By: Nathan McKay
With a recent fall in venture capital funding the Electronic Sports industry (Esports) has fallen on tough times.[1] Esports is a catchall term referring to any competitive video game league. Esports organizations will often field multiple teams each specializing in a particular game, each with its own associated league. Esports has always been a dynamic industry and while there are longstanding staples such as League of Legends and Call of Duty, recent years have seen entire leagues rise and fall and occasionally rise again.[2] This means that larger organizations find themselves in a precarious situation, wanting to field teams in new leagues while minimizing risk in the event that any particular league or team doesn’t gain traction.
To understand the risk esports organizations face one must understand what makes esports different from the traditional sports industry. Importantly, one must understand how esports teams generate revenue. Whereas traditional sports organizations generate revenue from a variety of sources, esports teams are limited to their post-publisher cut share of league revenue (usually spent entirely on player salaries, another topic of discussion), and any revenue generated from sponsorships and merchandising.[3] Unlike traditional sports organizations, generally, esports organizations don’t own arenas, they don’t sell their own tickets to games, and they don’t sell concessions and other high-margin items to fans. In fact, only a small portion of esports games are actually played in front of a large arena audience.[4] Most games are live-streamed via Twitch and YouTube in smaller studios with occasional attendance room for a small number of dedicated fans and only the larger end-of-season tournaments being held in large arenas.[5] As a result, sponsorships and merchandising are the primary sources of revenue for esports teams, unlike traditional sports teams who usually only rely on these for about 10% of their revenue.[6]
For most of the large games, including League of Legends, the game publisher retains league rights and with it the ticket sales and a large cut of streaming revenue. Riot Games, the publisher of League of Legends, a game with one of the largest esports followings, owns and operates leagues in each major region around the world, with teams paying, currently, around $20 million dollars for a slot in North America. Riot uses live venue revenue to cover costs, usually running the league at a loss as an advertisement for their game and service for the fans.[7]Organizations that field teams within the league are afforded a portion of league revenue, dependent on the league and its associated publisher, but this often isn’t enough to offset costs alone.
Due to limited revenue options, esports organizations depend on their sponsors more so than other comparable sports organizations as it is one of the few large revenue sources available. Therefore, any loss in sponsorship revenue presents an immediate problem. Sponsors have begun treading carefully around the esports industry [8] and as organizations sell or dissolve specific teams in an effort to adapt to current challenges, sponsors may attempt to cease payment for promotional deals citing a loss in viewership and value to the bargain. Sponsors can potentially defend this breach with the doctrine of frustration of purpose. The strength of this defense will depend on the specificity of deliverables and other provisions within each agreement, particularly any special recognition of the viewership value of specific teams within an organization. Absent these kinds of unique provisions it is highly unlikely that the sale of one or even two high viewership teams under an organization would result in a defensible breach under the frustration of purpose doctrine. This is because it is unlikely that advertisement with a single specific team would be found to be the basis of the contract in a deal where the deliverable is stated as promotion across an organization, its teams, and its players with no additional language pointing to specific teams or players.
Frustration of purpose, a defense to enforcement, requires a party’s principal purpose to be substantially frustrated without their fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made.[9] The frustrated purpose must be so completely the basis of the contract that, as both parties understood, without it, the transaction would have made little sense. [10]The doctrine applies when a change in circumstances makes one party’s performance virtually worthless to the other.[11]
A distinction often made is that between a ticket to view an event and a prepaid taxi to an event venue purchased at a markup due to the event. If the event is canceled the ticket holder is due repayment (or is excused for breach through non-payment) because the sole purpose in purchasing the ticket was to view the event, a purpose that was frustrated by the cancelation of the event making the ticket worthless. Conversely, there is no defensible breach in the purchase of a prepaid taxicab to the venue because the rider can still receive what they bargained for, transportation to the venue, it might’ve lost significant value, however, it is not virtually worthless.[12]
Esports organizations will likely have enforceable contracts where the language supports a bargain for advertisement across an organization, without pointing to the particular team or player. Ideal wording, resistant to the frustration of purpose defense in the wake of a team or player sale, where esports organizations seek to enforce sponsorship contracts, would be very general in nature avoiding the identification of specific teams and players. An example might be “[Organization] is to promote [Sponsor] across its Teams, Content Groups, Creators, and Players…”. This kind of wording would suggest that the sponsor bargained for promotion across the organization as a whole and the sale of even the highest viewership team would not render the principle purpose of the sponsor “virtually worthless”. Similar to the taxicab, the sponsor can still receive promotion across the organization, even if such promotion has lost value. For the performance under a general provision to be rendered virtually worthless, the organization would have to dissolve a substantial number of teams and player contracts, such that there is almost no viewership for the sponsor. At this point, other problems would be of greater concern.
Recently in esports news, Team Solo Mid (TSM), a large and very popular esports organization with teams across multiple popular games including Apex Legends, Dota 2, Tom Clancy’s Rainbow 6 Siege, and more, announced they would selling their slot in the League Champion Series (the League of Legends North American league) and would searching for opportunities in other regions.[13] This calls to question what might happen with their current sponsors. TSM has multiple sponsors including GEICO, Grubhub, Lenovo, Mountain Dew Game Fuel, and more. TSM’s LCS League of Legends team pulled massive viewership, especially in larger games, peaking at an all-time high of 1.7 million viewers during the 2020 League of Legends World Championship.[14] It is without a doubt that TSM’s LCS team represented a valuable component when sponsorship agreements were made. With the LCS team gone and at least a year until TSM fields another League of Legends team in a different region one can be almost certain that sponsors are bringing TSM to the table to have a discussion about deliverables. Retaining sponsor capital will be paramount for TSM, especially in the wake of their former title sponsor FTX going under in the recent crypto crash.[15]
It remains to be seen what will happen. Sponsors will likely raise frustration of purpose as a defense to non-payment, however, TSM might make offers to proportionally reduce payments in light of the recent change. Everything will depend on how provisions surrounding specific deliverables have been worded. If sponsorship contract deliverables fail to mention any specific team or player then it is likely that TSM will have a solid foundation upon which they can stand their ground and demand full payment under threat of further litigation. However, these deals do not exist in a vacuum, and one must consider if enforcement of the current deal over a mutual renegotiation is worth any potential loss of future goodwill among sponsors. A consideration especially prudent during a time when the Esports industry is undergoing massive change and uncertainty.
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Citations:
1. Cecilia D’Anastasio, The hype around esports is fading as investors and sponsors dry up, LOS ANGELES TIMES (Dec. 8, 2022, 11:31 AM PT), https://www.latimes.com/business/story/2022-12-
08/esports-hype-fading-investors-sponsors-dry-up.
2. Michael Crossman, Top 5 companies that failed in esports, CLAIM YOUR FAME (Sept. 22, 2020) https://claimyourfame.gg/top-5-companies-that-failed-in-esports/.
3. Tim Maloney, How Do Esports Teams Make Money? ROUNDHILL INVESTMENTS (Jan. 31, 2022), https://blog.roundhillinvestments.com/how-do-esports-teams-make-money.
4. David Bloom, Esports Stadiums Are Popping Up Everywhere, FORBES (May 31, 2019, 10:44 AM EDT), https://www.forbes.com/sites/dbloom/2019/05/31/esports-stadiums-are-popping-up-everywhere/?sh=5c011ece2521 (the industry is working to catch up, building its own arenas to lower long term venue costs and increase fan bases).
5. RIOT GAMES, https://lolesports.com/article/2023-lcs-summer-split-primer–ticketing-
information/blt91bc05103f15f4d4 (last visited Oct. 13, 2023).
6. Michael Beach, NFL Franchise Values Soar Driven by Ever Expanding Media Rights, CROSS SCREEN MEDIA (Sept. 8, 2022), https://crossscreen.media/state-of-the-screens/nfl-franchise-values-soar-driven-by-ever-expanding-media-rights/.
7. Ormi Wallach, How Do Esports Companies Compare With Sports Teams?, VISUAL CAPITALIST (Jan. 29, 2021), https://esporthow.com/how-does-the-lcs-make-money/.
8. Billy Studholme, Sponsors are wising up to deals with esports teams and adjusting spending accordingly, DIGIDAY (Apr. 5, 2023), https://digiday.com/marketing/sponsors-are-wising-up-to-deals-with-esports-teams-and-adjusting-spending-accordingly/.
9. Krell v. Henry, [1903] 2 KB 740 (Eng.)
10. Shmaltz Brewing Co., LLC v. Dog Cart Mgmt. LLC, 163 N.Y.S.3d 659, 663 (2022)
11. Id.
12. Krell, [1903] 2 KB 740 (Eng.)
13. Field Level Media, TSM Sell LCS franchise to Shopify Rebellion for reported $10M, REUTERS (Sept. 22, 2023 11:28 AM), https://www.reuters.com/article/esports-lol-shopify-rebellion-tsm/tsm-sell-lcs-franchise-to-shopify-rebellion-for-reported-10m-idUSFLM2qZ0Mc.
14. ESPORTS CHARTS, https://escharts.com/teams/lol/tsm.
15. Rohan, What does the FTX collapse mean for TSM and the esports industry, (Nov. 10, 2022),https://esports.gg/opinion/esports/ftx-collapse-mean-for-tsm-and-gaming/.