Growing Pains: Issues Affecting esports Stakeholders

Once nascent, the esports industry is in the midst of explosive growth and experiencing the growing pains of unchecked progress.

esports are organized video game competitions, played at professional level. Players from different teams, organizations, and leagues will compete in video games popular with at-home gamers, such as League of Legends, Dota 2, Overwatch, Fortnite, and Counter Strike. These events are watched by millions of fans around the world, either live and in-person, or by tuning in on TV or online. Relative to traditional sports, the esports ecosystem is comprised of many stakeholders. These include esports players, teams and organizations, as well as video game publishers.

esports players compete in leagues and tournaments with the hopes of winning a percentage of the allotted prize pool. Players typically enter into contracts with organizations and compete professionally under their banner in exchange for a fixed salary, a percentage of tournament winnings, and other incentives. These organizations (colloquially referred to as “Orgs”) form teams, sign players, and populate tournaments. Orgs typically have several teams that specialize in a respective video game, but operate under the same name – just as the NCAA’s Michigan State has uniformly branded “Spartans” teams compete in hockey, football, and basketball alike. Finally, video game publishers represent the core difference between esports, and traditional sports. Publishers hold an influential position in the esports ecosystem – dictating where, how, and who can play their games, via their terms of service. Through this selective authorization of rights, publishers play a disproportionate role in shaping the exposure and popularity of teams in any given eSport. They often do this in part by licensing the use of their games to tournament and league organizers for a fee, who can then host esports events in accordance with the terms of this license.

This article outlines some of the key legal and business challenges that esports (1) players, (2) teams/organizations, and (3) publishers face in the industry.

(1) Issues Facing esports Players

There is a power imbalance between esports players, and the teams they are contracted to. This dynamic is driven primarily by the fact that players generally represent a young and disadvantaged demographic, and there is surplus of players who are willing and able to play esports professionally.

Such a power imbalance has had some unfortunate implications. For example, in July 2019 Turner “Tfue” Tenney,a popular Fortnite player launched a suit against his team, FaZe Clan, for grossly unfavourable and restrictive contract terms [1]. In doing so, Tfue broke his non-disclosure obligations, and released his player contract publically. Some of the more onerous provisions included an 80/20 earnings split between Tfue and FaZe (with 80% going to the team), and highly restrictive sponsorship-sourcing terms. FaZe would launch a counter-suit in August 2019, attempting to collect on nearly $20M USD of Tfue’s undeclared earnings made while under contract with the team [2]. The countersuit is currently scheduled to be in heard by the Southern District of New York, which, if heard, could break ground in esports jurisprudence.  

The rise of esports-related influencers (like Tfue) has shifted some power back in favour of players. If incidents like Tfue’s continue to surface, there may be an increase in players seeking formal designation as “employees”. Players are currently classified as “contractors”, which statutorily prohibits them from protection under provincial employment standards acts. Accordingly, the legal designation as “employees” would give players the ability to benefit from certain statutory protections (e.g. minimum wage guarantees, vacation days, and formal routes of appeal and enforcement). Other subsequent benefits to players include the ability to form a players union and collectively bargain for their rights. 

(2) Issues Facing esports Teams & Organizations

esports has become an increasingly global space – attracting players and audiences from all over the world. Although this has been instrumental for the industry’s growth, it also presents a number of immigration and visa issues for teams housing players, and competing in tournaments, in a number of different regions. In an effort to facilitate esports player mobility, Riot Games successfully lobbied United States Citizenship and Immigration Services, in 2014 to recognize professional League of Legends (“LoL”) players as “athletes” for the purpose of obtaining P-1A working visas in the United States [3].

Although LoL players now enjoy certain mobility rights, many players competing in less well-recognized esports remain unable to consistently receive the requisite visas to participate in foreign competitions, or train in foreign facilities.  For example, in 2017 Russian professional Overwatch player Denis “Tonic” Rolyov was denied entry into the US just a week prior to Overwatch Contender’s playoffs [4]. In 2019, an entire Russian Dota 2 team, Gambit esports, was denied entry to the Ukraine to compete in a qualifying competition [5].

Unfortunately, situations like Tonic’s and Gambit’s are commonplace in esports; teams need to be diligent in their lobbying efforts, gaining the support of publishers. Additionally, they need to be well-versed in immigration requirements of prospective host countries, and ensure visa applications are made in a timely and compliant fashion.

(3) Issues Facing esports Video Game Publishers

Although esports has become a point of emphasis for most video game publishers, it still remains only a part of their business. Accordingly, some publishers opt to devote more of their time and resources to developing the esports scene around their video game titles, while others allow third-parties to take on a bigger role in shaping its growth. Detailed below are each publisher’s esports operating model.

Riot Games (Most Control)

Of the major North American publishers, Riot Games has taken the most hands-on approach – pushing for complete vertical integration with their premier esports title LoL. The LoL Championship Series (“LCS”) is entirely owned, and operated by Riot. The publisher is very selective with licensing any LoL content, but will occasionally defer to third-party coordinators with international or Pro-Am tournaments (such as the KeSPA Cup).

This model has afforded Riot almost complete autonomy in pushing the direction of the LoL esports scene, making it the most followed title in the world. Such autonomy, however, comes at a cost. First, the highly selective licensing of tournament broadcast rights prohibits the inclusion of third-party or ancillary events. This results in limited opportunities for innovative, or grassroots events, which could hamstring the long-term viability of the eSport. Second, Riot’s high level of oversight is both capital and resource intensive. Meaning, less of the publishers reserves can be devoted to developing and promoting other video game titles. Ultimately, Riot’s success, or failure, hinges almost entirely on the health of their LoL esports scene.

Activision Blizzard (Low Control)

In contrast to Riot, Activision sees themselves as a video game creator first, and an esports promoter second. Activision licenses their leading esports title, Overwatch, using a franchise-based model. Meaning, for a multi-million dollar fee, bidders can purchase a slot in the professional Overwatch League (“OWL”), and run their franchise almost autonomously from Activision. They employ a similar model with Call of Duty, selling franchise slots in their Call of Duty World League for a reported $25M USD fee [6]. Additionally, in 2018 Activision entered into a 2-year agreement with Twitch (the world’s largest esports media and streaming platform), granting them the right to stream OWL matches through 2020 [7].

This franchise-based model has proven useful for Activision in attracting traditional sports investors (such as the New England Patriots’ Robert Kraft, or the New York Mets’ Jeff Wilpon) as it is familiar to them [8].Akin to traditional sports , it builds local fandom around teams and cities, while creating natural rivalries. –. However, granting franchises such autonomy limits Activision’s ability to control the strategic direction of their Overwatch and Call of Duty leagues. Furthermore, this model precludes Activision from certain revenue streams in the form of merchandise, concessions, and ancillary sponsorship, which is captured by the select franchises.

Valve (Laissez Fair)

Finally, of the North American publishers, Valve takes the most laissez fair approach to esports. Valve allows third parties to freely organize Dota 2 events as they see fit, with the exception of The International – the eSport’s marquee event. However, even The International’s prize pool relies on crowdfunding, sponsored in large part by casual Dota 2 players’ in-game purchases and donations [9].

In deferring Dota 2’s marketing and operations to third-parties, Valve has empowered a flourishing esports community, with deep grassroots. This has culminated in Dota 2 being one of the world’s most followed titles, and boasting the highest prize pools year-over-year of any eSport. However, for all of Dota 2’s success, Valve’s narrow control has hampered their ability to steer the direction of the esports ecosystem. Accordingly, Dota 2 esports (and The International in particular) are perceived as tremendously authentic, but also more enigmatic for non-endemic brands.  Having third-parties largely responsible for broadcasting and promoting Dota 2 content raises a number of intellectual property concerns. In 2017, Valve released a statement that “anyone should be able to broadcast a match from [Dota 2’s spectating feature] for their audience” [10]. However, they also cautioned that such broadcasts cannot have a commercial purpose, or risk competing with the main tournament organizer’s stream. The boundaries of this capability have yet to be defined.

Ultimately, esports’ tremendous growth also presents unique legal and business challenges.

Responding to the needs of the gaming industry and capitalizing on today’s opportunities requires guidance from a multidisciplinary team of experts to provide holistic solutions, insight and knowledge to navigate the complex and evolving legal and operational landscape.

For more information about our firm’s esports expertise, please contact the authors and see our MT>Play group page.

 

Sources:

[1] Turner Tenney pka Tfue vs FaZe Clan Inc, Superior Court of the State of California, County of Los Angeles, Central District Case 19STCV17341

[2] FaZe Clan Inc v Turner Tenney pka Tfue, United States District Court, Southern District of New York

[3] Yannick Lejacq, NBC News: Score! Professional Video Gamers Awarded Athletic VisasI <https://www.nbcnews.com/technolog/score-professional-video-gamers-awarded-athletic-visas-6C10679998>

[4] Ferguson Mitchell, The esports Observer: Russian Overwatch Player’s US Visa Denied a Week Before Contenders in Los Angeles < https://esportsobserver.com/russian-overwatch-players-u-s-visa-denied-a-week-before-contenders-in-los-angeles/ >

>[5] Chelsea Jack, Hotspawn: Russian Players Denied Entry to Ukraine Ahead of StarLadder ImbaTV< https://www.hotspawn.com/russian-players-denied-entry-to-ukraine-ahead-of-starladder-imbatv/ >

[6] Adam Fitch, esports Insider: Call of Duty Franchise Sports Reportedly Going for $25 Million < https://esportsinsider.com/2019/03/call-of-duty-franchising-25-million/ >

[7] Jacob Wold, ESPN: Overwatch League to be Streamed on Twitch.tv in Two-Year, $90 Million Deal < https://www.espn.com/esports/story/_/id/22015103/overwatch-league-broadcast-twitchtv-two-year-90-million-deal >

[8] Darren Heitner, Forbes: Robert Kraft and Jeff Wilpon Among Franchise Owners in New Overwatch League

[9] Mike Stubbs, Forbes: The International 9 Dota 2 Tournament Prize Pool Breaks $30 Million < https://www.forbes.com/sites/mikestubbs/2019/07/27/the-international-9-dota-2-tournament-prize-pool-breaks-30-million/#21686ce62c07 >

[10] Valve statement re: Dota 2 broadcast rights: <http://blog.dota2.com/2017/10/broadcasting-dota-2/>

Authors