Esports Winter, Player Salary Caps and Online Toxicity: Unpacking ESI London 2023

CMS was one of a few law firms learning more about the ever-developing esports and gaming industry at the ESI London 2023 conference. CMS attendees Andrew Wilson, Chloe Day and Sarojah Sathivelu were able to hear from many of the leading names in the industry, hearing from the likes of national esports federations, academics, and big gaming companies alike. See their takeaways below.

THE ESPORTS WINTER

One topic which pervaded many of the discussions at ESI London was the so-called ‘esports winter’:  the widely used industry term for the struggles faced by esports organisations around the world in the latter half of 2022 and throughout 2023. The rapid growth of the industry, which peaked in mid-2022, was driven in part by the unprecedented popularity of livestreaming during the COVID-19 pandemic coupled with a huge wave of sponsorship deals. This growth now appears not just to have slowed but in some cases ground to a halt.

The esports winter has been well-documented by industry publications. Notable victims include major names such as FaZe Clan, who went public in July 2022. FaZe Clan’s shares peaked at $20.08 in August 2022, and it boasted a market cap of $1 billion (the first esports organisation to do so). In September 2022, however, public filings laid bare the company’s financial problems, causing a share price collapse.[1]  Following its acquisition by Gamesquare in October 2023 for $17 million, FaZe Holdings Inc’s share price now sits around $0.17.[2] Similarly, within weeks of becoming the first North American esports organisation to win the Valorant World Championships in August 2023, Evil Geniuses was forced to sell its spot within the Riot Games’ League of Legends Championship series, whilst also asking its Valorant roster to take significant pay cuts.[3]  

These examples are far from isolated and as a result, the esports winter was discussed extensively at the ESI conference. The reasons behind the decline are numerous, but there are a few key factors. Firstly, the industry has a widely acknowledged overreliance on sponsorship as a revenue stream. In general, esports organisations have so-far found themselves unable to properly monetize their online viewership (which remains strong) and diversify their sources of revenue. This has made esports organisations highly vulnerable to brands cutting back on advertising revenues amidst rising inflation and fears of recession around the globe.

Another issue for esports organisations is the unique role of video game publishers in the esports industry. Publishers are able to exert control over issues such as licensing and game development in a way that does not exist in traditional sports, and publisher decisions can have a huge impact on a game’s popularity as an esport. Further, it is publishers, not esports organisations, who stand to benefit from media rights deals for the broadcasting of tournaments and other events, wiping out a huge revenue stream enjoyed by traditional sports franchises.[4]

Another explanation for the esports winter is that this is simply a market ‘correction’ – a dip that was always going to follow the rapid growth that proceeded it and one which is in fact necessary to ensure the long-term health of the industry. With this in mind, there are clear lessons for esports organisation to learn in order to create a more sustainable environment. Crucially, esports businesses must diversify their revenue streams and build on the strength of their audiences and fanbases. Several esports’ organisations have launched apparel brands[5] and education services[6] in order to elevate their offering and decrease reliance on sponsorship. Tournament organisers can do more to capitalise on their online viewership, such as offering online items and unique viewer perks.

Another solution for esports teams is to create stronger brand identities and more unified fanbases. Historically, this has been a challenge for esports given the industry’s disparate, digital nature and the lack of geographical ties. As a result, esports fandoms tend to focus on specific games or specific players, not on the team as a whole. Team Liquid’s ‘Wave of One’ marketing approach seeks to counter this issue by creating one united fanbase behind the team. This approach is aimed at improving fan retention and fostering a business model which is less reliant on publishers, enabling teams to switch between different games without losing fans.[7] It is hoped that this increased independence will enable esports organisations to campaign for better revenue-sharing with publishers.[8]

Finally, it is crucial for esports organisations to distance themselves from traditional sports-based business models. Esports models must be flexible in order to account for the sheer number of games available and embrace the qualities that set it apart from other sports, such as the ability to easily connect players and fans from all over the world and involve fans in the games themselves.[9]

PLAYER COMPENSATION AND SALARY CAPS

In the midst of the esports winter, an open market system involving uncapped player salaries is becoming increasingly unattractive and unsustainable to teams and brands struggling to retain top talent while also trying to survive in a punishing economic climate.

Riot Games, a US developer and publisher, has announced that it will be introducing new strict financial regulations, called ‘Sporting Financial Regulations’ (‘SFR’) from the start of the 2024 season of the LEC, Europe’s top League of Legends league.  The SFRs aim to promote financial stability and sustainable growth for teams, players, and the league as a whole and discourage unsustainable spending practices. The LPL (China’s league) and LCK (Korea’s league) have already introduced salary caps.

At present, the average player salary at the top level of League of Legends is more than $410,000, with some players earning between £3 million - £5 million per year.[10] By contrast, there are vast numbers of unsigned, unsalaried players competing in the same tournaments. The introduction of salary caps may therefore help to stabilise and regulate the esports ecosystem. 

There was a discussion at the ESI conference regarding the percentage share of the prize winnings that should be awarded to players for winning tournaments. Some members of the panel were in favour of 100% of the prize winnings being awarded to the player as it is the player’s skill and effort that have resulted in them winning the tournament. Other members in the panel were in favour of all of, or at least the lion’s share of, the prize winnings being paid to the team owner / organisation as part of the terms of the player’s employment.

While the introduction of salary caps for esports players might spell good news for teams and organisations struggling with the current esports’ economic climate and unsustainable salary expectations, attempts to introduce salary caps and cap players’ earning potential invariably attracts regulatory and legal scrutiny, including among other things from the anti-trust and competition perspective. There is certainly a balance to be struck between setting the right salary cap to achieve sustainable growth for esports organisations to survive while retaining top talent and fostering healthy competition in the market.

CONTENT CREATORS AND BRANDS

While players obviously form a key part of the esports and gaming ecosystem, the content creator is also another key entity emerging in the space. Content creators or “influencers” on Twitch, YouTube or TikTok are a huge part in bringing games to the forefront of public awareness – gamers will often have a go-to content creator they trust to recommend a good game, or to walk them through gameplay.

Brands understand that content creators present a lucrative platform to advertise their products, while content creators themselves can access new sources of income via brand sponsorship. However, creator-brand collaboration is not always a walk in the park – creators come in all sizes, and what is marketable on a large-scale creator’s platform might alienate the fans of a smaller creator. An “alignment of values” is key.

There was discussion regarding the regulation of social media endorsements. Given the younger demographics that typically make up an influencer fanbase, regulators such as the Competition and Markets Authority and the Committee of Advertising Practice have produced Codes and guidelines targeted at influencers.[11] It is evident that brand engagement via content creators is not going anywhere – it will be interesting to see how the dynamic between content creators, agencies and brands continue to develop.

TOXICITY IN GAMING

Another hot topic of discussion was toxicity in gaming, and how companies were working to eradicate it. Panellists highlighted some disappointing (though perhaps not surprising) statistics:

• 2/3 gamers experience toxicity while playing, and
• 55% of female gamers will turn off their microphones so that other gamers will not identify them based on their voices.

Even though esports is a male dominated area, the industry cannot sustainably develop if it is hostile towards different groups. Women are a powerful buyer demographic, and so for economic reasons alone (aside from principles of diversity and inclusion) brands will want to make esports and gaming platforms a more welcoming place for women and other marginalised groups.

There is currently a lacuna of regulation for the specific issue of online toxicity, especially where this takes more subtle forms. Considering the incentive for brands to improve the user experience for women and marginalised groups, it would not be surprising if regulation was led by brands and gamers themselves – in any case, this will be a space to watch.

This article was prepared with the assistance of Amir Kenbar.
 

[1] FaZe Clan Faces ‘Substantial Doubt’ It Can Survive — Five Months After Going Public (forbes.com)

[2] FaZe Holdings Inc. Common Stock (FAZE) Stock Price, Quote, News & History | Nasdaq

[3] Why Esports Must Keep Leveling Down In 2024 (forbes.com)

[4] What is the esports winter — and how to navigate the cold? (esportsinsider.com)

[5] 100 Thieves hires Doug Barber to bolster apparel efforts - Esports Insider

[6] Gen.G Global Academy (ggacademy.gg)

[7] Wave of One: Team Liquid’s attempt to unite its rosters and fandoms - Esports Insider

[8] What is the esports winter — and how to navigate the cold? (esportsinsider.com); Why Esports Must Keep Leveling Down In 2024 (forbes.com)

[9] Esports Winter: What’s Next for Competitive Gaming? – Sportico.com

[10] How do esports players make money — and how much? (esportsinsider.com)

[11] CMA and CAP Joint Guide: Influencers' guide to making clear that ads are ads