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Riot Games has announced the Virtual Pass — a new effort to support the esports teams that participate in both League of Legends and Valorant.
In a blog post, John Needham, president of esports at Riot Games, discussed the company’s current and future efforts to make esports financially viable. Additionally, the post discusses how esports fit into Riot’s business strategy.
Setting the Stage
The esports industry has hit a rough patch in recent months. Teams have struggled while battling the current economic headwinds.
In recent weeks, some of the most iconic teams in League of Legends revealed how dire the situation is. The Madison Square Garden Company (MSG) sold Counter Logic Gaming (CLG) to NRG esports. Reportedly, MSG took a significant stake in NRG in lieu of cash. Meanwhile, Team SoloMid (TSM) is rumored to be selling its LCS franchise spot and pausing efforts in other esports.
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CLG and TSM had an iconic rivalry in the early days of the LCS. Losing both brands fundamentally changes the identity of the league.
The roots of this crisis can be traced back to the cost of franchising. In 2017, Riot franchised North American League of Legends esports. Teams wanted stability so they could sign long-term agreements with sponsors and players. To this day, franchised teams receive 50% of league revenues (not profits) among other benefits. Riot also continued to fund prize pools and pay a percentage of its digital esports content to teams.
However, each franchise spot came with a hefty price tag of ~$10 million. At the time, this was seen as a more reasonable investment compared to the $20 million fee Activision Blizzard charged for Overwatch League franchises. Regardless, teams needed to raise significant capital to participate, and the hype at the time led to high valuations. In turn, player salaries ballooned and outpaced revenue growth.
“The LoL partnership model helped the esports business in many ways, but selling sponsorships and chasing broadcast license deals was a new thing at Riot and, admittedly, it took us longer to source meaningful revenues,” said Needham’s blog post.
Riot’s reworked approach
Riot Games has taken steps to ameliorate the situation. The publisher implemented guaranteed minimum for its 50% revenue share, accelerated these payments to teams and deferred franchising fee payments.
Further, Riot’s partnership program for Valorant did not include franchising fees. “Essentially, we want teams to use their capital on their pro players, marketing, facilities, content, community and building their business rather than paying Riot,” added Needham.
Riot acknowledged it (and many others) believed that the esports business model would mirror that of traditional sports. The most obvious example of where these industries differ is broadcasting rights. For example, the NFL’s current broadcasting rights deal nets the league $113 billion over 11 years. Meanwhile, some esports media rights deals were inked during the early days of franchising, but these have dried up in the West due to a lack of competition and weak ROI.
The Virtual Pass
Starting for Worlds 2023, Riot announced plans to bridge this revenue gap. Today’s post announced the Virtual Pass which iterates on the prior Event Pass model. In addition to the expected digital goods, Riot will add new ways to enrich the viewing experience.
To do this, Riot plans to further develop its own watch platform. Previous Event Passes and Drops incentivize viewers to watch on this platform to receive exclusive content and deals from sponsors. Already, as much as 40% of Western viewership watches via Lolesports.com. Riot’s newest initiative will go a step further by adding an ecommerce layer. The publisher can use both player and viewer data (linked via incentives) to show personalized offers directly to viewers.
“Having the ability to sell esports digital goods and services directly to viewers will provide a scalable revenue source that should fill the hole left by the lack of broadcast licenses. This is one of the big areas where we think we will disrupt the business of sports – digital revenues sourced directly from viewers through our broadcasts,” said Needham’s post.
For 2023, the Virtual Pass will feature exclusive digital and physical products from both Riot and its sponsors. Riot plans to increase (virtual) access to events through features like exclusive camera views and premium chat channels. The Virtual Pass will also expand to Valorant esports in the coming year.
Ultimately, this new Event Pass will come in team-specific versions which will help teams monetize their fanbase. While some digital goods have featured team branding, Riot has rolled these out in limited quantities due scale. Over 100 teams participate in the League of Legends esports ecosystem. Riot limited Valorant partnerships to 30 teams partially due to concerns about scaling team branded products.
A spokesperson confirmed that Riot is determining some details of the Virtual Pass, including pricing, rewards and revenue splits with teams.
Promises and Solutions
Riot’s latest effort intends to benefit its partner teams through new revenue streams. However, it is critical to the esports industry that these products meet fan expectations for quality and value.
This is not the first time Riot planned to build out a unique viewership platform for its esports ecosystem, though it was prior to Needham’s tenure as president of esports for Riot Games.
“One reason League of Legends was regarded as a pioneer in esports franchising was its groundbreaking 2016 partnership with MLB’s BAMTech. This landmark deal secured an announced $300 million minimum guarantee over 6 years and promised enhanced distribution and monetization of LoL esports — aspects that have been eagerly sought after for seven-plus years,” said Sebastian Park, partner at Bitkraft Ventures. At the time, Park served as the VP of esports for The Houston Rockets and successfully led its bid for LCS franchising.
Unfortunately, this deal never quite came to fruition. Just 18 months after its announcement, the deal with BAMTech was scuttled due to a change in ownership. The Walt Disney Company purchased a majority stake in BAMTech and shifted the deal to ESPN+.
“It’s truly exciting that Needham and Riot are now taking the reins to bring these much-needed solutions to life, hopefully helping esports unlock its full potential,” Park added.
Until Riot irons out the details, the impact of the Virtual Pass is difficult to quantify. In any case, this is a step in the right direction for the esports industry.
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