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People are investing millions into League of Legends franchises. Will the bet pay off?

The Summoner's Cup at the 2019 League of Legends World Finals in Paris (Riot Games)

From the moment he was appointed Dignitas CEO in 2018, Michael Prindiville made rejoining the League of Legends Championship Series (LCS) his top priority. Dignitas helped found the game’s North American professional league six years ago, but the team was denied a seat at the table when the LCS turned to a franchise model in 2017. Now, after negotiating a merger with Clutch Gaming that reportedly cost $20 million, Dignitas is back at the forefront of the world’s most popular esport.

“[League] is showing no signs of slowing down,” Prindiville said. “l think it’s by far the most sustainable esport in North America, if not the globe. We really wanted to be a part of that, secure that franchise going forward. It’s a game we believe in.”

Dignitas is not alone in its zeal for League of Legends, a game that peaks at roughly 8 million concurrent players every day around the globe, according to publisher Riot Games. In 2020, two other previously scorned esports outfits will re-enter the LCS. Immortals Gaming Club purchased Infinite Esports & Entertainment and gained control of OpTic Gaming’s LCS slot, while Evil Geniuses bought Echo Fox’s recently vacated spot at auction. That spot cost Evil Geniuses $33 million, according to a person familiar with the sale terms.

“If you’re investing a large amount of time, of dollars, of resources, you want something that’s going to last,” said Evil Geniuses CEO Nicole LaPointe Jameson. “How Riot structures not only engaging new fans to the core game, but also fans into the esports scene, is very intelligent. They focus on putting the player first, inspiring joy in the community, and ensuring it’s truly multi-generational, which resonated with Evil Geniuses.”

The Evil Geniuses purchase represented a 230-percent increase in value of an LCS slot over just two years (Echo Fox paid $10 million for the spot in 2017). Nine of the top 13 organizations on Forbes’s annual “World’s Most Valuable Esports Companies” list are League of Legends franchise owners across North America and Europe, each with a valuation at over $120 million.

But it’s one thing to spend millions on the promise of growth, and another to generate even more in return. Amid skyrocketing valuations, how do these major esports organizations plan to turn those projections into actual profits?

Will Hershey, the co-founder and CEO of Roundhilll Investments, believes team owners make a calculus that starts with the League of Legends’ worldwide popularity. Hershey said that unlike traditional sports, which are timeless and don’t rely on the ownership of a particular entity to exist, the lifespan of esports is tied to their underlying games and those games’ developers. While the game of basketball can outlast the NBA, if Riot were to ever pull the plug on League of Legends, its esports league would follow it into the dark.

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Ten years after its release, League of Legends remains immensely popular. The free-to-play game generated $1.4 billion in 2018 revenue for Riot, third among all digital games behind Fortnite and Dungeon Fighter Online, per SuperData. Riot’s update of the daily peak concurrent players figure was the first time the publisher had revealed playerbase data since 2016, when it said 100 million active users played each month. The differing metrics make it tricky to definitively say League is growing, but for Hershey, there’s enough positivity to buy in.

“If you're going to bet on a single game, [League] is probably the one that makes the most sense right now,” Hershey said. “It's a game that has longevity. It's a game that's still making a ton of money for the publisher, and that's probably the single most important factor in terms of whether you want to make an investment.”

The second most important factor for future profits? Selling media rights, said Josh Chapman, the co-founder and managing partner of Konvoy Ventures, a venture capital firm that specializes in the video gaming and esports industry.

“It all comes down to media rights,” Chapman said. “I think this league will generate a lot of money. Whether it’s profitable is entirely contingent on each team’s individual investment as well as how much of that media rights revenue is shared with the slot.”

In generating revenue through the sale of media rights, Chapman thinks the LCS will be little different than traditional American sports league like the NFL, which currently has a nine-year, $27.9 billion rights deal with CBS, NBC and FOX to broadcast its Sunday games. But how much can LCS media rights be sold for?

Riot initially sold the League of Legends esports broadcast rights to BAMTech in 2016 for a minimum of $300 million over seven years, according to the Wall Street Journal. That deal was renegotiated in 2018 after BAMTech was acquired by Disney for $1.5 billion; the non-exclusive rights transferred to ESPN’s streaming platform ESPN+, allowing the LCS and other international leagues to be broadcast on Twitch and YouTube as well. The length and value of those deals has not been made public.

To get a sense of what the LCS media rights could be worth now, Chapman pointed to the two-year, $90 million deal Activision Blizzard’s Overwatch League signed with Twitch to be the league’s exclusive third-party streaming outlet.

Consider the following back-of-the-envelope calculation. Given that from September 2017 to August 2019, Overwatch averaged 33,987 average viewers per month on Twitch (via metrics website Twitch Tracker), Twitch essentially paid $1,324 per average viewer. If that price point was used for League of Legends’s 116,669 average over the same period, it would create a yearly media rights deal worth $154.5 million. Chapman’s calculation yielded a similar figure when comparing total Overwatch hours watched on Twitch (24.8 million) versus League (85.3 million) over the same two-year stretch.

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Chapman and Hershey both question that figure however, and believe that Twitch wildly overpaid for Overwatch League in a deal that was struck before OWL debuted in 2017. They both believe any subsequent deal will be negotiated for far less. In an Oct. 30 Konvoy Ventures blog post, Chapman estimated that the OWL Twitch channel brought in only $8.2 million of the $27 million in ad revenue Overwatch as a game generated for Twitch from September 2018 to August 2019, well below its $45 million-a-year price tag.

How does League of Legends fare? The Riot Games Twitch channel logged 120 million hours watched over the same period — 11 percent of the 1.1 billion hours of League of Legends watched on Twitch. Chapman’s ad revenue model posits that League of Legends as a game accounted for 10.09 percent (or $100.9 million) of Twitch’s one billion in annual ad revenue. In that case, the Riot Games channel would be worth roughly $11.1 million per year.

These are ballpark figures, to be sure. Along with the LCS, the Riot Games Twitch channel broadcasts the League of Legends European Championship and big-draw international events like the Mid-Season Invitational and the World Championship, so isolating what the LCS broadcast rights are worth from this method is difficult.

That said, Hershey still believes in media rights as the eventual answer for LCS slot profitability, beyond sponsorship deals or merchandise sales.

“But you’re dealing with a very important difference,” Hershey said. “[Consumers have] always had to pay in some way to get access to traditional sports. In esports, that’s something that’s historically been free, so it’s going to be a really big hurdle for all of these leagues to figure out.”

Clearing that hurdle remains a work in progress. Currently, the LCS revenue share is split three ways: 35 percent (at minimum) for the players, 32.5 percent for the teams and the remaining 32.5 percent for Riot. Each team gets an equal share of half the team money pool, with the remaining half distributed based on, “regular season finish and contribution to viewership/fan engagement.”

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According to Hershey, most 2018 revenue share payouts were slightly less than $1 million per team. He expects those payments to range between $1 to $2 million in 2019.

“So nowhere near what they’re paying up front in terms of a franchise slot,” Hershey said. “But right now, we’re just so early in figuring out what the monetization will be for any of the esports leagues. League of Legends and the LCS is no different.”

Chapman hopes all of the LCS franchise owners understand the long-term nature of their investment in the league. Based on the current payout levels, it will take years to reach any sort of sustained profitability. And while League of Legends is immensely popular now, the game may not stay that way forever.

“If you look at franchising a League of Legends slot, that can be incredibly rewarding if the game lasts another 10-20 years, but that’s certainly a lot of risk,” Chapman said. “Can you monetize it in the interim? Absolutely, but the business models and the purchase prices around those games have to be rational and risk adjusted.

“If they are not rational and risk adjusted for a finite entity, then I start to question whether this is too much, too fast.”

Prindiville says he’s in it for the long haul. “We think they have 50 more years of this particular esport left in the tank,” Prindiville said. “In the short term, it’s about sponsorship and media rights. Those are the predominant revenue drivers, within esports in particular as a single vertical within the broader gaming entertainment business that we’re looking to build. In the long term, we want to hold a key franchise like LCS because there’s long term asset value. Ten, 20 years down the line, who knows what the valuation of that slot will be? That’s how you build a big company, that’s how you make back those millions of dollars.”

The scope of Dignitas’s investment extends beyond any particular esport. As part of a $30 million Series A fundraising round in September, Dignitas announced its intentions to fund an influencer-based content and marketing business headquartered at its new 2,500-square-foot facility in Newark, New Jersey. It’s a hedge that diversifies Dignitas’s risk profile beyond the fate of one competitive esports ecosystem, a beachhead for wider expansion into digital entertainment that will shape the coming decades.

“We’re incredibly excited about the media business we’re building alongside our teams,” Prindiville said. “Not only does it touch the gaming space, but it touches the larger space within pop culture, which certainly reaches things like music and traditional sports, so we’re already beginning the process of expanding that out into the greater pop culture space.

“The world is becoming more and more digital as we speak. The allocation of dollars from brands are going to move from traditional sports that age out, to the next demographic where those dollars can see the most return, which is quite clearly the world of video games, esports, League of Legends.”

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