How to improve the LCS Ecosystem and Revenue Streams for LCS Teams

In times of controversy, the Twittersphere is often quick to pass judgment. I think in the race to condemn Riot Games’ President and founder Marc “Tryndamere” Merrill, there have been some potentially valuable lessons lost.

I find a lot of comments in Marc’s original post a bit off base and slightly out of touch with the League of Legends esports community at large-not a minority opinion. In fact it mostly seems that we’ve entered a parallel universe where its Tryndamere vs. the World. And since the original post he has walked his comments back some indicating at least some measure of regret.

But I don’t feel his comments are representative of the Riot Games esports department as a whole, and in Marc’s revised post it seems he realized that as well. So I reserve judgment about Riot’s intentions and opinions about many of the issues that have been raised in this whole saga by the plethora of personalities that have chimed in about it.

But at least the regretful drama started a conversation that’s been long overdue.

Unsustainability

TSM owner and founder Andy “Reginald” Dinh gave more or less a picture perfect response to try to put to bed some of the more outlandish claims in Merrill’s Reddit diatribe. But I wanted to clarify a few things that I think were missed in the prevailing discussion.

I’ve already addressed the current unstable ecosystem and some potential solutions in a previous article that you can find here, so for this article I will address the idea of revenue sharing and profitability for teams — including where Riot could potentially directly contribute to the financial solvency of LCS teams.

Let me start off by saying, I don’t actually believe that it’s Riot’s responsibility to subsidize teams with revenue and put money directly into League teams’ pockets. At least not in a vacuum, but the situation they’ve created somewhat demands that they do.

Sitting back and thinking about this, I can’t understand exactly what different members of the community want in regards to Riot revenue sharing. Each time I ask a different friend, colleague, or community member they each seem to have a different idea about what’s expected and what’s fair.

Do they want teams to get a share of streaming revenue? Do they want a share of esports revenue? Do they want a share of Riot Games Inc. revenue? What pool of money is it exactly that people think Riot should be sharing from? What’s fair? And does it matter if any of those categories are not currently profitable?

I want to address each of the potential streams.

Streaming Rights

In all likelihood, Riot Games has a good partnership deal with Azubu, Twitch, and YouTube. They probably have negotiated a good revenue sharing deal and it’s likely that the streaming partners pay them a flat rate over the top for bringing their streams to their respective networks. After all, the LCS brings enormous traffic into their streaming network.

These deals definitely bring some money back to Riot Games. But when people talk about revenue sharing in traditional sports, it is generally based on revenue generated from the sale of broadcasting rights, and what we’re really talking about is bidding.

For example, the NFL sells the rights to broadcast its content for billions of dollars. Specifically (via ESPN):

Until the broadcast contract ended in 2013, the terrestrial television networks CBS ($3.73B), NBC ($3.6B) and Fox ($4.27B) — as well as cable television’s ESPN ($8.8B) — paid a combined total of $20.4 billion to broadcast NFL games. From 2014 to 2022, the same networks will pay $39.6 billion for the same broadcast rights.

The NFL earning this amount of money simply by selling the rights to broadcast games (of course) generates a significant source of revenue professional teams. In all likelihood, this is the majority of the income that the NFL even receives (The NFL made ~$12 billion in 2014). The NFL is able to sell its broadcasting rights for this much money because of the popularity of the sport. People will watch NFL games regardless of where they are being aired.

I do believe there is a market where Riot Games could move to exclusive streaming partners, and make various stream providers bid for the right to air LCS content. But League of Legends is not as popular as the NFL — not close. And the amount that Riot could sell its broadcasting for doesn’t even hold a candle to the NFL.

How many streaming services would even be interested in getting into a bidding war over League streaming rights? Twitch, YouTube, Azubu, Ustream, Hitbox… are there any others that have ever shown much interest in esports? How many services could afford to go against the deep coffers of Google (who owns YouTube) or Amazon (who owns Twitch)? And how much are the rights to stream LCS games worth? It’s difficult to measure. There hasn’t been a deal of this type in esports ever before.

So, yes this is certainly one avenue where Riot could improve, but it’s not the only one, and it might not even be the most beneficial.

Esports Revenue Share

To the second point, should Riot share esports revenue with teams?

Well for that to be effective, there would have to be significant revenue to begin with. As of now, esports is still operating at a loss for Riot. Yes, when players watch the LCS and Worlds they are much more likely to play League of Legends and to buy skins, but even considering how much this boosts skin sales, and taking into account sales for the All Star Skins and the World Championship Skins, esports would still be in the red.

It’s getting closer, but it still isn’t break even. It then begs the question, is it fair to require Riot to share revenue when they aren’t even profitable yet? I’m not actually sure. But there’s more at work here.

Part of the problem is the absence of sponsors for the NA and EU LCS; especially compared to something like Turner’s ELeague, a product that only recently concluded its first season. The team at Turner has managed to accrue a myriad of sponsors and partners in a very short time. I find it strange when compared to the virtually sponsorless LCS. No more American Express, Plantronics or even Coke representation anywhere. If you take a stroll over to lolesports.com there’s not a partner in site.

Whether this is because Riot is being protective of their brand, or their biz dev team is ineffective or too picky about which deals they want to take, or whether Riot is overestimating their brand value, etc (there are really a lot of potential causes for why Riot doesn’t have any partners / sponsors for the LCS), it basically boils down to Riot not capitalizing on a very successful product.

And this is where Regi has a great point. The LCS puts restrictions on what teams and players are able to do for their own sponsors, and even what sponsors a team can partner with. This severely decreases both sponsor ROI, and available team revenue streams. It also makes it more likely that sponsors will choose to invest in other esports titles like CSGO, Hearthstone, CoD, DOTA2, Fighting Games, or even Overwatch.

The nature of LCS teams’ relationship with Riot Games is that (according to a number of owners) they need permission for almost any monetization opportunity that comes along because Riot is very protective of its LCS brand, and the team agreements are very restrictive. Until teams band together and fight for better agreements, I don’t think there will be much positive change in this regard. Riot hasn’t needed to change their policies in this regard, so why would they? More on this later.

Riot Games Revenue Share

I do want to address the last point I brought up in the intro about Riot sharing its corporate profits with teams. I think this is a completely unfair ask by anyone. Riot Games is a company run for profit, and it makes decisions based on profitability and to benefit its shareholders. Of course the manifesto of Riot is to be player focused, but if the company didn’t make money, there would be no company.

Riot has no obligation to provide profit to anyone else on any level. The LCS revenue makes up such a small portion of Riot Games’s business that it is completely disproportionate for LCS teams to get any significant revenue from Riot Games at large. Yes TSM playing in the LCS does affect skin sales to some extent, but most of it is just the fact that Riot Games makes really awesome skins and a great game.

Similarly, I wouldn’t want esports organizations to required to provide revenue sharing their own players either, though it would be super cool if they did. But I don’t think teams have this obligation to their players any more than Riot does to LCS teams.

Now I don’t actually think it’s the duty of the LCS to provide subsidies for teams, but I think in the particular situation Riot has created, they have to. Riot has total exclusivity over the teams’ ability to compete, and can dictate many of the ways in which teams can monetize, and even mandate certain positions within team organizations (such as managers and coaches). If you are restricting teams’ own business development and monetization, shouldn’t you be trying to help monetize on their behalf? Reginald has suggested many ways that Riot could accomplish this, but there are even more possibilities.

I believe that Marc is right in that it isn’t Riot’s responsibility to ensure financial solvency for these organizations, but as long as they restrict teams’ ability to do it to themselves, they sort of have to take some measure of ownership for teams’ financial stability.

I am honestly surprised there hasn’t been a collective hold out by LCS owners by this point already. It would probably only take 4 or 5 teams from NA LCS to get real change. Can you imagine what would happen if TSM, Cloud9, Team Liquid, and Immortals all held out on signing the team agreements for 2017? I doubt Riot Games would try to replace all four rather than negotiate terms.

It does seems that LCS teams are willing to take the first step forward. Wednesday, they collectively sent a proposal to Riot Games detailing what Reginald describes as how to “solve these problems together.” What does that mean, and what do their proposed solutions look like? We probably won’t find out for a while. But since Franchising and ecosystem issues have been brought to the forefront, I imagine we can infer the tone of the conversation.

But if Riot is unhappy with the current arrangement and the relationship that exists between them and team ownership, then they should change it for the better.

After all, they are the only ones with the power to do so.

Frank Fields is an esports industry veteran of 12+ years and has worked with IPL, Blizzard and Riot Games. Follow him on Twitter @FFMirhi