Billion Dollar Game
With hundreds of millions of dollars being poured into eSports every year, GC talks to the key players helping guide the industry to maturity.
sPORT GOES DIGital
In 2002, Sangam Stadium in Seoul played host to the semi-final of the FIFA World Cup, with more than 66,000 people in attendance. Twelve years later, that same stadium sold out for the 2014 World Final of the video game League of Legends.
Competitive gaming (or eSports) has been on the precipice of cracking the mainstream for years, but only now is it truly beginning to receive recognition befitting of the world’s fastest-growing entertainment industry. According to market intelligence firm Newzoo, revenues from eSports in 2018 are projected to reach $906m.
Investors are sitting up and taking notice, too.
American telecommunications giant Comcast, Chinese tech wunderkind Tencent, and Korean manufacturing heavyweight Samsung, all count themselves as major early backers for eSports. They join traditional sports teams, including West Ham United and the Golden State Warriors, who have taken stakes in eSports teams, along with well-known investors and celebrities, all of whom are fighting for a piece of the action.
The truckloads of cash being poured into the industry is a sure sign that eSports are coming of age. But despite the significant financial backing and high levels of organisation evident across teams and competitions, the lack of business maturity and legal sophistication has the potential to halt the upstart industry in its tracks.
‘Not too long ago, a lot of eSports businesses were being run by people who had never run a business before and, oftentimes, were extremely young. That’s changing, but it’s still an industry which is finding its feet,’ says Roger R. Quiles, founding partner at Quiles Law, a firm specialising in sports and eSports.
Such a fast-growing industry has meant that the operational side of these businesses has been an afterthought, not unlike the attitude found among the traditional Silicon Valley brand of start-ups. But, as often happens with start-ups, there comes a time when the money at stake is so great that the kind of corporate expertise and business nous typical of more traditional companies becomes a necessity.
‘We saw that there were a lot of best practices on the legal and operational side of things that hadn’t been learned, let alone implemented yet,’ explains Quiles.
‘Coming into the industry, it put me in a position where – for lack of a better term – I had to coach them on the dos and don’ts of what needed to take place to operate these businesses in a legal fashion.’
Counselling an emerging industry
Some owners are more diligent than others, particularly those who have been in the industry long enough to know how important a sound legal foundation is to a successful business. Drew Holt-Kentwell is the founder and managing director of Chaos Theory, a professional eSports team based in Singapore. He’s also the co-founder of FTW Talent, an eSports player representation agency, and has played professionally. Having worn many hats within the eSports ecosystem, Holt-Kentwell has a multi-dimensional view of the industry.
‘One of the reasons why we came out last September and said we were the first professional eSports team in Singapore, was because we took time to step back and build the model from a perspective that hadn’t been done before,’ he says.
Burnout is an issue that has uniquely afflicted the growth of competitive gaming.
‘We invested significantly into ensuring that we had professional contracts and incorporation documents. Globally, that’s becoming increasingly common.’
But despite the complex financial and human resources quandaries apparent, it’s still unusual for teams to have dedicated legal counsel.
‘It’s on the upswing and certainly appears to be the direction that things are going – but there’s a way to go yet,’ says Quiles.
‘These entities become too big to continue using outside counsel. Whenever you have these types of businesses that move in an incredibly fast industry like eSports, you’re going to need someone on the ground who is involved every step of the way. You need that person who is able to assist in making appropriate decisions, allocating risk effectively and providing counsel.’
‘If you are totally reliant on external advisers, then all of your intellectual capital rests outside of your company – and that is very risky,’ adds Ian Smith, commissioner for the eSports Integrity Coalition (ESIC).
‘This applies equally to traditional sport as well. It can get to the point where your lawyers know more about your business than you do, which is not where you want to be.’
Novel industry, novel challenges
For those companies and lawyers that exist in more traditional spheres of business, to argue for the value of in-house counsel is to push at an open door. What might get lost, however, is how unique a situation a lawyer in this world will find themselves in. The opportunity to serve as counsel in an industry that is in its infancy, operationally speaking, may never come around again.
‘This is an industry that, much like sports law, has every vertical of law that you could imagine underneath, just appearing in an eSports context,’ says Quiles.
‘It could be things like the hot new issue of investment, hammering out the relevant agreements that would need to be put in place for player negotiations, establishing new businesses or selling businesses, dealing with any disciplinary issues that may arise, making sure my players are being taken care of and making sure contractual hiccups are being avoided.’
Burnout is an issue that has uniquely afflicted the growth of competitive gaming. In other, more established sports, things like practice time have been legislated or collectively bargained very closely. In the National Football League, for instance, teams are only allowed one padded practice per day, and no more than 14 full-contact practices over the course of a regular season. But in eSports, the line between work time and free time doesn’t exist in the same way.
‘More often than not, professional eSports players work where they live. If you have a top-tier eSports team, that team generally buys a team house. The team will live there: you’ll work there, you’ll eat there, you’ll sleep there. Not exactly the healthiest of environments. I’m sure you don’t want to sleep at your desk. It’s something that creates a lot of burnout,’ says Quiles.
‘We don’t have limitations on practice. That’s all self-governed. Unfortunately, it’s a culture that has been created by all of us within the ecosystem that prioritises working harder, not working smarter. In fact, [businessman, investor and owner of NBA team Dallas Mavericks] Mark Cuban was asked about why he doesn’t want to invest in an eSports team some time ago. That was the very issue that he raised: something needs to be done about burnout.’
One of the higher profile issues being teased out as the industry grows is the employment status of the competitors – a challenge that has been confused by the lack of a cohesive, international body capable of elevating standards across the board.
The default position was that there is no position: the players exist in a grey area in which they put in thousands of hours of play time, attend tournaments and win prize money. How much attention can an 18-year-old online celebrity be expected to give to their annual leave entitlements or tax classification? If anything, the players were (and in many cases, still are) considered independent contractors, with all of the freedom and lack of protection that goes with that designation.
This is beginning to shift. Riot Games, the developer behind League of Legends, the most-watched competitive video game, announced plans in 2016 to require all teams participating in its North American and European competitions to employ their players and coaching staff. This brings with it healthcare and retirement benefits, but also higher taxes, which would now be deducted by the employing team.
‘Contract status is probably the number one issue apparent as a business in eSports,’ says Holt-Kentwell.
‘Most organisations will employ their players on full employment contracts now. So in Singapore and others, that comes with a certain amount of stipulations that they have to only work a certain amount of hours per week, they need to have leave, and anything outside of those hours is technically voluntary work.’
‘One of the things that we’ve been seeing in the US across the last two years, is the increasing usage of employee-based contracts for players. Prior to that, it was almost ubiquitous that every player was deemed an independent contractor, rightly or wrongly,’ says Quiles.
‘We still do have a lot of contractor-based contracts today – many of which wouldn’t hold up under judicial scrutiny – but that is something that persists when you look at the rest of the world. From a talent perspective, of course that’s always an issue. But from a legal perspective, it’s a very serious problem – in some jurisdictions, misclassifying employees in that manner can be potentially criminal.’
The French government has taken particular interest in the contract status and classification of eSports players. In 2017, a national decree was adopted that teams and leagues looking to hire eSports players on a professional basis must be accredited. Any application for accreditation must be made to the French minister responsible for the digital industry and must spell out the conditions of training and the mental and physical supervision of their players, including steps taken to minimise the risks associated with competitive gaming.
Nowhere is the novelty of the eSports landscape more apparent than the contractor-employee demarcation. Like so many other aspects of the sport, this is an attempt to graft well-established legal principles onto an arena that, until recently, was beyond contemplation. The main players in the industry – ambitious owners like Holt-Kentwell and lawyers like Quiles who serve them – make it work. But a close look at the practical realities of existing in this industry shows that the peg of traditional legal concepts may be too square for the round hole that is eSports.
It perhaps doesn’t help that a lack of cohesion also afflicts the top levels of the eSports hierarchy: the event organisers, the game developers and the competitive leagues themselves. Unified competitive gaming bodies are few and far between. Whereas soccer has the likes of FIFA to unite the disparate arms of the sport, there is no equivalent in the world of eSports. The eSports leagues in which the cyber athletes compete are separate, and often entirely created and managed by the developers of the games being played.
‘The difference is – and this is more of a legal point than anything else – because we are dealing with video games as opposed to traditional sports, there is an inherent IP issue at stake,’ explains Quiles.
‘The developer owns the IP of the game. So effectively, it would be akin to the NFL owning football. And when that comes into play, it almost disincentivises the developer from outsourcing their league initiatives, because why are they then going to give up on that revenue and make a smaller amount in what would be licensing from a third party? So from an economic perspective, I absolutely see that structure continuing.’
This intellectual property point has largely determined the structure of the industry. The developers and publishers hold the rights to the relevant IP and, as such, hold all the cards. This means that the rights-holders act as the ultimate gatekeepers for an entire industry. They determine who is allowed to host events, how the competition is marketed, as well as who gets to play – both in competition, and outside of it. The core rules of each game are also subject to the whim of the developers: how each gameplay feature is balanced, from the physics calculations of weapons in Counter-Strike: Global Offensive to the three-point accuracy of LeBron James in an NBA video game.
The developers and publishers hold the rights to the relevant IP and, as such, hold all the cards.
Despite the power imbalance inherent in eSports, Ian Smith sees potential for institutional co-operation between all links in the chain, for the benefit of the entire industry. As commissioner of ESIC, he has been responsible for overseeing the largest step taken towards a governing body in eSports, and he hopes that ESIC can fill the void at the top of the governance hierarchy.
‘The chances of the owners of these games all actually getting together and agreeing a governance structure is non-existent, it is a pipe dream. On the other hand, what you do have is a set of common problems that apply to all of those stakeholders and tournament organisers and broadly those are three things:
‘The first is integrity, which applies whether you are Splatoon or Warcraft. It doesn’t matter. You’ve got to have competitive integrity, you have to look at issues that we look at: cheating, match-fixing, doping. That first one is obvious.
‘The second is youth protection. We have a very young demographic of participants and fans. That brings with it tremendous responsibility, and that responsibility is the same no matter what game is being played.
‘The third is event safety and security and that was harshly brought with the shooting at the Madden event in Florida. Event safety and security for live eSports events has been an issue I’ve been seeking to address since I entered the sport.’
‘I think there is scope for eSports organisations to cooperate across these three common issues by setting common standards that apply to their events, their tournaments, their leagues. They can be at different levels – you could have bronze, silver and gold depending on the scale and size of the event – but you are basically ticking compliance standard boxes for youth protection, for integrity and for event safety. I think that there is scope for gathering those issues under an umbrella.’
Amongst all the positivity surrounding eSports and the gold bullions it produces, the ‘Wild West’ nature of the industry will inevitably need to be reined in at some point. What that looks like, and who decides how it should be done, remains to be seen.
Having spent time in the various echelons of traditional sports, Smith understands what a lapse in integrity can do to a game with the benefit of decades of history. For a sport whose history goes back a few years at best, the results have the potential to be far more catastrophic.
‘The necessary evolution for the industry is to start actually agreeing to some standards, and they either agree those standards amongst themselves and some kind of enforcement of those standards, or – and this is the doomsday scenario – somebody will impose those standards on them, because that’s the way of the world,’ says Smith.
‘We are heading toward a situation where either we answer those questions as an industry, to the satisfaction of politicians, or politicians impose something on us – and if they do, we as an industry will hate it.’