Mentioned in this article Games: League of Legends

On September 1st, the professional League of Legends organization H2K Gaming addressed a public letter to the EU LCS community. Co-authored by the team’s CEO Susan Tully and Co-Chairman Richard Lippe, the letter outlines the financial challenges with the current LoL eco-system from a team’s perspective, and included a threat to leave the LCS unless changes are made.

Upon reaching out to the organization, Co-Chairman Richard Lippe spoke to The Esports Observer to explain H2K’s decision to publish the letter, and to further elaborate the criticisms and solutions contained within.

Addressing this letter publicly seems like you are trying to put public pressure onto Riot Games – have you been in touch with the publisher about this before, and what was their reaction?

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]”…during 2016 when the NA and EU teams were working together, the teams collectively said that to achieve financial stability they required $700,000 in annual support from Riot.”[/perfectpullquote]

H2K and the other team owners have been in continuing conversations with Riot about the financial and structural problems with the EU LCS. We have recently become concerned that (i) Riot will not take proper steps to reduce or eliminate the need for the teams in the EU LCS to continue to subsidize Riot, and (ii) Riot may change its interregional rules by permitting NA Academy teams to import European players resulting in an even greater drain of player talent from Europe.

The principal reason for the public letter was to make the fans and others aware of the financial and other issues related to the EU LCS. H2K wished to pressure Riot into providing significantly greater financial support to teams in the EU LCS. This would permit H2K and the other teams in the EU LCS to remain competitively strong without continuing to incur substantial operating losses. It was prepared as a precaution in the event that an ESPN video interview conducted with me and Susan Tully on August 22nd required any clarification.

Once we saw that the video interview had not been made public, H2K released its letter to the EU LCS Community. H2K was informed by ESPN that the video content had been corrupted and was not usable. There were several important issues discussed in the video interview which H2K intends to focus on in a full and transparent manner.

[perfectpullquote align=”left” cite=”” link=”” color=”” class=”” size=””]”[The impact] includes players being forced to choose between significantly reduced compensation in Europe or being uprooted from Europe and relocating to North America.”[/perfectpullquote]

The most significant issue is what we believe will be the seriously disruptive and negative impact on EU players resulting from the policies we believe Riot plans to implement. This includes the players being forced to choose between significantly reduced compensation in Europe or being uprooted from Europe and relocating to North America. In our opinion, were Riot to provide fair and reasonable changes to the financial and operating structure of the EU LCS, the negative impact on EU players would be quite limited.

You mentioned an annual loss of 1,000,000 EUR. Can you please elaborate a bit on this number? In your opinion, is this a structural problem with the LCS or could this also be based on your inability to properly market the team?

The annual loss in excess of 1,000,000 EUR reflects reasonable operating costs. We know that other EU teams incur similar operating losses as do many of the NA teams. Several months ago Michael Moore, the managing partner of Phoenix 1, publicly disclosed that his team’s loss for the Spring split alone exceeded $500,000. We also know that during 2016 when the NA and EU teams were working together, the teams collectively said that to achieve financial stability they required $700,000 in annual support from Riot with a recognition that with this level of support many teams would continue to lose money.

The most significant cost for all teams are player salaries. For 2017 the annual base salaries for individual EU LCS players (depending on their skill level) generally range between 100,000 Euros, on a low end, and for a select number up to approximately 180,000 Euros on a high end. To this must be added team social security contributions which add about 14 percent to these costs. H2K base player salaries are somewhat higher than a majority of the EU teams but H2K also has quality players (who are also quality people).

[perfectpullquote align=”right” cite=”” link=”” color=”” class=”” size=””]”For 2017 the annual base salaries for individual EU LCS players (depending on their skill level) generally range between 100,000 Euros, on a low end…to approximately 180,000 Euros.”[/perfectpullquote]

Of course, H2K also pays reasonable compensation for its coach and other player support personnel. It also has administrative costs of approximately $350,000 including expenses for management, accounting and legal fees, insurance, travel and related expenses. Some of these administrative expenses are significantly below market costs since our management team is committed to the H2K mission. H2K also pays for a gaming house in excess of $60,000 yearly plus food and miscellaneous expenses for all the personnel living in the gaming house.

I’ve discussed the operating costs to provide some transparency. Management is highly sophisticated in financial operations working with a detailed budget and cost control systems. We believe our operating costs are both reasonable and needed to field a highly competitive team and to continue to develop a known and highly respected brand.

What do you consider the main challenges for teams participating in the LCS and what do you expect from Riot to overcome them?

Adequate financial support from Riot through subsidies and revenue sharing is the main challenge. Since Riot provides revenues which cover only a very small percentage of these costs, sponsorships can provide some limited assistance. But sponsorships are highly competitive and the teams actually compete with Riot for non-endemic sponsors.

Branding activities with a quality media agency will generally cost between $10,000 and $20,000 per month. H2K has made a substantial commitment to branding with such well known video series’ as H2What and has an active online presence. H2K is a known and respected brand and we believe H2K has done an excellent job in marketing the team. We do receive sponsorship support and, should we continue in the EU LCS, this should increase.

[perfectpullquote align=”left” cite=”” link=”” color=”” class=”” size=””]”One easy solution to generate the needed financial support for the EU teams is to have the EU fans design one skin and one icon for both the Spring and Summer splits.”[/perfectpullquote]

The simple fact, however, is that, as discussed in our public letter, without significant increases in the subsidy and revenue sharing from Riot, EU LCS teams will continue to generate significant losses. The reality is that it is easy for Riot to provide this support. In 2016 Riot agreed to increase the World’s prize pool by 25 percent of the revenues generated from one newly created skin and one icon. These were available for purchase for only 6 weeks. Riot’s 75 percent share of these revenues earned it in excess of $12.5 million which was more than the $10 million the NA and EU teams were seeking in 2016 from Riot collectively.

As a discussed in our public letter, Riot generates annually approximately $2 billion in in-game sales. The teams share virtually none of this although they clearly should participate in this revenue stream. One easy solution to generate the needed financial support for the EU teams is to have the EU fans design one skin and one icon for both the Spring and Summer splits. The revenues generated from the sale of these two skins and icons should be dedicated by Riot to the increased financial support of the EU LCS teams. I’m confident the EU fans would support this program, particularly since the availability of these revenues would enable the teams in the EU LCS able to effectively compete for player talent with the NA LCS.