Is franchising the future for esports?
Franchising has been an important tool in getting traditional sports investors involved in esports in recent years, but the effectiveness of the system itself conversely remains a controversial and hotly debated topic within gaming.
Major video game publishers Activision Blizzard and Riot Games have added franchising systems to their biggest esports leagues in the past three years, decisions that set off a wave of investment from sports owner/entrepreneurs such as Stan Kroenke, Peter Guber and Ted Leonsis. Other publishers are said to now be weighing implementing franchising for some of their games.
Proponents of the move say that franchising has added investment, a more sophisticated business structure, stability, expertise and enterprise value to esports. That’s because the ubiquity of the franchising model in traditional sports has helped make the structure of esports leagues more understandable and thus more alluring to prospective owners and advertisers.
But questions remain about whether some of the franchise fees were exorbitant, whether geo-location is the best way to unlock fandom for franchised leagues, and whether some games that are currently not franchised would be best served by staying that way.
Sports Business Journal talked to 10 industry experts about whether franchising is the right way to go for all esports leagues or only some, and when team owners can judge whether their initial investments were properly priced.
“What franchising really gives is stability for the teams and a level of commitment to whoever is running the league,” said Bryce Blum, founder of ESG Law and Theorycraft, who serves as a lawyer for many of the top North American teams. “It creates a framework for more collaborative structural decision making and revenue sharing — and for leagues it creates a reciprocal dynamic where teams can’t just walk away. That level of commitment both ways can be very valuable.”
Activision Blizzard started the Overwatch League in 2018, after selling 12 franchise slots in 2017 heading into the inaugural season — with franchise fees reported to be $20 million. Activision Blizzard also is moving forward with 12-team, franchised Call of Duty League next year that will be city-based. Franchise fees were said to be $25 million for that property. Riot Games sold 10 franchise slots for its North American League of Legends Championship Series in 2017 for $10 million to existing teams and $13 million for new teams.
Several popular esports remain unfranchised, including DOTA, Fortnite and Counter-Strike: Global Offensive. Among those that could move to franchised systems in the future are FIFA, Apex Legends and Rocket League.
Unfranchised leagues are closer in structure to open tournaments, where any team has the chance to qualify as long as it reaches certain achievements or prerequisites. Some unfranchised leagues also have promotion and relegation.
It is far from a consensus that franchising is the only model.
For example, Jeremy Dunham, vice president of publishing for Rocket League owner Psyonix Studios, said that while franchising is something some of its teams have been interested in, “there’s no outright evidence that says that is the only way to go.” He added that while Psyonix is considering franchising, “there are all sorts of different models to make it bigger and better and still get more opportunities for players to make money, get prestige and have more access to the game.”
Blum noted that a publisher’s goal for a given game is among the most important determinants of whether an esport should go to a franchise model. Epic Games, for example, is seen as more interested in growing Fortnite as a video game than creating a pure esport, and it has focused more on individual players than teams in its competitions. Fortnite has ever-changing elements within the game that increase the randomness and decrease the need for elite skill to do well. This makes it less likely that the game would move to a franchise model. Other esports simply may not have the fan base to support franchising.
“The answer to the question, ‘Is franchising right for all professional esports around the world?’ cannot be ‘yes’ because there’s going to be some games and leagues too small to reasonably justify the type of friction, and massive financial and legal lift, that comes with setting up franchising,” Blum said. “I do think it’s fair to call into question whether or not the cost [of esports franchise fees] matches the risk-reward profile, but that’s a separate question entirely than whether franchising as a structure has the potential to be a good thing for a particular esport.”
One positive that franchising has provided in esports is stability and security, industry experts say. For example, the LCS dropped its promotion and relegation system after it moved to a franchising model, giving LCS teams the confidence to know they could invest in and plan for the long term since there is no chance the team could drop out of the league. Teams in the Overwatch League know they’ll share in league revenue around media rights and sponsorship.
While unfranchised esports leagues such as Rocket League have set up certain revenue-sharing opportunities for teams, experts say that the biggest potential to distribute revenue from sponsorship and media rights is in the franchised properties, where the team owners help own the league itself.
For example, the OWL has had media-rights deals with Twitch and ABC/ESPN over its first two seasons, and the property is starting to land blue-chip sponsors such as Bud Light, Coca-Cola and Toyota with regularity. Along with getting local revenue from holding home events and selling tickets to them, getting revenue from these growing streams is part of how OWL teams plan to make their operations profitable in the coming years.
First Look podcast, with esports discussion at the 13:05 mark:
The nonfranchised Rocket League Championship Series lets teams sell certain in-game items such as branded car decals or wheels to people playing the video game as a way to help teams make money. But such revenue, while welcomed, is not seen by teams as massively material, and some in the Rocket League space say they would be happy to see a franchised model be implemented.
Still, industry experts point out that not all esports leagues are necessarily ripe to move to a franchising model for a multitude of reasons. Some critics and fans also feel that franchising takes away a grassroots element of a game’s esports ecosystem by getting rid of open competitions and taking away the ability to have Cinderella stories.
For example, Fortnite’s esports scene is not franchised, and it touted that 60 million people try to qualify for its World Cup event earlier this year. Some in the Rocket League space also said they were averse to the franchising idea after Sports Business Journal reported that Psyonix League was considering the move.
As franchising leads to deals for exclusive media rights, an esport’s distribution could be limited. The OWL in its first two seasons, for example, had deals with ABC/ESPN and Twitch, so its games weren’t on YouTube.
There also have been some longtime teams that have dropped out of a game’s esport league after it moved to a franchising model. Most recently, the Call of Duty League has faced some negative headlines over a couple well-known teams from its prior, nonfranchised model not switching over to its new franchised system that is debuting in 2020. One of them was the esports organization 100 Thieves, whose founder Matt “Nadeshot” Haag gave an impassioned explanation in a video released on social media where he cited the price of an expansion slot among the reasons for the move.
Haag also noted that 100 Thieves was trying to build a global fan base, which didn’t fully match up with the Call of Duty League’s new city-based model. To that end, the question over whether to geo-locate is another subset of the franchising debate within esports.
While Activision Blizzard’s two franchised esports leagues are trying out the home-team model like traditional sports, Riot Games’ League of Legends franchises are not tied to specific areas, which has led to dual visions on the best way to grow a competitive gaming property.
OWL owners and executives are reporting early positive results in their bids to build local fan bases, and they see the exclusive territorial marketing rights afforded to them as another benefit of Activision Blizzard’s franchising system.
Joe Heyer, Spectra’s director of esports partnerships who is helping sell sponsorships to Comcast Spectacor’s new $50 million Fusion Arena in Philadelphia (see related story), likes to tell a story from a recent watch party for the Philadelphia Fusion team in the Overwatch League. A Philadelphian walked into the bar where the Fusion was holding the watch party and questioned Heyer on what the fans were watching.
“He didn’t fully grasp it, but then I said, ‘By the way, we’re playing New York.’ And he said, ‘Go Philly and (expletive) New York!’” Heyer said. “That’s the spirit we’re trying to tap into.”
Among the most important business aspects to watch in the franchised leagues over the coming years will be how team owners come to view their investments in relation to their initial franchise fees. Most OWL teams, for example, have yet to turn a profit, so the pressure is increasing to find more revenue and keep costs from skyrocketing.
Ben Spoont, co-founder and CEO of Misfits Gaming, which owns franchises in the Overwatch League, Call of Duty League and League of Legends’ European series, predicted that team owners will start to know the value of their investment within three to five years.
Tucker Roberts, president of the Fusion and son of Comcast CEO Brian Roberts, said the Fusion has already seen its value go up, but that “we’re really in the first inning of esports,” and his family maintains confidence that the investment will pay off handsomely in the long run.
Potential expansion by the franchised leagues is also likely. The OWL would like to expand into Europe, and sources said that the Call of Duty League had more than 12 prospective investors and only stopped at a dozen teams for the first year for competitive structure purposes.
Chris Overholt, CEO of OverActive Media, which owns franchises in OWL, Call of Duty League and League of Legends’ European series, said he remains “a big believer” in the franchising model set up by Activision Blizzard CEO Bobby Kotick and Activision Blizzard Esports CEO Pete Vlastelica.
“We were compelled by the Overwatch League model, and the way Bobby and Pete have put that together has allowed us to participate in the sharing of revenue and enterprise value over time,” said Overholt. “We have a long view to this industry, and we know what it’s going to take to make profitability and enterprise growth a reality.”
For more coverage of the business of esports, visit our partners, esportsobserver.com.