A statement to the current and future economic system of the EU LCS
I would like to express some of my feelings, thoughts and views to the current situation of EU LCS and some outlooks to the possible future. Please take in consideration that I will not write down any confidential data I got from RIOT.
On the other hand it’s a fact that I - as an owner – am still waiting for detailed information for season 2018 and it seems like that there are a lot of changes for the entire season 2018 that are still not written in stone.
I also want to say that I can understand a lot of the frustrations expressed by H2K. We at UOL have chosen a different way to handle the current situation and our possible reactions on RIOT’s future decisions. From the reactions about H2K’s letters, I can see that a lot of people have a pretty wrong view about what the real economic problems are that the organisations are facing. Also it seems that a lot of people involved in esports are starting to believe their own expressed mantras too much.
I believe it is no real news when I state that the economic situation for the esport organisations is generally difficult. Being a CEO of an organization “only” involved in League of Legends, I will not discuss any other games but just stick to the area where I am familiar with: EU LCS and LOL.
Before I reflect my view about the future of EU LCS and UOL, I want to dig into some experiences I made in the last 3 years of LCS. This is from the viewpoint of a medium/smaller organization, for organisations with longer history or deeper pockets it may be different, they can talk for themselves.
Also I would like to state that UOL as a family based organization is not a realistic example for an average organisation dealing in the EU LCS. We also made a lot of different experiences than other organisations and our focus was always about what was the best for the team and the game. Being the first team with employed players, having loyal players like Hylissang, Vizicsacsi and Exileh, our “own” team coach and a super low cost management of (near) family based persons which support UOL by working for free or with lowest compensations.
Let's start with some basic issues about costs, branding and income.
In the last years the conditions for players improved a lot. The salaries went up exponentially and their status changed from (semi) independent contractors to employees. As a side note, all UOL players always had employee contracts. As an employee (beside all kind of other labour rights) the contracts include health insurance and unemployment benefits.
When RIOT followed the German Law and made player employment mandatory for all organisations, strangely a lot of players demanded to compensate the “loss” for tax and social fees from the organisations, as if they did not pay tax and health insurance before.
On top of the huge salaries the organisations MUST pay a part of the social fees, which means an additional ~21% increase of the salary costs.
Beside of all above another reason the salaries went over the moon was the use of investment capital. Organisations simply invested tons of money to buy their rosters, just focussing on individual performance and putting rosters together as boy bands. That’s with the hope that you can buy success and the return of investment will come one day.
As a result the players salaries went out of proportion compared to the income of the organisations.
Organisation branding, player exposure
It’s difficult in esports to create your own face as an organisation. The solid building of a brand normally takes a couple of years. In other sports the normal path is to grow steadily and work your way through the different level classes into the highest league class. In esport there is mostly no “second” league class. It is the top league or nothing. When you look at EU LCS, only 4 organizations (FNC, ROC, H2K, UOL) played for 3 years or longer in the highest league.
This means building an own brand identity, play style and solid fan base in such a short time is a difficult and very resources costing act.
One thing that is used as a tool in other sports to accelerate brand popularity is team and player exposure. Specials and spotlights about players, interviews and team presentations are a proper way to help the brand to grow in popularity.
Different from classic sports like football, the majority of players in LOL simply refuse to sign contracts longer than one year. Main reason is the hope to get a better contract at another team for the next season or even split. As a result it’s a walk on a knife´s edge for organisations, how much they invest in hyping players and pay a lot of money for their exposure and popularity. The more popular a player will get the more it will be foreseeable that he will leave the team for better offers. In addition a lot of the “organisation” fans move with the player to the new organisation.
It’s the same when you work with rookies. They usually sign only for a one year contract. That means you have the risk of taking a no-name starter and/or invest a lot in player exposure and in the end it does not pay off for the organisation. After the contract ends, the player is free to leave without any financial compensation for the organisation.
With the exploding discrepancy between EU and NA player salaries, this will now not only be an issue for small and medium organisations but for all EU teams.
Income: Sponsors, revenue sharing and the role of RIOT
I don’t want to repeat too much how an EU LCS organisation can finance itself. Check Romain´s video for a detailed explanation: https://www.youtube.com/watch?v=swy8YDxqS7Y&t=2s
Actually there are 3 sources of income:
a) RIOT: The basic compensation from RIOT which is basically falling far behind to the increased costs but I am happy there is still some compensation.
And for people asking why RIOT should pay any compensation: every company invests in marketing. Normally it’s something from 8 to 12% of the revenue. (EU) LCS is nothing else than a marketing tool for RIOT, means the organisations doing a part of the marketing job. They should be paid for it as long as no revenue sharing of adverts or other sources for the playing teams exists.
b) Merchandising: Organisations can be happy making more than 50 to 100K€ out of this.
c) Sponsors: The deals with sponsors are much more difficult to create and in volume smaller as generally predicted.
And before people start talking about UOL to be too pink/naked/gay or what else, we do extremely well at the sponsor side in comparison to other teams. And we are happy to have sponsors who are real partners with a lot of support in all kind of areas. More content with them will come shortly.
All current sources of income combined cannot compensate the costs of a normal operating organisation at the moment.
Some rules of economics and outlook for 2018
When doing business every investment is made to gain a profit. This profit can be financial or strategical. As an example: football clubs investing in a virtual football league as an expansion to their normal activities to secure large existing sponsor deals and/or to find new supporters for their brand.
When investing in a product with a restricted life time like a game the main questions are: how long will this game or the league survive and is it long enough to get a return of investment? As an organisation just playing the game the question is: in what do I really invest and how do I get a ROI (Return Of Investment)?
Normally I would say investing in the game and team will increase the value of the LCS slot, the growth of the brand will bring fans and fans bring sponsors.
Possibilities to get a ROI: generate sponsor money, sell the spot or sell the brand. Unfortunately the most important part for the ROI is not created yet: revenue sharing.
But with the possible coming changes to the EU LCS from an investor’s point of view everything is set back to near zero and a lot of value/capital is destroyed.
When the future plans for EU LCS as reported by ESPN ( http://www.espn.com/esports/story/_/id/20563464/sources-eu-lcs-split-four-regions) are correct, this will for sure have several economic short time consequences and further create some possible long time effects.
On short time, factual:
1) By expanding EU teams from 10 to 24 the existing slots value crashes down to (almost) zero. Again according to multiple press releases, current participating NA LCS teams will get compensated by several million when they get no new slot in 2018.
2) Brands have large additional costs to move to new locations, found new legal companies, build up new infrastructures and have to do a double book keeping in the transition year.
3) Sponsors will be spread out over 24 organisations instead of 10.
4) 24 teams are fighting for 3 world spots instead of 10 like in NA.
5) 24 teams are fighting for 120 players on a market which will be swept clean by NA organisations.
On long term, hopefully:
1) Building a new league systems with a popular second level based on regional leagues will give more financial safety.
2) Easier to activate (smaller) local sponsors.
3) Better talent building because the need of more players.
4) More rivalry between regional league champions, fighting in a new structured EU wide competition or tournament.
5) General lower player salaries but some top EU teams will try to offer NA salaries to keep best players
For the current EU LCS teams it means new insecurities, new investments and a loss of value of existing investments. The real shocker for all current organisations and investors is the realisation that RIOT can do these changes without any saying of the organisations. Although that’s the natural risk of investing into organisations playing in a non-franchised league the behaviour of RIOT in this matter will have a direct impact on the risk assessment of the new organisations and future investors. For the current investors it means that their ROI plans are obsolete and the whole investment has to be newly valued.
RIOT, compensation and fairness.
Although I believe the changes as described by ESPN can have a positive effect on the long term, the organisations will run into big financial risks for the next 2 years.
It would be fair by RIOT to compensate teams for the actual loss of investment and the new costs and risks created by these changes. This can be done directly by RIOT or by asking a buy-in fee for new organisations entering the local leagues for the use as a compensation similar to the NA model.
When the risks and costs need to be carried mainly by the organisations the current financial situation for existing teams, which helped to make LOL popular, is getting dramatically worse.
Revenue Sharing, the solution to all problems?
Entering the major league in a classic sport like football means automatically a multi-million euro compensation for the participating organisation. This money is coming from the league and is a share of the revenue made by selling the rights for broadcasts and sponsor/advertisements contracts.
Because all rights of the league are in the hand of RIOT it is only RIOT who can create revenue. On the other hand the organisations can only make sponsor deals by activating their own social media channels and selling parts of the jersey for logos.
Till now RIOT missed the opportunity to create substantial revenue figures. The only revenue deal which went public was the BAMtech deal made in NA. According to reddit user RIOTMagus (https://www.reddit.com/r/leagueoflegends/comments/6wsafm/mind_games_weldon_discusses_rumors_and_his_fears/dmals5z/)this deal is also a base for a financial model to support EU LCS, which is very positive.
But again there is the devil is in the details: is this supporting model replacing the actual compensation model or is it in addition?
In case the EU organisations do NOT get any guarantee for a fixed compensation they have to trust RIOT taking the right steps to generate a certain volume of revenue to survive. In that case the organisations will bury the whole risks for this new finance model and the change to local leagues, alone.
What does this mean for LOL esports in EU with the above described changes
The only logical step for current organisations and investors is to lower their financial commitment for LOL in the next year(s). At least as long there is no clear path how organisations come finally to a situation with positive results. The final outcome is that esports in EU will suffer badly, at least in the first years. The discrepancy between the two west leagues, EU and NA, will be simply too large. NA comes with a very large financial investment volume based on a clear plan how investors can come to a return of investment build on a solid base: a protected licensed league.
Everybody can make up their own mind what the consequences will be for the EU player pool and quality of the rosters.
In the long run the model could work for EU but with big risks in the next years. As soon EU gets too deep in the declining spiral more investors/organisations will consider to jump out of LOL and the bubble bursts.
So it is up to RIOT in cooperation with the old and new organisations to finds ways to grow new talent, new hype and keep the quality of the rosters on a level which can compete with other regions.
There are several ways to do so. As an example, a change towards a transfer market like in football with longer player contracts and buy out sums or fees, could help to balance the leagues and give organisations an incentive to invest in new talent, create player content and build new champions.
Jos Mallant (CEO Unicorns of Love)