Esports Finance & League Stability
Are Rainbow Six Siege Esports in trouble?
R6 Esports is in an interesting spot. Based on Twitter sentiment, you’d think the system is in jeopardy. I don’t agree with that. I think the league is a few tweaks away from being excellent.
My opinions on the league, operations, global ecosystem, etc
Ubisoft is a big company. Big companies, despite what the perception is, are run by people. Just like you and me. They have red blood. They wake up each day just like us. They think about the things they have to do, the people in their lives they have to care for etc. When you think about it from this perspective, it lowers the "perfection perception" which usually goes something like "well this company makes a billion dollars a year so they should be able to do this much better!". There are many things about the R6 Esports competitive ecosystem that can be improved, and the people at Ubisoft are considering all factors and doing the best they can. If you believe that there are people at Ubisoft who have bad intentions for R6 players or teams, then you can stop reading here because there is nothing that I can say that will change your mind on that.
An esports league has several components to it, but the success of the league is a mix of the Publisher, the Orgs/Teams, and the Players. I'm not sure what the optimal success ratio is but for easy maths here, lets just assume it's close to 33/33/33. This means that the burden for success should not be too heavy for any one party assuming all parties have the opportunity to make material gains.
Ubisoft has set up a global esports ecosystem that requires no fixed buy-in from organizations to take part. Also, they allow organizations to generate revenue through the R6 game interface. Most of this compensation is based on the org's ability to sell its own weapon skins. This means that in order for organizations to do well in R6 Share, they have to market themselves well inside of the R6 ecosystem. No organization can have a gripe about R6 Share revenue if they aren't doing their part to market themselves and the game. If you are an esports organization and you don’t have the capital to buy a franchise in Call of Duty or League of Legends then Rainbow Six Siege should absolutely be an esport you consider entering along with Rocket League, Valorant, CS:GO, and DOTA.
Ubisoft has had to make many spot decisions over the last year or so. These include(but not limited to):
How to handle NAL Lan League with Covid
How to handle International majors and their prize pool split with Covid
Handling situations with players whose organizations forfeited their licenses (and thus leaving the players in limbo)
Bringing in new organizations to fill out the league
Dealing with NAL LAN League logistics for 2021
It is 100% fair and valid to question some of these decisions. Some have made sense, some haven't. That's the way life goes. But on the very core issues, something that is important when it comes to players being dropped or finances: UBISOFT HAS EXPLICITLY AND UNEQUIVOCALLY MADE IT CLEAR WHAT THE RULES AND EXPECTATIONS ARE FOR PLAYER TREATMENT AND FINANCIAL SUPPORT. If organizations act in bad faith or just plan poorly, most of that is out of Ubi’s hands.
A Stable Career
If you want a stable career, Esports is not for you. Be an accountant. I see on Twitter things like "but you are messing with people's careers!". See my above statement. Someone losing their job is NEVER SOMETHING TO BE CELEBRATED or EASILY BRUSHED ASIDE. But the idea that you are entitled to job security "just because" doesn't have merit. If job security is THE MOST IMPORTANT THING FOR YOU then being a firefighter, doctor, accountant, plumber, electrician etc all have great security. Esports is still in its infant stages. It is high risk/ high reward. The people who make it in the industry will come out BIG if they are in early and can sustain. But many will leave mostly empty-handed. This is just the nature of gaming/esports (or any early-stage ecosystem...google "dotcom bubble" for you non-boomers).
In any “esports scandal,” so much of the public outcry starts at the perception that a stable esports career is an inherent right to all of its participants. This just isn’t the case. It’s not the case for the publishers who put on Esports (hello H1Z1), it’s not the case for the orgs (too many to name that have died), and it’s not the case for the players either.
This will change when the entire ecosystem stabilizes. Until then, job security is not in the cards.
I’m not tossing stones from a glass house either. If you’ve made $1 in esports gaming, you’ve made several hundred thousand MORE THAN ME!
Esports Finance
The ecosystem around esports athletes (in most esports) is not yet sustainable. Most discussions of cash flow and revenue lack nuance specifically because of accounting jargon (how do you define profit? And for which company line items are you boxing that into?). This discussion usually involves these ideas:
“Esports shouldn’t be profitable, and if you think it’s going to be, you are in the wrong business.”
“If you aren’t ready to lose millions of dollars, you shouldn’t be in this business”.
I categorically reject both of these. I’m a start-up entrepreneur. Beating long odds is part of the game. I also reject the idea that just because this is a new industry, that basic dollars and cents fundamentals can be thrown out the window.
Do I think that if you sign a top-level esports team and do nothing else, that you can be “profitable”? Absolutely not.
Do I think if you have a business that operates on multiple fronts and a part of that business is esports but you don’t generate much revenue specifically from esports but it still fits into the wider business is OK? YES!
Do I think that if you sign a top-level esports team, market the crap out of it and sell the crap out of it that with sponsorship dollars + prize winnings + publisher revenue share + media revenue + merchandise you can AT LEAST BREAK EVEN?! 100% yes.
If someone disagrees with that last statement strongly, I’d be interested to know what their business-building track record is.
At Disrupt, we’ve been revenue negative in 2018, 2019 & 2020. There is a decent chance that in 2021 we are revenue neutral. Maybe with a lucky bounce or two, we could *GASP* be revenue positive. There is a zero% chance we’ll be “profitable” because any earnings we have will be reinvested into the company to drive growth (greater benefits for our players, staff, increased content product/quality, expansion to new titles...these are all things we consider).
For any esports organization that is hemorrhaging cash on a monthly basis, there is really only one justification for that. It is that at a later date you calculate there to be a point in time where you’ll be able to sell an asset (either your entire brand or a spot in a league) for SIGNIFICANTLY MORE than your annual losses or get to a point where your positive cashflow is so great that it makes up for previous losses. If the ownership group cannot put a relatively specific date and price target or future income potential, they are literally just shooting in the dark.
IMO, acceptable formulas for annual cash loss would be something like:
(years) * (annual loss) = X
(asset value) @ {date} >= 10X
Or
(years) * (annual loss) = X
(net annual operating income @ {date}) >= X
The point is that for ANY BUSINESS to justify incurring annual losses there absolutely has to be some projected payoff that accounts for the risk you are taking AND THE OPPORTUNITY COST OF DEPLOYING YOUR MONEY ELSEWHERE (I’m a TSLA long, if I had taken the $ invested in Disrupt and put it in TSLA...oof I shouldn’t think about that. But that is a real opportunity cost…) If there isn’t, it’s just a hobby (hey that’s cool!) or poor decision making.
Our Own Decision to Commit to 2021 Rainbow Six Siege Esports
If you've followed us for long, you'd know that competing in PL/NAL was a long time goal of ours. Competitively, we never could qualify and had a couple of efforts fall just short.
At the end of 2019, we were in conversations with the 2 teams that won their spot into the North American Pro League. However, under no circumstances could we justify the salary offers they were getting from other orgs (I've seen the number 6k/month thrown out publicly). We decided relatively quickly that “this does not make sense and would be disrespectful to our investors to take this risk given that there is no discernable ROI in any discernible time frame”
I want to be very clear here...every organization will have its own model and its own way to calculate how much they can afford to pay and what they see as potential ROI. I cannot speak on behalf of another org's calculation. But based on the information we received from Ubisoft (same info as the other orgs) and based on our knowledge of the sponsorship market and other revenue opportunities, these salary numbers did not work. There was nothing Ubisoft has ever told us to make us think those numbers made sense. I’ve seen sentiment that suggests Ubisoft was not clear about revenue or licenses and this is not the case from my point of view.
This is a very tricky thing: On one hand, my thought is "Hey man, go get the bag, I'm happy for you." on the other hand, the longer-term consequences of this are very very very very real.
How so?
Well, it looks something like this:
Team 7 and Team 8 get $6500 salaries.
Team 1, 2,3,4,5,6 at the next contract negotiation go "well team 7,8 are getting this and we are better than them, so we should get more!"
Now the "baseline" has been inflated past sustainability.
Then you have teams 8,7,6 drop out of the league or drop their roster because they cannot justify the cash loss.
The public blames the publisher...but Ubisoft didn't tell orgs to sign players to unsustainable contracts…
This causes a reset and then the process starts over again (but hopefully not!).
Coming back to the 33/33/33 principle, this is where its key that there is alignment between players/orgs/publishers explicitly as it relates to operating expenses in the league.
The players have the RIGHT to demand any number they want. But the short-term pay increase is harmful *if it leads to long-term unsustainability*. By earning inside the financial umbrella of the entire ecosystem, the players can aid in sustainability. (what would you rather have...quick boost in pay and be jobless in a few months, or less pay, but never worry if the rug is going to get pulled for non-competitive reasons)
The publisher needs to help orgs succeed. Viewership of the league, sponsorships, and most importantly, REVENUE SHARING!
Org's need to 1) not overreach their own pocketbook and 2) treat the players well inside the financial umbrella of the ecosystem 3) promote the heck out of the game and their players so that the entire pie grows!
It ought to be a relatively harmonious relationship with no particular party realizing outsized gains unless the others do as well. If the Publisher is doing really well financially, that should trickle down to the orgs and players. If the players are earning well but the orgs are dying, that’s not good. If the orgs are making lots of money but not passing it to players, that’s messed up. Again, it should be as harmonious as possible.
After Disrupt backed out of PL negotiations in late 2019, we weren't sure what we were going to do. Then an opportunity came to sign an APAC team in early 2020. We had contracts out to the team...then, I got the fortuitous call from Ubi. I met the Ubi team at Invite in 2020 and we got the offer for NAL. Boom! I WAS STOKED!!!
We looked at the numbers, made some educated guesses, and came up with a salary and operating budget.
We hypothesized that the LAN league would generate at LEAST ONE meaningful sponsorship deal for us over the course of the year. Unfortunately, that was not the case. Would it have been different if LAN occurred and no Covid? Maybe, maybe not.
This offseason (December 2020-February 2021) we took a good hard look at everything. We looked at going to another region, we looked at entirely dropping the roster and picking up a new one (and by “looked at” I mean thought about for 5 seconds and dismissed...but the thought did occur), and we considered just leaving R6 PL altogether. Disrupt Gaming would be a cashflow positive venture if we did not have professional esports overhead so in order to really commit here is not an easy decision. After some updated revenue guidance from Ubisoft, we decided that another year in NAL was the best thing for us to do. There is just too much potential here and as long as we don’t put our entire business at risk, it’s worth continuing.
Our organization can not spend at the level of the top NAL teams. We just can't. Even if we could, I'm not positive we would. If TSM, SSG, and DZ are the Yankees, RedSox, and Cubs...we are the As (if you are in the EU then a football metaphor would be Man U, Man City, Chelsea, Leicester City or Inter, AC Milan, Juventus, Napoli...this is fun!).
(If money is the most important factor for a player, we are unlikely to be a good fit for them. That’s OK. If players level up from us and earn way more with another org, we’d be genuinely happy for them. Our entire history is laden with people who have used Disrupt as a springboard to greater things. Again, this is OK!)
We looked at the USA Median Salary, bumped it up 20% or so, and feel pretty good about that. Our players should be more than comfortable especially when you consider housing is covered as well. Our incentives are aligned too. When we close a sponsorship, the players will get some of that windfall. When the players win prize money, the org gets a little piece of that. It's a win-win.
I think it’s important to clarify here that this is JUST sustainable. Ultimately there has to be some upside for me, my family, and our investors to continue through this indefinitely. I'm not here for Twitter clout or to spend 5 years just to break even. I'm here to take care of my family while participating in something I'm passionate about and love.
So what do I see the upside as?
Well, I think over the next 2-3 years we'll see North American Siege become a real asset with measurable demand. I'm not super confident in an "asset sale price" prediction, so I'll leave that out, but I do think the ecosystem will allow us to build a SUCCESSFUL BUSINESS that justifies the opportunity cost of me working on this for so long with no income.
TL;DR
99.9% of all issues regarding Siege revolve around money. When any one particular party gets squeezed too hard (in the current environment, it’s the organizations which is why you see them leaving) it causes problems. It’s not JUST the publisher’s responsibility to fix things, it’s a collaborative effort from publishers, orgs, and players.
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-cashflo
Great article!!