” said Noah Whinston, CEO of Immortals, which will now focus on “Overwatch,” “CS:GO” and “Dota 2” after being rejected by Riot. To make the “CS:GO” and “Dota 2” teams work, Whinston said, you have to build a system of content, events and technology around those brands to build sustained value.
Immortals, Dignitas and Team Envy are in the difficult position of having taken on outside investment and then losing their spots in Riot’s LCS, developments that severely damaged their enterprise value.
Whinston said Immortals will focus on expanding the depth of its involvement in other games, including “Dota 2” and “Counter-Strike.” In a statement, AEG Chief Strategy Officer and Immortals board member Steven Cohen said management and ownership are aligned on the next steps.
“Going forward, we’re not just team operators,” Whinston said. “Being a team operator is very important to us, but only insofar as it powers all the other elements of the business we care about, whether that’s content, or creating tech platforms around our fan base or moving into the live event space now that we’re partnered with AEG.”
Dignitas and Envy did not respond to requests for comment. Like Immortals, Envy has a spot in the Overwatch League. Dignitas is not in either league.
Riot’s plans in Europe will be closely watched. So far, Riot has not said what a franchise there would cost, and its plans for Europe have changed several times.
But Europe has upside potential, argued Marty Strenczewilk, CEO of Splyce, which fields an EU League of Legends team. Whereas the U.S. has reached most of its fans already, he said, Riot hasn’t even developed alternate language streams to play across the language-diverse Europe. “Just the Spanish broadcast alone,” he said. “Let’s not forget that’s the third-most spoken language in the world behind Chinese and English, and we’re talking about a market that’s barely been tapped.”
Investors will continue to back companies that want to provide third-party services to teams, leagues, media partners and sponsors too. There’s still a strong demand for better audience information to inform sponsorship or media deals, and the live events business shows promise as well. There is some caution on the third-party service provider front, though, because publishers may want to take those business lines for themselves, building exclusive venues for their games, developing in-house analytics tools and hiring their own content producers.
Strenczewilk predicts people who already have a toehold in esports will gain the upper hand in this second phase of esports investment because they’ve gained the confidence to move quickly.
“If you’re trying to be someone’s first investment in esports, that’s hard,” he said. “You’ve got to convince board members, and there’s a barrier. But if you’re the third, who cares?”
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