The Billion Dollar Industry of Professional Video Game Battles

isn't just a group of kids goofing around. It's actually a professional sports team practicing. People have been playing video games against one another since video games have existed, but there's a rapidly growing industry being built around professional video game competitions, also known as e sports. The big championship matches draw live crowds of over ten thousand people and online audiences that hit the tens of millions of viewers. What you heard earlier was a team I recently visited

in Los Angeles. They're called Echo Fox, and they were practicing for this year's North American League Championship Series, which is a contest for people who play the game League of Legends LCS is one of the most prominent e sports leagues, and Echo Fox is built on a particularly ambitious vision for the future of the sports. Taken together, Echo Fox and LCS show us just how big e sports might eventually become, and also how much has to

be figured out along the way. Hi, I'm Akio and I'm Joshua Bursting, And this week on Decrypted, we're taking you inside this world of video game competitions. We'll be showing you how e sports resembles traditional sports and how it looks much much different. We'll also introduce you to a couple of key characters in this business, starting with Rick Fox. Rick is an actor and he also won three NBA Championships playing basketball for the Los Angeles Lakers.

Money is pouring into e sports from professional sports, and the sports business is changing fast. We'll look ahead at what the industry is trying to build for the coming years. So josh to report out this episode, you escape the brutal New York winter to spend a couple of days in California. That's right, I flew out to l A in January to spend some time with the people who run Echo Box, the professional sports team we mentioned earlier.

Bad luck for me. It was actually kind of cold and rainy when I got there, so I jumped in a cab at the airport and headed to what Echo Foxes Pressed people had described to me as the team's training facility. Sounds fancy. Thank you, okay, thank you very much. Hav a good day. Okay, So here I am. I can say that from the looks of this building, professional video games have not quite made it to the level

of the NBA in terms of glamour and glitz. I'm standing on pretty drab street right across the street from a self storage unit, um, a dentist and a gas station. It's like a plane brick building. Um, so you know, clearly not quite the big time yet. Okay, so not so fancy. Well, the player has had these huge, comfortable looking padded chairs. Those were kind of fancy, but otherwise no, so I'm trying to picture it here. Would you see.

There was no stretching or drills or anything. The guys pretty much walked in, sat down and started playing video games. They all refer to one another by their screen names. So the captain is frogging and he's kind of a joker. He was messing around. He kept flipping back and forth to watch a basketball game when the action slowed down and they're big free agent is is a young guy named Looper. He didn't say much of anything at all because he just came over from Korea and doesn't really

speak English. While they were playing, I hung out with Tim Cho, he's one of the coaches, and he had his laptop open on his knees. So I'm just writing about why certain players need to work on, specifically learned when we notice him the things we need to immediately correct. Let do you have a spreadshade open on your computer and you just have a column for each player or something.

That's what I'm gonna right now. And then what I'm kind of doing is I'm going to print out a sheet because coaching in this game is really arbitrary and a lot of it's something that hasn't been figured out yet completely. E sports is changing fast. Video game publishers are now just starting to treat this as a potentially serious part of their business. According to the research firm super Data, it was an eight hundred ninety two million

dollar industry last year. This year's projected to cross the billion dollar mark, and people in organizations associated with traditional sports have begun investing in the sports organizations or just setting up their own teams from scratch. The owners of the basketball teams the Philadelphias have Any Sixers, the Miami Heat, and the Sacramento Kings have all made recent e sports investments. The NBA itself just announced that it was starting its

own video game league. It's based on NBA two K, which is this popular basketball video game tam made by the company Take two Interactive. In the league, actual NBA teams will field their own digital teams that will compete against one another in a video game depicting the actual NBA teams. Sounds meta, yeah, very But before all that, there was Echo Fox. It was one of the first moves from traditional sports to e sports. It's named after Rick Fox, the former NBA player and actor Rick Fox.

Now we're guarding him. He popped three crazy like a Fox. He got together a group of investors that started the team near the end of Rick is six ft seven and I'm not much of a basketball fan, so I had to google him. But he's a very handsome guy. He's also acting in a bunch of TV shows. Yeah, if you walk around l a with him, people hunk

their horns and wave. He's a real celebrity and when he started this e sports team, it was as if the popular Jack had walked into the cafeteria one day and just suddenly decided to sit down with the nerds. So this was a big validation for the people already involved in the sports. They were onto something big. Yeah, and Ric has served as something of a tour guide for other people in traditional sports who want to follow him into the business but are a bit confused. He said,

it's a funny feeling. Um, I feel like someone dropped me in a foreign country and I was forced to learn the language, you know. So I've I've been able to speak it. I would say pretty pretty fluently as a Fiday. But still I miss maybe misscongregat a herb here and there every once in a while. But I'm getting there. Yeah. So, another guy I want to introduce you to is Jace Hall. He's the CEO of Echo Fox.

Jace is a celebrity in the video game world. He's made a bunch of his own video games and he used to run the video game studio at Warner Brothers. Jason is also about six ft seven which makes him one of the only people in the industry as tall as Rick Fox. The two men met nearly a decade ago at a conference. They immediately hit it off, and Jason invited Rick over to the film production studio he

was running at the time. Here's Jason. He eventually came over and he saw the world that you know this is. You took a look at the office, right, it's like a bit of a playground for video games. Yes, and uh um, you know, the minute he walked in, it was like, you know, the little kid gets unlocked. Next thing we know, we're playing video games against each other and competing. Jason is unbelievably good at video games, and

according to Jason, so is Rick. Rick is probably the best Miss pac Man player that's ever been in the NBA. I can tell you that right now with the higher levels, packing is pretty serious. He has not yet been able to take me in that game. Um. But serious competition evolved out of that. We started live streaming it and you know, just and we start building an audience around that. Um. And then that's really where some of our competitive rival

we just started spanning different video games. I will give Rick this, there's an arcade game called Galagha or some people call it Galaga, which he is just dominates. The day after I met Jason, I had breakfast with Rick. I told him that jas had mentioned MS pac Man. Did he bring up Gallaght? And he did. I don't think there's a single person that building would never bring up there gallagh because they're all they were all blown away.

Then it's it's rare that I will sit down and and and just prove my authenticity to my friends when it comes in his face. But when I do, it's always like, what where did this come from? Um? Jason's miss MS pac Man stories? Ring ring true? I'm about I'm probably like to points behind him in top score, So I gotta let him have that one. I can't. I can't gotta let him have one. Care So, for the first few years of this relationship, Rick was having

a great time fooling around playing video games. He's always been into video games. He plays with his son, Kyle, who's working towards becoming a game developer himself. But then something changed in Rick and Kyle went to a League of Legends tournament at Madison Square Garden. Thousands of people showed up to watch with solo bid versus Outer Logic, gaving very low lot of for parent City Gaming super megac. Within months, Rick and some other investors had paid one

million dollars for the right to feel the team. The whole team lives together in a house in Los Angeles, paid for partially by Riot, the video game publisher, and partially by Echo Fox, their team. Rick when it talks specifically about the money he pays his players, but other people involved in lcs tell me that most players make six figure salaries. Okay, and tell us a little more about these players, who they are, where they come from,

how they stumbled into this lucrative world of professional video games. Yeah, it's really different for each game. There's a whole scene around various video games, mostly playing online. When I asked most of the players for Echo Fox how they came to be pros, they said they pretty much started competing, showed they were really good, and began moving up the ranks. They also all said that it's much harder to become a pro now than it was a few years back.

Rick is constantly relating the sports to his time playing in the NBA. One of the first things he did after forming Echo Fox was to take the team on a tour of the Lakers practice facility. I wanted them to see my world. I wanted to understand where I came from. Um, I wanted them to get a sense of what a professional franchise, you know, structure looked like, because that's what we want to That's what drives us right to bring that level of of support and background today.

So Rick also wants them to work out like athletes. When I visited the team, they were preparing for the new season, which started in late January. The organization was launching into a special e sports training regiment that had been set up for them at a gym in Santa Monica that's right near the arena that Riot built to host the actual games. One of the big purposes of today is just here's our starting point, right, so reaction

time and to get health and fitness. So we're gonna also measure like blood pressures that just these kind of basic things. Are also going to measure grip strength, which is a measure of your brain activation, believe it or not. So they tested everyone's memory, measured how high they could jump, and had this little machine to see how many times they could click on a button in ten seconds. They

could click on a button a lot. But one surprising thing was the fastest person on the team was actually Rick. A few guys had spent their offseason working out, but this is still a group of guys who spent most of their free time sitting at a computer. The gym was clearly not their natural habitat. I gotta measure something in order to manage it, right, So this is all about just seeing kind of where one's at today and

then giving it. Looks at an old review of some of the the exercise stuff and the cycling, so it's gonna be funny. The price dragging rights clearly. Speaking of prizes, let's talk about how these sports teams are actually making money. So there is the prize money from tournaments, but no one really wants to rely on that for a business. Mostly investors are betting that big opportunities will develop in the future. This could happen in a few ways. There's

the value of the team itself. That is, Rick and his co investors bought a slot in LCS, assuming that if they want to sell it five or ten years from now, it could be worth much more. Then there's the media rights deals. Those work a lot like they do in professional sports, or at least they hope they will at some point. And there's advertising where teams and players take on sponsors. That's the big one. A lot of this sounds pretty similar to the economics of traditional sports,

but there's one thing that's very different. The game they're playing is the property of a video game publisher. In the case of legal lessons, this is Riot Games, but it's not just Riot. Pretty much every major video game publisher now wants to have the sports leagues built around some of their games. Here's what Jas had to say.

Imagine football. Imagine the stadium and the players and everything about it is owned by Wilson, who sells and makes footballs, and the whole point of everything is to actually sell the football. Well's everybody in the stadium and bout the football. Everybody watching needs football. Now, if that's the case, the orientation of the entire economic structure how you would manage that area fastly different than the way football is today. Right. Riot recently signed a deal with bam Tech, which is

Major League Baseball streaming media unit. Bam Tech is paying Riot a minimum of three hundred million dollars to stream league competitions through the year three, it'll run its own Legal Legends streaming app and handle the technology for streaming on platforms like Twitch and if you don't know what twitches, it's the most popular live streaming website for video games. So the main way that traditional sports teams make money now is by sharing in the revenue that comes from

TV deals. But Riot is keeping all the money from its streaming deal to itself, at least for now. Some team owners were unhappy about that. You can see these tense exchanges on Reddit between Riot executives and team owners. Yeah, Jason Rick were not involved in those. They like to present themselves as kind of the grown ups in the room, something that seems to annoy some of the other owners at times. Either way, they say they're fine with what

Riot's doing, and Ryot's position makes sense. Here. Here's a company that made a video game that became popular in this brand new way, and now the company's capitalizing on that. Yeah, but that's not even its main business. Riot made nearly two billion dollars in revenue from League of Legends just last year. Most of that was unrelated to the sports, and we should also mention there's costs for Riot to it put some money towards player salaries and other team costs.

At the same time, the publisher wouldn't have this new opportunity in e sports if these teams didn't come along and start competing. So it has to figure out how to keep its new business partners happy and financially sustainable. To this has both sides a bit on edge. There's the promise of all this new money floating around, and no one wants to get left out. Soon after Rick started Echo Fox, another team called Energy was started by

two of the owners of the Sacramento Kings. It started to look like the new big money teams would come in, dominate the league and change everything. The teams with less money were worried. It turns out they did not have to be. Echo Fox and Energy were both really bad at first, so bad that the end of the summer season they had to play in a tournament where the losers would be sent down to the minor leagues. And even though Echo Fox managed to stay in the league,

Energy lost. Now this is bad for Energy, obviously it lost its investment, but it was also bad for Riot. Instead of playing in the minor leagues. Energy said it was going to stop competing in League of Legends altogether. Right now, video game publishers are competing with one another for the attention of new investors, and having a big name abandoned league was not a great look. Rick sees all of this as a sign that everyone in the sports is still going through some growing pains right now.

If we go back in the history of any league, any before, any professional sporting league, you'll see that, you know, league was formed. Owners come in a group of you know, savvy owners come in and they and in some cases it's six teams that start a league, right, and then he grows to twelve. Then it grows to four, right, And that doesn't happen overnight, right, it happens over a

period of time. It'll get to that. Uh, and we'll look back thirty years from now and go, wow, they did that really quickly, you know, just we're in the middle of it now, so it feels it feels like it's taking forever. Riot's been struggling with these really basic questions. After all, they're trying to build a sports league from scratch.

The company did not want to record an interview for this show, but an executive told me that it's developing new ways to share media rights and what to do about teams getting relegated to the minor leagues, which it says fans like but team owners hate. The company thinks it will have the details ironed out sometime in And this is kind of the situation that everyone in the sports is in right now. They say, the broad outlines of the future are emerging. Echo Foxes LCS team is

playing okay this year. As of mid February, they were right in the middle of the pack. You know, Rik and Jason, the coaches you talked to in l A. Are they starting to get a feel for what makes an e sports team good? And you know what are they doing better this year than last year? Well, they brought in a bunch of new players. I mentioned Looper, that was big. And when they talk about strategy, they'll stress that individual players can be talented, but the real

factor for success is playing together as a team. And that sounds a lot like traditional sports. But there's another way that the sports is different, and that's that Echo fox isn't just a single team, right The organization owns eleven teams playing a range of different video games. They also sponsor players who compete in video games like Mortal Kombat and Street Fighter. Those don't have teams per se. It's it's more like the tennis circuit, where there's a

single player playing taken together. You can think of this kind of like if a single company employed everyone who worked for the Knicks, the Jets, the Rangers, and the guys who box at Madison Square Garden. And this lowers the stakes a bit for what happens in any one league. So if you're bad at LCS, you might still be good at other games like Counterstrike or Overwatch. They're diversifying their portfolio. Unlike uh, say, the Lakers, who who just

played basketball in the NBA. We at Echo Fox get to we get to play in Legal Legends, we get to play in E League and cs GO. We get to play in Call of Duty. You get to play and gear the War like. We're in different leagues. So most professional sporting organizations just have one expression. We have numerous expressions. It's kind of like this conglomerate of video game related business ventures. The company just signed its first

million dollar sponsorship deal with a computer maker. Asis Rick and Jason are looking beyond having just a bunch of competitive teams. They say they want to dabble in things like making scripted comedy videos and maybe running their own tournaments, and who knows what else. It's not clear which of these ingredients are the most important for a mature e sports business. But that's mostly because there's no such thing yet. Yeah, of course we have a team and then they play.

That's just that's like looking at a piano and looking at one key, you know, the whole keyboard here. There's like a bunch of notes that can be played, not just one. And I think the most successful esport ornizations are going to be the ones that figure out as much of that as possible. But you want to be the model. We're not looking at it. There there's no one out there right now you can model yourselves after it. No,

absolutely not. We're we have to be as far as I'm concerned personally, we are the ones that are are setting the model. There's we have to be. There's no no, there's nothing. So, Josh, do you think the traditional sports industry is even a good analogy to understand the sports business? Well, yeah, sure, I think people like to watch competitions and so if you're trying to understand the appeal, there's a lot of similarity there. It's easy to dismiss video games as sports.

Like for me, I love basketball, but I don't get anything out of watching League of Legends. Then again, I don't find golf airy exciting either. I don't either. So what do you think is different here? I think the businesses is really different. I think the sports business is less straightforward. Advertisers want to access people who watch video game related content. They're generally not watching traditional TV. But

advertisers also don't really understand this population. So what Echo Fox or another sports organization does is it gathers all these audiences up through a bunch of various sports leagues or through its YouTube channels or whatever, and it says, hey, big brands, we speak your language, but we also speak this other language. Let us be your translator. And that's it for this week's episode of Decrypted. Thanks for listening

tell us. Are you a fan of E sports? Record a voice memo and send it to us at Decrypted at Bloomberg dot net, or you can write to me on Twitter. I'm at Joshua Brewsting and I'm at Aki Ito seven. You can subscribe to decrypt it on iTunes or wherever you get your podcasts, and leave us a rating and review. This helps us make our shows better and it also gets our podcasts in front of more listeners. This episode was produced by Pierre Getcari, Liz Smith, and

Magnus Hendrickson. Alec McCabe is head of Bloomberg Podcasts. We'll see you next week.