What Happens When Real Sports Money Moves Into Video Game Sports?

Hoping Mainstream Investors Make E-Sports Attractive to Big Advertisers

Published on .

Reprints Reprints

Live gaming in Brussels.
Live gaming in Brussels. Credit: Riot Games via Instagram (lolesports)

The National Football League embarked on a tumultuous offseason before the playoffs even started, with three teams vying to move to Los Angeles and the league approving its first relocation in almost two decades. That was nothing compared with the upheaval taking place in a slightly less famous sports league, the League of Legends Championship Series. When the new season begins Saturday in the world's most prominent venue for competitive video gaming, three of the 10 teams in the North American branch of LCS will be run by new owners, several existing teams will field entirely new rosters, and little about the landscape will remain untouched from 2015.

Let's just say this up front: It's silly to compare LCS, where teams sell for about $1 million, to the a multibillion-dollar juggernaut in which a star such as Tom Brady makes that much for playing in just two regular-season games. But for those tempted to scoff at video game competitions, developments over recent months mark the arrival of big business—and veterans of pro sports industry -- into the burgeoning world of e-sports. Among the new Legends owners are Andy Miller and Mark Mastrov, who also own a stake in the Sacramento Kings, as well as Memphis Grizzlies co-owner Steve Kaplan and former NBA star Rick Fox. These deep-pocketed newcomers have arrived on the scene in time to push this insular world into something that looks a lot more like traditional sports.

"The guys who are buying teams want there to be an NFL- style ecosystem," says Michael Vorhaus, president of Magid Advisors, a consultant who has worked with e-sports businesses. The new e-sports moguls are kickstarting a process of long-term change. "Everyone who I have talked to who is looking to buy a team or owns a team is looking for capital appreciation," he says, with the common expectation being a 10-fold rise in value some day. "And no one thinks that some day is next year."

Getting there isn't simply a matter of scale. Competitive video gaming is still in its Cambrian explosion phase, with all the corresponding chaos. The e-sports landscape consists of a mess of game publishers, independent tournament organizers, teams, and streaming platforms -- all of which are typically run by young men working at cross-purposes with no overall strategy.

Legends Championship Series is an island of relative stability by comparison with this e-sports disarray. That's primarily because Riot Games, publisher of the game League of Legends, runs the competitions itself and maintains strict control over the teams involved. Still, Riot has yet to develop many of the accoutrements of the standard sports league business model. There are no long-term broadcast deals or stable organizations that keep teams running, no standards for the way players are treated, and not much in the way of a strategy for ensuring competitive parity. The recent turnover in team ownership might be an early sign of professionalization -- and an indicator of significant upheaval along the way.

The big changes in Legends started last fall when Team 8, which had struggling in recent seasons, decided to drop out of the league. Selling an e-sports team is different from selling a franchise in the National Basketball Association. No arena leases or massive player contracts change hands; the only thing for sale is is the right to enter the competition itself. Terms of these e-sports deals aren't public, but people with knowledge of the recent transactions said slots this offseason sold for between $800,000 and $1.2 million, as much as triple the prices during the previous offseason.

The new owners of Team 8's slot dubbed their squad the Immortals. They quickly built an all-star roster by spending freely to attract top players using a stash of money raised from outside investors. Even before hiring players, Noah Whinston, the team's chief executive, hired support staff to do such things as set up a nutrition schedule and develop training regimens for his team. When all was said and done, only one person from Team 8 remained. Commentators starting referring to the new roster as a dream team.

The Immortals's most notable advantage has been access to capital. Mr. Whinston said that splashing around money was the best way to persuade players to join him instead of a rival team with better cachet among fans, such as perennial favorites Cloud9 or Team SoloMid. "You need to be able to spend money to catch up," he said. "No startup would come in and say, 'We'll only pay you as much as Intel would.'"

By the end of the year, two other groups of investors had followed a similar pattern and started new teams, NRG and Echo Fox, back by significant resources. Representatives of those teams either didn't respond to interview requests or declined to comment. The new money meant that the cloistered fraternity of e-sports owners found itself under increasing pressure. By some accounts, player salaries have as much as quadrupled in a single year, making holding on to a roster spot a daunting proposal for team owners without considerable financial resources.

"The expectations have grown exponentially," said Stephen Ellis, a former professional video game player who is now involved in a range of e-sports businesses. "Teams are almost being forced to take on outside investment on unfavorable terms."

The worries of poorer teams played out in a recent online debate about whether teams should make player salaries public. Talking about how much your colleagues make gets awkward no matter what line of work you're in. Employers prefer to negotiate salaries in private, and openly discussing compensation is taboo in many workplaces -- even though laws prohibit penalizing workers for sharing how much they get paid. One notable exception is professional sports. Not only does everyone on the Cleveland Cavaliers know how much Tristan Thompson's most recent contract is worth ($82 million for five years), but NBA fans start the debate over whether he should be the sixth-highest-paid power forward in the league from the moment the numbers go public. Arguments over salaries have become part of the pro-sports spectacle.

E-sports players -- and maybe more relevantly, their employers -- don't yet have their finances subjected to this type of public scrutiny. That could change. Team Ember, another newly formed squad, recently published a list of how much it pays players to compete in a lower level of League of Legends competition. The salaries ranged from $70,000 to $92,000, along with housing and health care. Elemental, the team's parent organization, has raised $2 million from investors at Signia Venture Partners and said discussing salaries was a way to do right by its players. How can someone negotiate a fair salary without knowing how much other players are getting paid?

That argument resonated with many people in the e-sports industry and inspired calls for teams to prove they aren't taking advantage of mostly teenage players. Mr. Whinston of the Immortals immediately supported the idea. Other team owners pushed back. Devin Nash, chief executive of Counter Logic Gaming, another team in Legends, believes venture-backed teams are pushing for salary transparency as a way to gain an advantage against those who can't afford to keep up. The new money, he argues, is already undermining the stability of the market. "This ecosystem broadcasts one message: Money wins. New VCs with even more backing come in, or existing ones do another investment round. Salaries rise 200% again. And again. And again. And in two years, it's impossible to have an e-sports team unless you're a behemoth," Mr. Nash wrote in an online essay.

The NFL and the NBA smooth out tensions between richer and poorer teams through intricate systems of revenue sharing and salary caps. Nothing like this is in place in e-sports leagues. Whalen Rozelle, Riot's director of e-sports, says the company isn't inclined to intervene at this point."We can't just decide on a whim that it works in basketball, let's apply it one-to-one for e-sports," he says. The company has no official stance on whether salaries should be public.

The biggest difference between's Riot's stewardship of Legends and the NFL's approach to pro football is that e-sports isn't Riot's core business. Game publishers have traditionally seen competitive gaming as a marketing expense that pays off by encouraging people to buy more games. There has never really been a market for broadcast or streaming rights, which account for the lion's share of revenue for organizations such as the NFL or NBA. But this may be changing, too. Turner announced that it would start its own e-sports league, and ESPN unveiled a new e-sports operation on Thursday. Activision, the publisher of Call of Duty, recently bought Major League Gaming, an online network for e-sports events, in a deal reportedly valued at $46 million.

New team owners in the League of Legends Championship Series expecting to see a return on their investments are surely going to push Riot, which is owned by the Chinese Internet conglomerate Tencent, in the direction of NFL-style management, says Bryce Blum, a lawyer who represents teams and other e- sports organizations. "There's still no [revenue] sharing, there no broadcasting split," he points out. Riot already helps pay for player salaries, but a steady stream of money from television or Internet distributors would presumably lay the groundwork for a more stable league.

Other people within e-sports are hoping that the arrival of mainstream investors will make the industry seem safe to big advertisers. If the new investors happen to squeeze the smaller teams, so be it. "All I can say is there's a massive opportunity in the marketplace right now," says Steve Arhancet, co-owner of the Legends squad Team Liquid, "and some people know how to solve it, and some don't."

-- Bloomberg News

In this article:
Most Popular