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Is Franchising the Future for Esports?

There seems to be no end to the debate as to which model is best for the future of esports. Will it be the ‘closed-shop’ model of franchising which has been hugely successful for North American traditional sports? NFL, NBA, MLB, NHL and MLS all use this model, and consequently the top 3 leagues in India (IPL, PKL and ISL) have followed suit.

Or will it subscribe to the quintessential ‘open-shop’ model that continues to steadily grow the 'bottoms-up' and universal spread of football (soccer)? We see this model in the Premier League, Bundesliga, La Liga, Serie A and Ligue 1 in Western Europe and J-League, K-League and Chinese Super League in major Asian markets to name a few.

As a pioneering upstart, we at Irony Inc. are focused on unlocking the potential of the vastly untapped Indian esports market and regularly get questioned about our view on franchising by those exploring the formation of an esports team IP. Esports is still young and opinions remain varied as night and day. There is still no clear answer as the industry continues learning and iterating as it navigates through its initial phase of evolution.

Understandably, franchising has been a hot button-topic in investor circles and a regular subject for dozens of feature articles and opinion editorials, some of which we recommend reading in addition to our take on the subject.

Konvoy Ventures (a venture capital fund dedicated to esports and gaming) managing partner Josh Chapman, is not in favor of franchising. Adam Stern of Sports Business Journal (SBJ) and The Esports Observer (TEO) talked to 10 industry experts for his story entitled ‘is franchising the future of esports?’ which collected more positives in favor of franchising. Andrew Webster, the games editor at Verge makes several positive observations in favor of the growing resemblance, relevance and relationship between esports and traditional sports.

Last, but certainly by no measure the least, Matt Ball of Makers Fund conjectures in his essay entitled ‘esports and the dangers of serving at the pleasures of a king’ that regardless of the model, most publishers want teams to make money and the ecosystem to thrive whilst super-charging their game IP. However, due to their conflicting priorities and interests, esports teams may have a limiting cache unless a game is born that offers the popularity of Fortnite, the longevity of League of Legends and incentives closer to the NBA. Ultimately, the game must be fun to play, fun to watch and fun for professionals.

How did we get here?

The origin of esports can be traced back to 1970’s. It was built by the community ground-up without much input and involvement from the publishers who only saw esports as a mere marketing expense for their game IPs. But with a myriad of opportunities on the horizon, this began to change. Publishers started gravitating from what was called the game-first paradigm (GFP) to the entertainment-first-paradigm (EFP) as referenced by William Collis in his book; The Book of Esports.

Some examples of the publisher-first-paradigm are ESL, ELEAGUE and EVO (Evolution Championship Series). In the EFP, publishers saw esports as an independent media business capable of generating its own revenues (Sponsorship, broadcast rights, merchandising, etc.) and at the same time becoming a huge marketing and propagation activity. The call-to-action to franchising in many ways is a by-product of the EFP.

Catch them young

Each passing year has seen esports reach new milestones and step confidently into the future of competitive entertainment. But its use case is not limited to just that. Esports now offers a potent trio of content, community and competition. The industry is quickly becoming more mainstream and integrating into pop-culture across sport, music, film, fashion, food, fitness and more.

Esports are becoming especially attractive because they offer a way for traditional sports to reach more young and feminine audiences which, over the past decade, have increasingly moved away from cable subscriptions. Today, playing games and consuming game content is not only becoming a preferred pastime for the cord-cutters and cord-nevers, but it also provides them with much- needed social connection, especially during the COVID- 19- induced lockdown.

Critical factors of franchising

According to Newzoo’s Esports Trends to Watch in 2020; franchising is going to be an important factor in the growth and development of esports. As part of its continuing transformation from a predominately a ‘hit and miss’ driven model to the ‘games-as-as-service model, the idea here is to push esports to derive recurring revenues in the form of media rights deals, sponsorships and long-tail in-game monetization. Long- standing publishers such as Riot Games (League of Legends has franchised in North America, Europe and China and Activision Blizzard (Overwatch (OWL), and Take Two Interactive (NBA 2K League) have, to varying degrees of success, franchised their respective leagues since the turn of 2017. Blizzard’s Call of Duty League launched in 2020. Riot Games Korea announced its top 10 franchisees for launch in 2021, and its counterpart in Brazil will launch a franchise model next year.

The franchising system removes seasonal promotion and relegation of teams participating in the league, meaning they will instead have a permanent spot that they own. To earn this spot, the team must be approved by the game’s IP holder and pay a substantial entry fee. The cost for the Call of Duty League’s franchise fee was reportedly around $25 million USD. The franchising system is also a familiar format for media (linear, OTT and streaming), advertisers and traditional sports fans.

In fact, both existing esports organizations and traditional sports organizations have invested in the franchised leagues mentioned above. Let us understand the six critical factors of franchising:

  • A financial model that offers franchisees a potential return on investment: The franchisee pays a fee to the franchisor to obtain access to shared revenue and the right to exploit exclusive revenue opportunities for itself. Additionally, players are able to garner guaranteed contracts with minimum salary commitments, performance bonuses, retirement plans and insurance benefits. And franchisees can use the permanence factor to make long-term business decisions and negotiate longer deals with sponsors or hiring stadia/venues. All three factors are quite a must for the growing esports ecosystem.

  • A sporting model that optimizes the audience interest: The success of a game title as an esports is based on 4 factors - Skill, Community, Accessibility and Reward. Skill – the talent and time required to master a game. Games have improved to dizzying levels of complexity, requiring deep skill to master. The more a game allows its best players to express their mastery, the more exciting it will be to watch. Community – the support a game receives from its creators and fans. Rich online networks have formed around games, facilitating digital community and competition. Accessibility – the barriers to purchase and learn a game. Games and gaming platforms have integrated into daily life through affordable consoles, home PC’s and ubiquitous smart phones, creating true accessibility. Reward – the benefits for getting good at a game. Because of Twitch, YouTube Gaming and other streaming platforms, becoming a pro-gamer is worth the significant time investment as there is fame and fortune as rewards.

  • A ‘closed shop’ system in which continued participation is guaranteed: The franchise system provides the league a higher degree of stability, consistency and accessibility making franchises not only more attractive for investors but also advertisers.

  • Control structures that maintain the product – e.g. salary cap, player drafting, etc.: The league is able to benefit from collective bargaining agreements (CBA) and the necessary checks and balances which ultimately improve the competitive dynamics of the contest which is a must for growing the overall attractiveness of the product.[2]

  • A system that provides investment security: While entry fees help organizers capitalize the league in its initial ramp-up period, they ultimately create a high level of commitment and reciprocal dynamic for all stakeholders who can work in a more collaborative manner on a unified agenda.

Franchising beckons the future of esports as it fixes the fundamental lacunae of the open-shop model

Mike Sepso, Co-Founder and CEO at Vindex (formerly founder of MLG, that was acquired by Activision Blizzard which effectively runs the Overwatch League and Call of Duty League) strongly believes that Franchising will Dominate Esports and Crush Open Systems.

In the long term, the open system cannot create enough value for partners. Advertisers and content distributors chase the biggest and strongest, not the most nuanced. Investors favor stability, predictability and explicit legal rights to IP and geographies to protect asset value that open systems can’t provide.

Franchising beckons the future of esports as it fixes the fundamental lacunae of the open-shop model. These are:

Esports has involved giving away a lot of free IP:

  • Free content has been a massive part of the esports boom to date. Publishers have allowed gamers and third party companies to set-up their own competitions and tournaments without demanding payment for use of the games.

  • This is at odds with the cast-iron protection and monetization of IP that has been at the heart of the traditional sports industry’s commercial growth and the whole idea of franchising.

Esports needs advertising dollars to humanize and iconize its athletes:

  • Extrapolate the human side of the athlete and build icons and custodians of the game.

  • Storytelling via live-streaming to build a broader emotional connect with the community.

  • Setting up a players’ association to protect and safe-guard players interests.

Unsurprisingly Publishers are keen to make money from esports. They want to develop profitable commercial programs, media and event assets and a closed- shop model ensures just that:

  • Commercial value creation – as publishers haven’t historically been earning from esports.

  • Collaborate on ‘expertise’ and ‘structure.’

e.g.: Gen.G

Gen.G is one the most successful global esports organizations. Based in Los Angeles, Seoul and Shanghai, its founders and leadership have built an esports company that transcends games, gender and geography and makes for a case study for investors. The journey of building a global esports brand actually started with a rebranding campaign of an existing team known as KSV.

Today, Gen.G’s core mission is to help fans and athletes use the power of gaming and esports to get ahead of the competition. It calls Dennis Wong of LA Clippers and actor Will Smith its investors and has raised US$ 46M. The company has quickly become a commercial and thought leader, building a global, inclusive and cross-cultural future for sports entertainment.

Gen.G hired a lot of its staff from the NBA and MLB including its CEO, Chris Park. Park believes esports has inherent strengths that traditional sports are still trying to develop. Gaming is intrinsically digital, social and global, and also allows for closer fan-star relationships than sports - traits that can yield rapid growth.

With a clear focus on education and women as twin levers of development, Gen.G has partnered with several universities to promote esports at the collegiate level with a commitment of US $1 M over ten years. Gen.G has also set-up an all-female Fortnite team called Team Bumble, title sponsored by social platform Bumble. This is not to discount their rosters across League of Legends, PUBG, and Clash Royale on mobile.

Gen. G is also heavily focused on franchised leagues and has set up he Seoul Dynasty franchise in Overwatch League, Gen.G Tigers of Shanghai in the NBA 2K League and have been selected as a franchise holder for the League of Legends Championship Korea (LCK) starting from the 2021 season.

The India Opportunity

The next Asia Franchise for League of Legends, NBA 2K League and Call of Duty League should certainly be from India. Don’t let that opportunity pass you by. Set up a team, build capabilities and experience because when publishers come calling, they are not just going to offer you a seat at the table because you are a moneyed professional ownership group. They will be looking for that unique something you can bring to the table as evidenced by the 23rd team, Gen. G Tigers of Shanghai of the NBA 2K League from Shanghai, which promises the NBA greater brand development in Asia, along with player development and talent identification in the region . Now go get your ducks in the row and be ready for the right moment to strike.

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