Can Old-School Esports Teams Survive in a Big Money World?

Can Old-School Esports Teams Survive in a Big Money World?

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In the face of immense investments from wealthy athletes and sports organizations, the likes of Team Liquid will have to adapt or die

In the face of immense investments from wealthy athletes and sports organizations, the likes of Team Liquid will have to adapt or die

The last few years have been a veritable Cambrian explosion for competitive gaming. This is particularly true when it comes to esports teams – new and well-funded organizations have become almost unbelievably numerous. Shaquille O’Neal, Alex Rodriguez, Rick Fox, Jonas Jerebko, and other famous athletes own stakes in upstarts like NRG, Echo Fox, and Renegades. Competition grows fiercer every day. And proliferating rivals aren’t even the biggest threat. The scariest specter may be the game publishers themselves, who are increasingly cognizant of esports’ huge revenue potential and determined to maximize their share.

It’s hard to believe that every esports team will survive the maelstrom to come. The organizations with the best chance may not be the ones with the most money. When the dust clears, the most important factors might end up being the same things that have characterized successful teams throughout esports’ tumultuous history: experience, passion, and unflinching persistence in the face of adversity.

In December 2002, a 19-year-old Dutch kid named Victor Goossens departed for South Korea to compete full-time in StarCraft: Brood War, the 1998 real-time strategy game from Blizzard, and probably the most enduring esport ever. Though Goossens was skilled, qualifying in 2003 for the illustrious OnGameNet Challenge League, it was his team, not his skill, that would one day make him famous. A few years earlier, he'd founded an informal Brood War clan called Team Liquid. The only members were Goossens himself, aka Liquid`Nazgul, and a selection of obscure Canadian and European players with tags like Liquid`Drone, Liquid`Frost, and (most memorably) Liquid`Meat., a forum Goossens had founded in 2001, soon became a cornerstone of the Brood War scene, a place where the best players gathered to discuss strategy. By the mid-aughts, it was the most prominent StarCraft forum in the Western world. When StarCraft II launched in 2010, Team Liquid was the first to capitalize, picking up a slew of sponsors and top-tier players. They sponsored tournaments, helping StarCraft II grow to become the first "tier one" esport of the modern era. As the years wore on, the team diversified, expanding into games like Super Smash Bros. Melee, Hearthstone, Dota 2, and Counter-Strike. In September 2016, an investment group called aXiomatic, led by Golden State Warriors co-owner Peter Guber and Washington Wizards owner Ted Leonsis, purchased Team Liquid for an undisclosed sum.

The existing leadership was left intact. Fourteen years after taking his first step into an esports career, through persistence, grit, and passion, Victor Goossens had finally made it big.

Today, Goossens comes across as polite, relaxed, and supremely confident. His English is flawless, with only the slightest hint of an accent. It doesn’t take much to get him going on the scintillating future of global esports. "I fully believe that esports really is worth watching, that our youth [already] grows up thinking that it’s alright to watch, to play."

Perhaps the most obvious sign of esports’ growth is the sheer number of new investor-fueled teams. Together, these organizations leverage unprecedented spending power. Though it’s impossible to know exactly how much money is in play – the terms of such investments are invariably secret – the tsunami of funding has had a profound impact on the industry. Goossens says increased bidding for players in games like League of Legends has caused salaries to spike substantially. In late 2015, the League of Legends team Ember revealed that it was paying its players around $70k each, plus benefits and health insurance, which industry insiders called "inflated beyond the market level." (Ember disbanded a few months later.) Though no organization has disclosed salary information since, Team SoloMid CEO Andy Dinh called attention to costs in an August 2016 Twitlonger post, stating "most LCS teams lose money because stipends are stagnant, sponsorships for LCS team operations are shrinking and the cost of player salaries, content production, support staff and housing costs are spiraling up." In September, Riot acknowledged that player salary costs were rising – as a direct result, they said, of "significant external investment" in the scene. "Motivated owners in the LPL have been trying to be more competitive globally in part by importing star players at high salary, which has led to a similar increase in salaries in leagues like the LCK as they try to protect their homegrown talent," said Riot Games' directors of eSports Jarred "Bradmore" Kennedy and Whalen "Magus" Rozelle in a shared statement. "That investment is a positive thing, especially for pros, but we understand it creates pressure for teams juggling costs in the short-term and we want to help them avoid cutting pro salaries and support."

Goossens admits that the feeding frenzy was a major factor in Team Liquid’s decision to seek investment. In a way, his hand was forced. "If we operate on cash flow and others are spending way more, it means that we’re not going to be able to get the players that we want,” he says. "If we can’t get the players then we can’t get the sponsors that we want, and eventually it’s a downward spiral."

Investor appetite is so intense that most modern esports teams operate at a significant short-term loss, in expectation of a long-term payoff.

"It's not like you pick up an LCS team and you can get two million in sponsorship. It just doesn’t work that way," Goossens says. To keep up with other organizations, he needed more capital – a lot more capital.

Operating at a loss is not uncommon for startups. Tesla Motors only recently turned a profit, but that's never deterred its investors, who dream of highways one day packed hubcap to hubcap with Elon’s electric creations. Uber lost $1.2B in the first half of 2016, but the company insists it has a credible path to future profitability. Still, for most startups, success is far from guaranteed. Fortune estimates that nine in ten fail outright.

Bruce Stein, CEO of aXiomatic, the group that acquired Team Liquid, thinks esports’ future is bright enough that the proliferation of competitors is not an issue. "Most of the dollar volume projections for esports that I have seen are, in my opinion, very conservative," he says via email.

Valve’s crowdfunded 'Dota 2' tournament strategy makes the scene less attractive for teams, but it generates tens of millions of dollars of revenue... for Valve. 

Conservative or not, projections of esports' future tend to paint a rosy picture. The research firm Newzoo predicted last year that the global esports industry would reach $1B in annual revenue by 2019. That’s a billion dollars of merchandise, event tickets, sponsorships, online advertising and media rights... a fraction of the $5.2B generated by NBA teams in 2015, but still an impressive sum.

Not everyone is convinced. Deloitte's Duncan Stewart pointed out in an interview with SBC News that primary data sources for esports revenue are often unreliable, which may lead to an exaggeration of industry size. Most organizations don’t even publish their revenue numbers, leading to uncertainty about the actual scale.

"In my experience, a lack of reliable published revenue numbers almost always indicates that revenues are smaller than thought," Stewart said. "Think about sales of eReaders in the early days: nobody disclosed how big they were, and that was because they weren’t as big as hoped."

Overblown growth forecasts aren't the only risk. Even if projections are accurate, it's not entirely clear that teams will benefit proportionally from all the new money. For instance, in Valve’s Dota 2, the esport with the most prize money awarded annually, it’s the publisher and players who receive the vast majority of the revenue. The sixth International Dota 2 Championship boasted a $20M crowdfunded prize pool; the winners walked away with $1.8M each. But only 25% of fan contributions went to the prize pool – meaning Valve pocketed around $60M.

Team Liquid is one of the few investor-funded esports organizations to maintain a Dota 2 roster, and Goossens admits that the scene has its challenges for team owners.

"There’s $25 million in prize money every year, which outscales any other esport by an enormous margin... it simply means that the money an organization pays a player means less to that player."

That’s a problem because esports teams earn money through sponsorship, which means using players as brand representatives in events, commercials and livestreaming. Because salaries are negligible compared to tournament winnings, there's less leverage in Dota 2 to get players to do these things, which means less revenue for teams. As a result, most large investor-led organizations have stayed away. NRG, Echo Fox, Immortals, and Renegades prefer League of Legends, which has more viewers, a dependable and standardized competitive infrastructure, and lower prize pools. Even in League, though, team owners have their concerns. As Team Solo Mid CEO Andy Dinh wrote last August, "[The League of Legends Championship Series] told team sponsors, which are a necessary source of revenue, that they can’t even go backstage to watch the players compete. Teams can't have sponsor branding on beverages or hats. Logitech is one of our greatest and most supportive sponsors and they simply can't get visibility through us competing in LCS because we can't wear their headsets while competing."

He also criticized the time-intensive LCS schedule, claiming "there simply is no time or energy for the players to do other activities to make money, such as event activations for sponsors, creating content and streaming." Other owners have expressed similar concerns.

Goossens acknowledges that there is room for improvement in the relationship, but claims that Riot understands the value of teams and the fan loyalty they bring. "I'm not too worried because I think Riot is aware of this and they treat it very seriously," he says.

It's hard not to root for him, to hope that he's right. Old-school organizations like Team Liquid, Cloud 9, and TSM have done so much for esports that it would be a tragedy to see them pushed out. But esports is serious business now, and in business, the pursuit of profit drives everything.

If the global esports industry meets projections, there will be hundreds of millions of dollars in annual revenue up for grabs over the next several years. The investors pouring in, snapping up teams and starting new ones, are convinced that they can get a slice of that multimillion-dollar pie. But they're not the only ones with an appetite. Money flows upward, and the ultimate power in any esport is the publisher. At the end of the day, publishers have the final say on who gets to broadcast and profit from their games – and how.

Can we expect Riot – or Valve, or any publisher – to look out for the long-term economic interest of teams? In many cases, teams and publishers benefit symbiotically from one another's success. But it's naive to think that their goals always align. Riot restricts sponsor branding on player equipment because they think it improves the LCS product. They prohibit LCS players from livestreaming certain non-Riot games, though the players' teams would benefit from streaming of any kind. Valve’s crowdfunded Dota 2 tournament strategy makes the scene less attractive for teams, but it generates tens of millions of dollars of revenue... for Valve.

Goossens shrugs off these concerns. He’s a steadfast believer that competition is only interesting if you care who wins. He argues that storylines are strengthened when fans develop attachment to specific teams and the rivalries between them. He believes that publishers will understand the value of robust teams with loyal fans, and make concessions to owners accordingly.

Bruce Stein of aXiomatic makes a similar argument, albeit in robotic PR-speak. "Current revenue models certainly favor developers by a considerable margin," he says, "but developers need engaged audiences, and audiences are drawn to watch games played by top players and teams. Future revenue models will therefore need to be more balanced if teams are going to be able to build rosters with top talent."

What’s certain is that esports' days of explosive change are far from over. Total chaos might not be the ideal environment for investors, but it's a state Goossens thrives in. More than a decade after his Brood War peak, he still frames his business philosophy in terms reminiscent of StarCraft:

"A company is about making the right decisions over and over and over. The more mistakes you make, the more you're going to have issues. I have a lot of faith in our decision-making ability."

It's a stressful time to own an esports team. But Goossens is no stranger to stress. He's survived fourteen years of esports industry vicissitudes; chances are, whatever happens next, he'll survive that too.