As mentioned in our first blog post on eSports, the eSports industry has experienced, and is projected to experience substantial growth. As the eSports industry continues to develop at a rapid pace, we are starting to see risks that are specific to the industry. In assessing whether a target is worth its price tag and whether its projections are attainable, the following are a few unique characteristics that pertain to the eSports industry that you should know about prior to entering into this space.

Know the game

Firstly, knowing the game and the third parties involved is crucial in the eSports industry. Despite several eSports teams exceeding the $100 million valuation, their value is often heavily reliant on tournaments and competitions held by the game developers because these widely broadcasted events in turn attract sponsors and advertisers. However, the goals of the game developers may not always align with the owners of eSports teams. For instance, Blizzard Entertainment, Inc. (“Blizzard”) recently announced that it will drastically cut their support for one of its most popular eSports games, Heroes Of The Storm. This included an announcement that Blizzard will cancel, among other things, the Heroes Global Championship, the premier tournament that boasted a $1 million prize pool and drew over 3.2 million hours of viewership in just 10 days back in 2018. Unexpected announcements (such as a game developer deciding to focus its resources elsewhere) have the potential to cripple the future revenue of a company that generates a portion of its revenue through prize money, sponsorships and streaming for that particular game. While many would call this instance an anomaly, the damage this announcement had on team owners and professional players that invested their resources into the game was material.

Furthermore, game developers often have unrestricted control over the structure and format of how the eSport ecosystem is run for their specific game. For instance, Riot Games, creator of League of Legends, switched their eSports operations to a franchise model (similar to traditional sports) for the beginning of their 2018 season. Aside from the ‘buy-in’ fee of USD$10 million (or USD$13 million if the team was not part of the previous 2017 season), this switch resulted in Riot Games having full control over which 10 teams (of a rumoured over 100 applicants) would be allowed entry into the franchise. Some teams, such as Dignitas, one of the original League of Legends professional teams in North America, who participated in tournaments since 2011, had their application denied. Unexpected changes such as this have the potential to greatly diminish, or even eliminate the value of an investment in an eSports team.

Know the trend

Like other industries, the eSports industry is equally subject to the trends of what’s cool and popular at the time. Given the growth of the industry, it is no surprise that new games are hitting the market at record speeds. Newcomers such as Blizzard’s Overwatch and Epic Games’ Fortnite have taken the industry by storm. For instance, Epic Games announced that it will provide $100 million for Fortnite eSports tournament prizes for its first year of competitively play (2018-2019 season). This number is nearly four times larger than any other prize pool announced for any other eSports game. Furthermore, Epic Games boasts about their 78.3 million players for the month of August 2018, which is just one year after they launched in late July 2017. This immense popularity directly takes away from play time, viewership and advertising exposure of the previously established games. Therefore, in eSports acquisitions, it’s more important than ever to focus on gaming trends and product life cycles. As an eSports team owner, you wouldn’t want to miss the boat on a game you didn’t expect to take off.

Know your rights

An important consideration for every team is choosing their name and associated brand. It’s crucial to know your branding rights and the parties that can affect those rights before you pour resources into building your brand. For instance, a recent article highlights how the Toronto Esports Club was forced to remove the word “Toronto” from its team name “Toronto Uprising”, despite having built a brand with that name over the previous Overwatch season and being in the minor league of Overwatch. Toronto Defiant, a new team that received the Overwatch league franchise for 2019, purchased the exclusive naming rights for “Toronto” and Blizzard responded by forcing Toronto Esports Club to rebrand their team within 6 weeks. These issues are often not resolved by exercising ones’ intellectual property rights to the brand name nor is it about whether a company has the right to exclusively buy the use of a word that is already in use by another party, in this case, “Toronto” – it is based on the terms and conditions these teams first agreed to in order to join the league or play the game in the first place – and these terms and conditions often give, in this case, Blizzard, the authority to enforce decisions in its sole discretion.

The substantial growth of the eSports industry makes companies in the space a desirable target for acquisition. However, given the unique characteristics of this emerging industry, it is important to pay attention to the risks and perform the proper due diligence before expanding into the world of online gaming.

The author would like to thank Travis Bertrand, articling student, for his assistance in preparing this legal update.

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