Games

Even Esports Is Suffering From the Wealth Gap

One of Call of Duty's top teams just got priced out of a game it dominated.

by Will Partin
Sep 6 2019, 1:54pm

PR photo courtesy of CDL

Last Thursday, Matt “nadeshot” Haag, uploaded an emotional video to Twitter announcing that 100 Theives, the esports team he leads and co-founded with investors like Dan Gilbert, Drake, and Scooter Braun, would not be participating in the Call of Duty League (CDL), a forthcoming tournament being run by game publishing titan Activision-Blizzard. If you’re not up on the ins-and-outs of esports brands, this is a big deal, akin to Andrew Luck’s sudden resignation from the NFL. Unlike Luck, though, 100 Thieves wasn’t so much opting out of a game that kills its players as they were unwilling to opt in.

Haag, through his previous team OpTiC Gaming, and now through his own brand, is very nearly synonymous with professional Call of Duty competition. 100 Thieves’ CoD roster (who are about to be some of the hottest free agents on the market) was among the game’s best squads, winning two major tournaments in the last few months alone. They are exactly the kind of organization, in other words, who one would expect to be taking part in CDL. But they’re not. Why is that?

Haag doesn’t mince words: “The CDL is incredibly expensive. It’s so expensive. Not only are there a lot of upfront costs, but there are a lot of operational costs that we’ll be spending money and resources on for years. And we are not equipped and prepared to make that jump.”

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Matt "nadeshot" Haag in his video explaining 100 Thieves' departure from CDL. Source: Twitter

To break it down a bit: CDL is a franchise league, meaning that teams must pay a large fee ($25 million in this case) that guarantees them a permanent spot in the league, similar to how, say, Major League Baseball expands (both the Tampa Bay Rays and Arizona Diamondbacks paid $130 million to enter the MLB back in 1998). This approach stands in contrast to relegation leagues (in which the worst performing teams can lose their spot, i.e. Premier League) and open circuits (in which new players or teams can qualify for each tournament, i.e. professional tennis or golf). Traditionally, esports have used either the relegation model (League of Legends) or open circuit (Counter-Strike, Dota 2) model. But franchising has become increasingly popular in recent years with tournaments like Overwatch League, the (revamped) League Championship Series, and, now, the CDL.

But just like owning a Ferrari ends up costing at least as much money as buying one, the CDL will also have significant recurring costs for teams. One major expense is facilities–teams will have to own (or rent) a venue at which to host their home games, similar (again) to most major sports teams do. What’s more, the introduction of “home” and “away” games mean that teams will have to pay to have their players shuttled between cities multiple times each week, which adds up fast. Both of these are expenses that most esports teams aren’t paying for right now and require a level of resources beyond the means of most esports brands.

To add insult to injury, 100 Thieves wouldn’t even be able to compete in the CDL under its own brand. Rather, the company would have to develop a “new” sister brand, one associated with a specific city, a significant departure from esports-as-usual––while most teams have a vague regional identity, very few have a city-based one. For Activision-Blizzard, forcing team owners, whether new or established, to develop a brand specifically for the CDL serves a number of purposes: on the one hand, it ensures a certain kind of thematic and aesthetic cohesion, with each team adhering to a common set of design standards. More subtly, though, exclusivity prevents CDL brands from competing in (and therefore advertising) competitor leagues, the same reason that you don't see the Atlanta Braves also competing in the NFL.

A still frame from a 100 Thieves youtube video depicting Nadeshot realizing how many grocery bills his team has run up.
A still frame from a video on the 100 Thieves Team House. Source: Youtube

Brand dilution is bad for any esports team because it divides company resources and audience attention, but it’s especially harmful to a team like 100 Thieves, which has built its success on being a highly desirable lifestyle brand influenced by the surging popularity of streetwear. (To date, 100 Thieves is one of a handful of esports brands whose merchandise I wouldn’t be embarrassed to wear in public. Never forget the gamer dress).

All of which is to say that it’s very hard to fault Haag for his reasoning. Even so, the news that any esports team, let alone one backed by Drake, Scooter Braun, and Dan Gilbert, can’t afford something might seem odd at a moment when interest and investment into esports is higher than ever. You could be forgiven, too, for thinking that Activision’s leadership team is kicking themselves right now, given that they’ve effectively priced out one of CoD’s most beloved brands.

But I don’t think that’s what’s happening here––or, at least, it’s not the whole story. Beneath the (absolutely justifiable) feelings of resentment towards Activision-Blizzard that many CoD fans are feeling is another tale about the changing ways in which esports are financed, by whom, and at what scale. Not all money, it turns out, is created equal and the CDL captures in microcosm the state of esports investment. As the flows of capital shift, new axes of power rise, while old ones are left wondering what happened to the industry they ostensibly helped build. To see why, though, it helps to have a bit of context.

Creating the Game

What we might now think of as esports started bubbling up out of online multiplayer scenes in the late 1990s and early 2000. At that stage, game publishers were mostly content to let fans do what they wanted with their products. Esports, by and large, were seen as a fortuitous, but ultimately inconsequential, feature of well-designed competitive games––something for designers to be proud of, but hardly an industry in their own right. Though there were plenty of groups, namely teams and tournament organizers, who saw the commercial potential in esports, publishers largely laid low, except to put on the occasional launch tournament.

That all changed around 2010 for a number of reasons, the most important of which is that publishers started to see esports as part of a coherent and ongoing business strategy. Game monetization was shifting away from charging $60 up front and towards extracting revenue from players over a long period of time, betting that a long tail of microtransactions would ultimately yield greater profits than a single point of sale. In this context, esports were imagined as a way of retaining player interest in a game over a period of years, a kind of persistent marketing. (Whether or not that worked is another matter).

But what’s important for this story is that publishers also began to see that esports, more than simply helping to actualize the latent value in games as a service, could themselves be profitable media products under the right conditions. If esports grew enough, blue chip sponsorships, lucrative media contracts, and franchise fees might all become new lines of revenue for publishers, greatly diversifying their revenues.

In the meantime, though, it was mostly esports teams that began to attract investment from venture capital funds and retired sports stars like Rick Fox and Shaquile O’Neal (as anyone in esports will be eager to tell you), who helped finance Echo Fox and NRG Esports, respectively. But while a million here and a million there from individual investors and VCs overhauled the business of running esports teams, that tier of investment wasn’t (and isn’t) particularly interesting to a company like Activision-Blizzard, which boasts, as of this writing, a market capitalization of just under $40 billion.

Activision-Blizzard’s ambitions were an order of magnitude larger and aimed at groups willing to invest at a scale beyond what most (though certainly not all) venture capital funds would be comfortable with. No, with franchising, Activision-Blizzard had their eyes on massive sports and media conglomerates like The Kraft Group (New England Patriots, Gillette Stadium, and the New England Revolutions), Sterling Equities (New York Mets, Brooklyn Cyclones, and SportsNet New York), and Comcast Spectacor (AKA Comcast Sports Ventures, owners of the Philadelphia Flyers), all of which are worth billions. For these companies, $25 million is penny dust, not an entire round of Series A or B funding. To put things in perspective, it cost Sterling Equities less money to buy into Overwatch League than to pay the annual salary of Mets second baseman, Robinson Cano. Venture capitalists might seem like high rollers, but they’re not the biggest fish when it comes to investing.

Traditional sports firms had long expressed varying degrees of interest in esports, but few of them actually made the leap because they couldn’t find what they saw as an attractive point of entry. “We looked at some of the existing teams that were either completely for sale or looking for investors,” Jonathan Kraft, president of the Kraft Group, told ESPN in 2018. “But we couldn’t really get comfortable with something that was grassroots, bottom-up like that … We know what we don’t know and we wouldn’t have done well with that.”

Rick Fox signs fan autographs outside the LCS studio
Rick Fox signs autographs for LCS fans. Photo courtesy of Riot.

To get the Kraft Group (etc.’s) money, publishers had to do something different. That something was franchising. Though Riot Games switched its League Championship Series to a franchise model similar to traditional sports in 2018, Activision-Blizzard upped the ante with OWL by geolocating teams in specific cities––the exact same strategy the company is now replicating with the CDL.

For traditional sports firms, this was the attractive point of entry that they had long been seeking, a combination of familiarity and ambition. Not only did the highly-regulated franchise model signal (to them) a long-term vision for esports, but also allowed these organizations leverage geographical affiliations into fandom––a speciality of sports teams, and why you see players from the Overwatch League team NYXL tossing out the first pitch at New York Mets games––as well as cross-marketing opportunities, such as Boston Uprising’s Gillette (as in Gillette stadium) sponsorship. Again, as Kraft puts it, "Everybody [i.e. big sports money] that looked at it was excited. They saw what we had seen, which is the marriage of the traditional organized league model, with teams in geographies, so cleaning up some of the Wild West nature [of esports], but doing it with a game that was inspiring lots of passion and interest from young people."

But teams are only half the story. Franchising is also an unbelievably sweet deal for publishers. Not only does Activision-Blizzard collect enormous franchise fees from teams––altogether, fees for OWL and CDL have netted the company close to $1 billion––but franchising also shifts most of the risk of running these leagues away from the publisher and onto participants. If OWL were to collapse in the next few years (unlikely, but certainly not impossible), it would definitely be embarrassing for Activision-Blizzard. But the people who would take the biggest financial hit would be OWL teams, not Activision-Blizzard. No wonder the company was so eager to sell another round of franchises, a point Kotick made in his earnings call with investors this January.

The 100 Thieves Roster celebrates after winning a tournament,
Photo courtesy of MLG

If franchising altered the balance of power in esports and drew previously reticent investors into the industry, it also increased the scale on which esports were operated and financed. And this, frankly, this puts teams that don’t have a billion dollar company to fall back in a tough spot. So while I’m sure Activision-Blizzard would have happily welcomed 100 Thieves into CDL (as they did, it should be said, for a handful of teams that aren’t tied to a sports or media conglomerate), Haag’s organization, fairly or no, was never really the target market for CDL. It was always going to be aimed at, and priced for, the biggest firms in sports.

For some commentators, 100 Thieves’ forthcoming absence from CDL is a simple story of corporate capture, of publishers coming in and planting their flag on something the game’s community built on its own. That story is a little too neat for my liking––there have always been commercial interests in esports, not all of which have been particularly well-intentioned––but it’s not not true either. The better frame is simply that publishers have grown increasingly bold over the last decade and their ambitions have outstriped the financing that an adolescent industry has available to it. After all, most estimates place the sum value of the entire esports industry at around $1 billion, barely more than half of the least valuable NFL franchise (Buffalo Bills, at $1.6 billion). There’s money ... and then there’s money.

None of which is to say that the CDL is a guaranteed success. Call of Duty’s esports scene has never been anywhere near as popular as the franchise itself, and the kinds of numbers that it pulls on Twitch––a peak of 82K concurrent viewers for a large tournament in May––are respectable, but pale in comparison to games like Counter-Strike and League of Legends. That gap is particularly acute at a moment when gnawing questions about esports’ (un)profitability are becoming harder to ignore. The thing that Activision-Blizzard and Haag appear to agree on is that it's smarter to let someone else carry the risks.