Along with capturing the attention of those outside the video game industry, electronic sports (eSports) are attracting a new class of investors seeking to get in early on the rising phenomenon. Nowhere else is this more evident than in Riot Games’ League of Legends eSports scene – the League Championship Series (LCS).
Yet, despite going rates of $1million+ for an LCS spot, and increased profile for eSports in general, the business of owning a team in the LCS is far from a path to immediate profit. Specifically, the prospect of achieving substantial return-on-investment (ROI) is affected by fierce competitive rivalry within the current ecosystem.
Focusing on North America
Note: Riot’s LCS is segmented into European (EU) and North American (NA) regions. For simplicity, only the latter will be evaluated.
The overall attractiveness of investing in LCS ownership is defined by the capacity of teams to generate profit. In the absence of publicly available financial reporting by teams, Michael Porter’s Five Forces Analysis is useful in gauging this capability; especially since traditional sports benefit greatly from the attractiveness of professional team ownership, not only as status symbol, but as a profitable domain.
The objective is to shed light on: How profitable is it to own a team in the LCS?
While Porter’s five forces analysis is intended for traditional industries, the reality that investors are willing to infuse working capital into LCS teams makes for an intriguing application. The North American LCS is defined as a group of ten (10) teams, competing against each other in seasons consisting of two splits (Spring and Summer), not only on a digital playing field, but also as providers of a product – entertainment – to consumers, e.g. fans and viewers of professional League of Legends play.
Along these lines, a new wave of investors, from outside the video game industry, are gambling that these teams can evolve into profitable media properties. Analyzing the strength of competitive forces helps relate profit potential, and likelihood that sustainable investment levels will continue in the NA LCS.
Five forces defined
Determining attractiveness, e.g. overall profitability, of investing in an LCS team starts with understanding competitive intensity across the entire ecosystem. An “unattractive” proposition entails combination of Porter’s five forces acting to drive down overall profitability; whereas, an “attractive” scenario would involve high levels of profitability. The figure below illustrates these forces tailored to the North American LCS eSports landscape.
Threat of new entrants
New teams are introduced into the NA LCS either through promotion or sale of a current owner’s slot. The latter can be at behest of the team owner, or forcibly by Riot Games – which was recently the case for three teams in May 2016. Lacking a contractually defined process for adjudication, LCS membership is essentially at the sole discretion of Riot Games. Accordingly, all three teams were left with no choice but to sell their spots before start of the 2016 summer split.
Conclusion: The presence of relegation in the LCS increases pressure to win. Also, Riot’s virtual autocracy, in regards to decision making, significantly increases the threat of new entrants, as teams are largely beholden to the game publisher’s whim.
Strength of force: HIGH
Power of buyers
So what are LCS teams selling, and who’s buying? Well, fans are the foremost customer for any enterprise built around competitive entertainment. However, eSports teams don’t currently generate ticket sales or broadcast rights revenues, leaving them mostly dependent on merchandise sales and sponsorship dollars. In terms of outputs, buyers (fans and sponsors) form the market for these clubs, through sale of branded apparel and corporate partnerships.
Buying power is high if buyers have multiple alternatives, and low if not. And with ten members apiece, the European and North American LCS compose the sole source of professional League of Legends eSports properties in the Western Hemisphere – excluding the Brazilian League Championship Series.
Conclusion: Similar to major sports in North America, Riot guarantees complete regional exclusivity – sanctioned professional play is expressly limited to the LCS. This reduces the number of choices for fans and sponsors, while raising the value of LCS properties.
Strength of force: LOW
To determine intensity of competitive rivalry amongst LCS teams, it’s useful to chart factors that affect competition for fan support and sponsor revenue. For example, if teams are positioning themselves differently – rivalry will be intense. Likewise, if teams are of similar size, the intensity of rivalry will increase. If brand loyalty is insignificant, this will also intensify rivalry. The figure below illustrates the distribution of LCS clubs across several factors.
Conclusion: A wide range of ownership backgrounds and structures point to strong competitive pressures between teams. And while teams range from newly formed to well-established within eSports, they all classify as small enterprises, e.g. less than $50 million annual revenue.
Strength of force: HIGH
Threat of substitutes
While professional League of Legends play is restricted to Riot owned or sanctioned leagues there is a growing universe of other eSports titles vying for the growing segment of casual viewership and sponsorship dollars. Established games like Counter-Strike: Global Offensive (CS:GO) feature multiple professional leagues, a growing number of major tournaments, and even linear TV penetration. New game titles like Overwatch factor into a more diverse and competitive eSports landscape that includes mobile games such as Vainglory and Clash Royale. All of which are making serious bid to capture more of the estimated 427 million eSports fans by 2019, according to research firm Newzoo.
Conclusion: Mounting competitive pressures from other eSports scenes affect teams in the LCS, by relation. Even if the overall pie for the eSports market continues to grow, there is no guarantee that League of Legends will maintain its current market share of viewership and/or sponsor value.
Strength of force: HIGH
Power of Riot Games as supplier
In terms of LCS eSports, game publisher Riot Games is sole supplier of the League of Legends game title, which is the nexus of competitive play. Riot’s complete control over the game’s intellectual property and hold on its competitive scene represents a position of unmatched leverage, when compared to teams.
Conclusion: Riot Games continues to function as more of a monarch than strategic partner for teams in the LCS.
Strength of force: HIGH
Teams in the League Championship Series (LCS) benefit from a stable and wildly popular eSports scene. However, they face extremely high competitive pressures. Barring structural changes to the LCS, near-term prospects for achieving ROI remain less than attractive. Still, a continued rise in the price for team slots is more than likely, as LCS properties represent considerable upside.
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