Here’s a long anecdote.
In 2016, I sat alone in a DC coffee shop. Sporting a suit that reflected my youth and a binder filled with financial models, it was potentially the biggest moment of my life. For the past two years of business school, time outside of the classroom was spent drinking and attempting to explain the business potential of esports. And for the first time, I had someone eager to listen.
A cold e-mail to a friend of a friend of a professor turned into a four-hour car ride for what could have potentially only been a five-minute coffee. Or worse: cold feet entirely. Over ten emails, two phone calls and a large Excel spreadsheet, there was a general understanding that the conversation would be to explain the esports market. But the underlying motive was to get financial backing to potentially pursue an entrance into the space.
In October of 2015, Immortals would purchase their way into the LCS as a successful venture capitalist-backed organization, the first real success in this category after Ember failed to qualify for the LCS with their investor-backed concept. Yet their purchase at a premium would eventually lead to their downfall — something predictable just a split into their project. But while the financials of the company would crumble behind the scenes, it did create an opportunity for others to potentially do it better.
Maybe even another business school student could do it.
He walked in dressed in the finest flannel LL Bean had to offer and navigated to the chair across from me. Immediately pointing out that he thought ties were terrible and doesn’t think he would ever wear one again — probably the most life-altering advice I received from our entire exchange — the conversation started light. And that was his expertise: if you could casually talk about the topic and be entertained or fascinated by it, it was worth your time and money.
Over the course of four hours, five coffees and an unbelievable oatmeal, I rarely spoke. It would be four hours of stories, insights and commentary. He rarely touched the binder, seemingly already memorizing all of the content that was sent his way.
He would slow down and take a pause. With a short, audible breath, he released the line I remembered the most: “So, why do you want to get into esports again?” The twenty-minute pitch back would feature lines about the growth potential, the admiration of esports, the life of making money through online entertainment. Even with all of the clear faults in esports, it was still esports. It mattered to me.
And we could make a lot of money.
He simply smiled, tapped the table and stood up from his chair. We were the only two people left in the coffee shop and the barista behind the counter checked her phone. We had made it through the morning rush and were exiting just as the lunch wave would make it through the door. Stretching out his hand, the conversation was over. He saw the writing on the wall in the language that I just wasn’t able to read just yet. And his closing remarks, in hindsight, told me just that:
“If doesn’t matter if you care. That’s the worst part about business. You could have an incredible idea, an incredible business model. But if other business partners don’t care, what are you supposed to do? Tell them to care?“
On a recent episode of Trash Talk, Team Liquid CEO Steve Arhancet and G2 Esports CEO Carlos Rodriguez would voice their general frustration with the “bottom” teams. Organizations are reaping the “rewards” of being a member of the league without actively engaging in building the league to its fullest potential. It goes without saying that Arhancet and Rodriguez could also not be acting in the best interest of the league and are primarily focused on the aspirations of their organizations.
But they are spending lot of money.
The free rider problem is easily visible with team spending and general intrigue in teams from fans. For example, when watching the LCS broadcast, organizations like Team Liquid are likely to have a significantly higher viewership than teams like Immortals — even when removing the influence of the timeslot.
But understanding the free rider problem is much more complicated. It is a difficult balance. It is a market failure. The market is flawed in a way that an organization benefits from without expending effort or paying for it.
The LCS’ expansion into an eight-team playoff is a great example of facilitating this. In esports, smaller organizations often struggle to compete with the “top names” due to a variety of reasons. Smaller organizations often struggle to sign or retain their better players as bigger organizations can offer much more value when it comes to monetary compensation and name recognition. Their window to compete and see a “rise” in success is much smaller. The LCS expanding the number of teams in the playoffs was an attempt to give smaller organizations a chance to compete with the top of table. They can say they’re a playoff team.
Unfortunately, as they found out, it doesn’t necessarily incentivize success. In fact, it has seemingly done the exact opposite. And fans are taking note.
If you’re a top organization, you can feel a sense of disappointment. You want to see the little guy succeed because it is good for the big picture. Unfortunately for them, the little guy isn’t necessarily looking at the increased profit potential. They’re witnessing the immediate flow of cash.
Organizations need to be incentivized to invest, not necessarily be incentivized to be “successful.” The permanent partnership system doesn’t push many organizations to do just that. With certain ownership groups whose primary form of income is earned outside of the esports space, esports has just been a cherry on top. Picking partners with similar interests is incredibly important as a result of this. And right now, the LCS doesn’t have a ton of leeway when it comes to finding the right partners.
When a league isn’t successful, the free rider problem becomes more noticeable. It is a problem not just in esports but in other “conventional sports” and even in the public sector. This is what makes it such a fascinating conversation — especially with Riot Games building out another franchising system for VALORANT. Making it free to enter (and rewarding them with an incredible stipend) is already starting things off on an interesting foot.
From an optimistic perspective, the LCS has seen recent growth from organizations. The biggest success story has been FlyQuest but organizations like Evil Geniuses and Counter Logic Gaming have once again been welcomed by fans with open arms after years of receiving the cold shoulder for some of their decisions.
But every team being onboard does matter. Organizations simply can’t get away with taking a year off. And that’s the message that needs to be spread. Esports isn’t like regular sports. Tanking does nothing positive. Instead, it puts a target on your back.
It is rumored that two LCS organizations are actively seeking offers for their spot in and a rumored five have had conversations regarding a departure from the league. The league has gone from the “sure thing” to the “question mark” and it is on the owners and their new commission Jackie Felling to get the league back on track. It could be them relying on the old guard to once again steer the ship in the right way. Or it could be listening to what the bottom of the table wants to see, what help it needs.
Fortunately for them, they’re battling basic economic theory. Unfortunately for them, they’ve been breaking all of the economic rules for some time.