Riot Games announced on Thursday that it would start selling franchises to its North American League of Legends Championship Series for the 2018 season. ESPN sports business reporter Darren Rovell sat down with Riot executives Whalen Rozelle, the co-head of esports, and Chris Hopper, senior manager of esports, to discuss the strategy and the execution.
Rovell: Why did you feel you needed to go with franchises?
Rozelle: When we inked our [$300 million] deal with BAMTech last year to sort of secure an economic future for our sport, we felt we needed to restructure LCS for a future with a better partnership. A partnership in which we're all aligned with a common interest of having success, promoting fandom and creating something that is fun to watch. So we wanted to make changes that we felt were necessary so that we, together, could stand the test of time.
Rovell: Part of the new model allows someone to buy in for $10 million and it guarantees them that they won't be relegated down for the foreseeable future. How important was making that stipulation to someone who would make that sizable of an investment?
Rozelle: The primary thing is that we want our partners to feel confident about investing [in] our sports for the long term. We want them to build academy teams and fill them with players that won't be playing at the top level for two to three years. We want to incentivize teams to think in the long term just like we do. We think this change will be a big step towards unlocking potential investors or allow current teams to find new partners to raise capital so that they can build the resources necessary for the future.
Rovell: How did you guys come up with the $10 million franchise fee?
Hopper: We looked at the economics and we looked at the revenue sharing that we would be adding and then we tried to find a price point that we felt would be a fair valuation for a spot. We wanted to set the price point at a value that would justify a significant investment from an owner but not disqualify people who couldn't write the biggest checks.
Rovell: There are 10 spots. How many applications do you expect to receive?
Hopper: We've seen a lot of interest expressed from LCS teams, Challenger Series teams and even people outside the League of Legends space. We are confident we will have a large number of applications, which will give us a lot of work to do.
Rovell: What does the entire process look like from now until bringing teams into the league?
Hopper: The written application will ask for a variety of input on the organization, how their team works, what their revenue streams look like, how they control their costs, what support they provide their players and how their teams interact with fans. If they advance, we'll then do more of a face-to-face and legal and financial background checks and look to select ownership groups by the middle of November.
Rovell: What does the perfect owner look like?
Hopper: Well, there isn't really a perfect owner. If we had 10 identical owners, it wouldn't generate the excitement we're looking for. We want different owners with different backgrounds to grow the league as a whole.
Rovell: Riot is taking roughly a third of the revenue. Tell me how the rest of the revenue brought in is split with the teams and the players.
Hopper: The teams will get 32.5 percent of the overall revenues, which will be allocated in a variety of ways. There will be a flat percentage split with all the teams to give them a financial base to work from. There will be additional money from that pool being given based on a team's regular-season finish to incentivize competitiveness at every level and then there will be more money given to teams that drive the most viewership and have the highest fan engagement. There will then be 35 percent of the revenue pool being given to players so that teams can better fund salaries (the minimum pay is $75,000 a year per player). Many players make more than $75,000, but we're not going to institute a cap.
Rovell: If a team that is not currently among the 10 teams playing gets in, it has to pay an additional $3 million fee?
Rozelle: We're calling it more of a transition fee, and it's given to the current members of our league if they aren't accepted in 2018 and don't get a franchise. So it's like a parachute payment to be able to say to existing owners that we know they made an investment in our ecosystem and don't want them to leave empty-handed.