A Deeper Look into the Future of Esports at Riot Games
Riot Games' President of Esports, John Needham, shares insights about Building the Future of Sport at Riot Games from why they love esports, the current limitations, and how Riot plans to aid teams
This article is for informational purposes only and should not be considered investment, trading, or legal advice. The views and opinions expressed herein are exclusively those of the author.
Introduction
In a recent blog post, the President of Esports at Riot Games, John Needham, shared his view on why he thinks Riot Games is building the future of sport. While the article emphasizes that Riot is all in on esports despite the industry-wide turmoil it’s facing, Needham discusses why Riot loves esports, the problems facing esports organizations, and Riot’s plan to aid everyone involved.
In this article, we will take a deep dive into the close relationship between Riot Games and esports, examining the challenges esports organizations face today and the strategies Riot is implementing to address them. By understanding these dynamics, we can gain valuable insights into the ever-evolving landscape of esports and Riot's commitment to supporting its growth and development.
Why Riot Loves Esports
Riot's journey into esports began with Valve’s success in Counter-Strike and Blizzard Entertainment’s with Starcraft. Riot drew immense inspiration from these two thriving esports scenes, particularly the success of the Intel Extreme Masters ("IEM") series. While Riot was developing League of Legends ("LoL"), they recognized a unique opportunity to create a competitive ecosystem and viewing experience that would not only satisfy players' expectations but would one day provide a viable career path for aspiring professionals. They saw esports as more than a mere marketing strategy but had the potential to become the most powerful and effective force in promoting LoL’s widespread adoption.
However, according to Needham, esports, and LoL in particular, face a significant challenge in their complexity. Casual viewers, with little to no gameplay experience, tend to find LoL rather complex with many moving components, which creates an unwatchable product. Esports doesn’t align with many of our past experiences, therefore, lacks the intuitiveness of scoring a goal or shooting a basketball. This has made the product less accessible to casuals and will always be a hinder to the industry.
This is why nearly 60% of Riot’s esports viewership are current or former players striving to improve their skills. Esports serves as both entertainment and education, captivating players while providing insights into the game's strategic elements. Riot's motivation for investing in esports is to elevate the core gaming experience that transcends beyond the game itself (e.g. Arcane TV Series). By directly connecting to fans in and outside the game, Riot takes gamer culture to new heights, enhancing user acquisition, retention, and monetization. Riot loves esports because of its ability to establish a direct and interactive connection to its viewers that is seamlessly monetizable outside the conventional bounds of media. As a result, players relentlessly consume out-of-game content to improve their gameplay, playing an indispensable role in the game's longevity that cannot be underestimated.
This point is further expanded on by Duncan “Thorin” Shields during his Last Free Nation podcast. For the uninitiated, Thorin is a highly regarded journalist that helped shape modern-day esports over the last 20 years, starting with Counter-Strike 1.6. In his podcast, Thorin emphasizes the significance of esports as the lifeblood of LoL and its profound impact on the game’s longevity. He points out that if LoL had been released in 2009 as just another multiplayer game, chances are it would’ve had a relatively short shelf life, and its player base would have dwindled nearly a decade ago. However, esports has played a crucial role in keeping players engaged and returning to the game. When players come back, they spend more time in-game, translating to increased spending. This is further supported by Needham, who highlights that 3 of the top 6 best-selling LoL skins of all time are esports-themed. This indicates that Riot not only recognizes that their highest spenders are esports fans but also understands the critical importance of maintaining an active and vibrant esports scene for their flagship games.
Recognizing the pivotal role of esports in LoL’s success, Riot has leveraged these insights to shape the company’s comprehensive vision for the next five years.
But esports can only thrive when a multitude of teams showcase their unprecedented talent, captivating audiences, and fueling their desire to watch and learn. The essence of displaying remarkable skill in esports relies on teams acquiring top-tier LoL players from across the globe, fostering fierce competition. However, securing these esports players necessitates substantial capital. To achieve this, teams must generate revenue through typical channels such as sponsorships and merchandise sales or through venture capital. Historically, venture capital has served as the primary financial resource in propelling esports organizations to their current prominence. Yet, with VC funding experiencing a downturn, are these organizations now facing uncertain times?
Are esports organizations in trouble?
In 2017, Riot made the drastic decision to transition the LoL Champion Series into a franchised model. The existing LoL professional teams were required to pay a $10 million flat fee to participate in the new partnership while new teams paid an ever greater $13 million. Sure, esports was gaining immense popularity but teams didn't have this capital sitting in their bank accounts. To address these substantial costs, Riot introduced a revenue-sharing model that allowed teams to benefit from league-based revenues such as media deals and team-branded digital goods. Additionally, in receiving these revenues, teams were obligated to share their own league-driven revenues as well. But this money only kicked in after teams paid the franchising fee and once they were playing in leagues, so the question remains, how did they afford the fee? The answer is venture capital.
Before venture capitalists realized it, games like Counter-Strike 1.6 and Starcraft had ignited a passionate esports culture that endures to this day. These games mesmerized audiences in unimaginable ways. In the early 2000s, it was abundantly clear to those involved that competitive gaming and esports were destined to achieve remarkable success and mainstream recognition for decades to come. This phenomenon only gained more popularity with titles like Call of Duty and, subsequently, LoL. As esports continued to amass a devoted following, production quality improved and brands eagerly joined as sponsors. At that point, venture capitalists bore witness to this unstoppable and undeniable new digital revolution.
Fast forward to 2018, and venture capital has played a substantial role in the franchised NA LCS teams. Half of the franchised teams secured venture capital funding, totaling over $200 million. Further, 40% of the teams were organized or backed by NBA teams, who injected significant capital not only to cover the franchising fee but also to assemble competitive rosters and finance marketing costs.
With access to substantial capital, teams fought to sign the best players, leading to a significant escalation in salaries and subsequent increases in expenses that surpassed the corresponding revenues. As expenses continued to escalate across various games and revenue growth showed inherent unpredictability, teams were faced with the choice of either ceasing operations or seeking additional venture capital to extend their respective runways.
Today, both scenarios have unfolded: 30% of the initial franchised teams have ceased operations, while several teams have successfully raised additional venture capital post-2018, totaling $215 million. This has proven somewhat concerning since this injection of capital has solely served as a lifeline for teams without any meaningful progress in constructing new underlying business models that prove sustainable. Now, with venture capital funding drying up and sponsors backing out and not renewing, esports is in the hot seat.
Naturally, esports organizations have been conducting mass layoffs, cutting their rosters, and even trying to sell out of LCS. In 2023 alone:
100 Thieves laid off ~30 employees or 15% of its workforce only six months after conducting a round of layoffs in mid-2022
Faze Clan is reportedly laying off 40% of its staff amid economic struggles
The Guard organization laid off their entire working staff
Evil Geniuses cut every player on their LCS roster
TSM confirms LCS departure, plans to join another region
Cloud9 cut costs by backing out of half of their intended leagues/tournaments
Madison Square Garden group is selling Counter Logic Gaming's LoL slot to NRG
The list goes on...
Riot’s Plan to Help Esports
It is undeniably evident that both parties share the blame for the current state of LoL esports. From Riot's exorbitant franchising fees to teams offering players multi-million-dollar contracts, modern-day esports has become a looming bubble. Riot acknowledges its past mistakes in managing LoL and is actively working to improve the team partnership system. In the Valorant Champions Tour (“VCT”) league, Riot has introduced a new partnership model that reduces the financial burden for teams to enter and maintain their slots. Instead of direct payments to Riot, professional teams are required to invest in marketing activities, create broadcast content, engage their fans during VCT events, and support their professional players to retain their slots.
In return, Riot will provide a fixed annual stipend, a percentage of esports-driven digital sales, prize pools, and further incentives for teams to market VCT beyond the minimum requirements. The objective is to allow teams to allocate their capital towards pro players, marketing, facilities, content creation, community engagement, and business building, rather than paying large sums to Riot. Within this partnership, Riot’s primary plan in supporting esports teams is through the sale of digital goods, which holds significant revenue potential.
Needham explains esports has an advantage over other forms of media in that it enables a direct connection with fans. For example, fans who use their Riot account on the LoL watch platform receive rewards through event passes that unlock in-game content such as digital currencies, emotes, and skins. Riot also utilizes the "Drops" feature, delivering digital codes from sponsors to viewers through the broadcast. Both rewards and Drops are recognized as the primary reasons why 40% of LoL's Western viewership occurs through Riot's watch platform.
Consequently, Riot's plan to support esports teams revolves around the further development of this watch platform and transforming it into an advanced commerce platform that enables the direct sale of digital goods and services to fans.
Needham provides a glimpse into the future of their watch platform:
“Imagine a pro player in a competition chooses a champion you play in League – boom! – we send you a prompt through the watch platform to buy a skin you don’t own for that champion. Another hypothetical example is when we see that one of our players watches every T1 match but hasn’t purchased the “T1 fan pack” which includes an in-game T1 emote, a special T1 summoner icon, and the T1 fan pass granting them access to a special chat channel with other T1 fans and the team directly. When this player logs in for the next T1 match, we promote the T1 fan pack with details on how the revenue will be shared with the team. This way esports fans will be able to support their team directly with their purchases.”
While seemingly enticing, there are clear issues with certain aspects of this model, as pointed out by Montecristo, an esports commentator and prominent personality in the world of LoL. The model places the burden on individual teams to invest money in supporting fan packs and exclusive engagements. This requires teams to hire staff and community managers to create, design, implement, and market these community programs specifically for their LoL fans.
Additionally, Thorin raises a valid point from a fan's perspective. As a dedicated fan of T1 who watches to improve my skills, chances are I am already aware of the skin that Riot's watch platform is promoting, and I may have consciously chosen not to purchase it. Now, Riot is not only pushing skins on me while I play LoL but also when I'm watching LoL. This can become irritating to the point where I may prefer to switch to streaming platforms like Twitch or perhaps not watch LoL at all.
While digital collectibles present a significant revenue opportunity, Riot acknowledges the challenges of creating in-game content around esports, particularly with nearly 100 teams in the global LoL ecosystem. This is why Riot deliberately restricted the number of teams competing in VCT to 30, making it easier to develop and integrate team-specific esports in-game content.
But perhaps Riot’s approach to creating in-game esports content for all 100 teams is flawed. After all, only 10 of these teams are franchised and have enough fandom to effectively sell team-themed collectibles. Another option for Riot is to focus on team logo-oriented digital goods similar to CSGO releasing stickers. This would certainly cut down on the time and resources needed to develop in-game content to sell but Riot has always been in the camp of designing skins that are over the top.
Beyond digital collectibles, Riot aims to provide fans with out-of-game experiences to further engage with the game. This includes the development of the "Virtual Pass", a virtual ticket program designed to enhance the fan experience during online events and generate substantial revenue. Starting with Worlds 2023, the Virtual Pass will offer a collection of digital items like exclusive skins, event passes, and special content, along with unique physical merchandise and sponsored goods. The plan is to expand the Virtual Pass concept to other esports events in 2024 and beyond, introducing interactive features such as premium in-game cameras, live event venue cameras, exclusive chat channels and lounges, digital collectibles, and status items. There is also a possibility of incorporating select fan messages into the event broadcast.
The ultimate goal is to create team-specific versions of the Virtual Pass. This approach aims to provide fans with exceptional experiences, strengthen their connection with their favorite players and teams, and create additional revenue streams for the teams through well-designed products.
Although the Virtual Pass appears to be a positive move towards distributing profits among esports teams, it's important to consider that Worlds 2023 is still several months away, and the reality is that most teams won't even qualify for the event. Making it to Worlds is an incredibly challenging task, made even more difficult by teams trying to reduce costs by parting ways with top-tier talent. This creates a difficult situation for esports organizations in need of immediate capital, as their options for survival are limited.
To summarize, Riot is providing extensive support to esports teams through various initiatives. One of their key strategies involves the development of their watch platform into an advanced commerce site, enabling direct sales of digital goods and services to fans. This approach aims to unlock significant revenue potential for teams while strengthening the connection between teams and their supporters. Additionally, Riot's partnership model in VCT reduces financial burdens for teams and incentivizes marketing efforts. By combining these approaches, Riot is actively working towards creating sustainable support systems and growth opportunities for esports teams in the evolving landscape of competitive gaming.
That being said, the goal for Riot should be to invest in its esports initiatives with the sole objective of maximizing LoL’s viewership. When more people are playing and watching LoL, there are infinitely more possibilities to monetize in and outside the game. And if the goal is to maximize viewership, has Riot done a good job of this so far?
LoL Viewership
In analyzing LoL’s viewership numbers from 2017-2023 from its most popular leagues including LCK, LEC, LCS, and LPL, the numbers don’t exactly instill confidence.
From 2017-2022, the LCS (NA) and LEC (EMEA) have both experienced significant declines in hours watched and peak viewership. From ‘21 to ‘22, LCS witnessed a 25%+ drop in hours watched and a nearly 18% drop the year prior. The LEC on the other hand, had a ~14% drop from ‘21 to ‘22. While YoY peak viewership remained relatively steady in the LCS’s case, we can’t say the same for the LEC as the figure dipped almost 1:1 with hours watched.
Furthermore, when we examine the statistics for the now-completed 2023 Spring leagues, viewership continues to mostly trend downwards.
In terms of the Spring LoL leagues, there was a 24% average decline YoY in hours watched. Additionally, half of the leagues experienced lower viewership numbers compared to 2017. When considering peak viewership, the Spring leagues had a 23% average decline YoY, with only the LCS Spring showing lower viewership numbers compared to 2017. The data clearly illustrates that the LPL (China) and LCK (South Korea) leagues are in positions of relative strength when considering the total % change since 2017, in both hours watched and peak viewership.
Naturally, some may argue that the viewership decline is attributed to this analysis using Twitch.tv data, suggesting that a significant portion of viewers have transitioned to Riot's watch platform. However, this argument holds no validity as the watch platform utilizes an embedded Twitch stream, which contributes to the overall Twitch viewership statistics.
This decline in viewership will undoubtedly have a detrimental effect on the direct-to-consumer broadcast sales for Riot, resulting in significantly reduced revenue for the already struggling esports teams. It remains to be seen how Riot will tackle this trending issue and what the future holds for these esports teams, which currently face an uncertain outlook.
Conclusion
In conclusion, Riot Games presents a paradoxical situation regarding its approach to esports. The "Future of Sport" article aims to alleviate concerns among stakeholders, particularly venture capitalists, by emphasizing Riot's dedication to esports and the importance of financial support for teams. However, Riot also acknowledges the absence of traditional revenue streams enjoyed by traditional sports, such as ticket sales, concessions, and broadcasting rights for live events. However, Needham assures us that Riot is confident in its capacity to bridge these revenue gaps by leveraging the sale of digital goods. This strategy, however, places esports teams in a position of extreme reliance on Riot's support, raising further questions about the long-term sustainability and profitability of the esports industry.
Riot's unwavering commitment to esports is stronger than ever as they strive to shape the “future of sport”. The ongoing development of esports within Riot's flagship games greatly benefits the company in terms of user acquisition, retention, and monetization. But the esports industry faces numerous challenges, such as unpredictable revenue and excessive expenses, leading to an uncertain landscape for organizations heavily dependent on venture capital funding.
Recognizing their significant role in shaping the world of esports, Riot is actively dedicated to enhancing the team partnership system. The implementation of a new partnership model through VCT aims to alleviate the financial burden on teams, while also offering incentives for marketing, fan engagement, and player support. Furthermore, Riot's emphasis on selling digital goods and services via its watch platform creates additional revenue opportunities for teams.
Overall, Riot demonstrates its active support for esports teams, aiming to foster sustainable growth and maximize viewership. As the esports landscape continues to evolve, we will observe Riot's unwavering commitment to the industry and the ongoing development of its advanced commerce watch platform, which has the potential to significantly influence the future of LoL esports.
Until Next Time
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