Esports: Conflicts of interest by design

Words by Sebastian Lager, esports veteran actively involved in the space since 1999 and founder of TwogNation

 Esports is the rising star in the world - especially with Generation Z gaming and esports became an important factor in our daily lives. Over the last decade, esports became more and more under the influence of big corporations. When I was talking about Apple vs. Epic (in my previous article) this was one of the aspects I tried to highlight - that essentially all big companies in gaming are trying to corner the market, establish monopolies and or set up obstacles for any potential competition. Of course, in the end, this becomes an issue because monopolistic ventures for corporate gains lead to conflicts of interest in any industry. Today, I will try to dig deep into the underbelly of esports, a side that most of the people are not aware of. 

I want to start with a small observation between traditional sports and esports. Traditional sports is much older than esports, meaning they had time to regulate every part of it, from sponsors to team ownership. These regulations are keeping the industry in check. However, since esports is much younger than sports, the regulations are not finalized and there are lots of loopholes here and there. These loopholes can be used by big corporations to create a monopoly in their field. When we are taking a look, conflicts of interest are happening on every level of our industry. Let me start with teams and sponsors.

Owning a team is the entry point for esports. But over the years team ownerships became a huge problem. In some cases, rather than investors, professional players started to own different teams. Valve (CS:GO & Dota 2) had to come forward and state that players can not own teams that they compete against. In the end, these teams had to transfer their assets because the players were the owners of the teams. Imagine Messi owning parts of Real Madrid and playing for Barcelona. Valve gave their verdict, set deadlines and had to regulate the scene for a healthier environment, however, this was one of the smaller problems compared to what is still in the industry.

In esports, there is a conflict of interest when teams have a second team. For example, the OG organization had to close down its second esports team “OG Seeds”, because it leads to a conflict of interest in the market. This is just one of many examples. However, in esports even this is not regulated. For example, in football, second teams competing in the Segunda Division are not allowed to be promoted to La Liga. However, in esports, this is still an issue and many teams keep their second teams. If both match up in a tournament it is a huge problem for other teams. Some of the publishers ruled this out, but apart from the closed league systems, there are many examples where such incidences can still occur.

In essence, sponsorship is harmless in the esports world. Every day we see maybe a dozen sponsorship news. However, if you are careful you can see that sometimes these sponsors are becoming active in decision making. If they are not a shareholder and are not involved in the decision-making process then it is viable. But if they are affecting the organization's choices, that is when conflicts of interest arise. Especially in the East, we can see that the same company that sponsors the league is also the owner of one of the teams in the league. This problem showed its face when Overwatch League was introduced by Blizzard. One of the teams was also a major sponsor of the tournament. Now, this was a huge problem and it creates question marks over the integrity of the whole league.  In the case of Overwatch we had even a publisher of the game (Netease) being part of the franchise system (Shanghai). This means the same company distributing and publishing the game, which involves early access, insights and many more advantages is also the company that has a clear interest in their team getting this access to these advantages. 

Team sponsorship can lead to conflicts of interest as well. For example, League of Legends and Dota 2 are the main players in the MOBA genre. However, sometimes we can see two teams with the same sponsor playing with each other in an official match. In such matches it is indisputable that there is a possibility of the sponsor or partner pressuring the owner and hence influencing the outcome.  Sponsors are one of the main sources of income in esports and this way sponsors gain power over organizations. It is not very different from a Formula 1 driver letting their teammate pass because they have a shot at the championship at the end of the season. In esports, this type of conflict of interest could occur more and more over the years to come. In particular, teams that are heavily reliant on one main sponsor or allow decisions to be influenced in the background, are those teams most susceptible to this.

Franchised leagues are an interesting example in this manner. In American franchised leagues,  teams are forming what is similar to a union - it is basically a socialist environment, unlike their European counterparts. Since there are insanely high entry fees into the franchise,  everybody wants the league to perform better, and be as competitive as it can be. They are using a socialistic vehicle to score higher, capitalistic gains. There are salary caps just like the NBA and NFL and things can change relatively fast because the team's strengths are close to each other. However, most of the organizations have teams in other esports titles as well. The dilemma for the teams derives from the decision as to how they treat their (mostly differently branded) franchise team, while outside of that operating in another system, often against the same teams just under a different name. That is compared to sports quite unprecedented. This is one of the choices we have to make - are we going to open our doors to franchised leagues or are we going to allow powerhouses in the leagues?

Now in retrospect, disconnecting the traditional team names from the franchises was maybe not a bad decision after all, but the reality remains that as long as the owners, players and investors are the same, they’ll essentially operate 2 systems. Will they draw the line? Is there even a line? Can it be abused? Time will tell as the franchise is quite new to the esports market.

Omega League is a good example of teams blurring the line between tournament organizing and team ownership. They had many teams in the competition. The transparency was on point as well. However, teams would not be able to pull the trigger if Covid-19 did not happen. So to survive, they had come up with a new tournament that sustained them. They worked as a union and everybody earned something from it. If such leagues or tournaments are not done with full transparency we will see conflicts of interest. In China, for example, they were unable to gather the teams and Valve was not producing tournaments, so teams started to pull out. 

If we delve into China here we can see that it is the perfect example. For nearly a decade most of the streaming platforms were at each other's throats for exclusive streaming rights, between teams, players, and even tournaments. A player can sign an exclusive deal with HUYA and if he or she was in a tournament that was broadcasted on DouYu, it meant problems for the entire system. Because platforms can also own teams, content creators, etc. These problems are happening much less now but nepotism is still running deep in the East. In particular, nepotism in China is becoming a major concern in esports. In my opinion, in the West, there is also a lot of nepotism but it is much more subtle than in the East and less public. Over the years in my business life I understood that it does not matter whether you have the best product or not, what matters is who do you know, what doors are open to you or what favors can you call in? As I wrote in my previous article, industry veterans are generally gatekeeping, because they want to keep out people who cannot deliver, and no one wants to take the risk. So the line between nepotism and “individuals we trust” is also quite blurry. That is a phenomenon in every industry, however due to the tiny volume of esports, gatekeeping and “well-connectedness” - a lot of these things are more apparent, especially to industry insiders. While it can be discouraging for new kids on the block with their products, services or ideas - it was also a mechanism of esports to protect itself from outside interference, opportunists and the still rampant snake oil salesmen sector that evolved.

Let us go up one level higher, and talk about tournament organizers. Organizing tournaments is one of the most important things in esports. The entire esports machinery is built around it since without tournaments there is no esports. However, after some time tournament organizers became bigger and bigger and some of them ARE everywhere. We know that they have tournaments in every region of the world, they are working with esports federations, with governments, and even with the media. This monopolistic approach is undermining the integrity of the system. Most of the news that would be scandals are covered up, teams are pushed in one direction or the tournament's rules can be changed at whim. Since the regulations are not there yet and the esports federations are fractured it is easy to manipulate different sectors, especially if you have a big influence over the market. The giants of the industry, such as ESL are trying to corner every aspect of the market. It’s not by accident, it’s very much by design. They try to strike exclusivity with publishers, teams, leagues and media, while also doing many of the aforementioned things. Even the unions, associations and federations are not free of it, which essentially is a form of imprinting the corporate agenda onto structures that were in essence supposed to be unbiased and impartial.

Besides sponsoring teams and having activations, nowadays we can even see betting companies even organizing tournaments or having similar products. That also opens a whole new spectrum of question marks if not well executed and handled transparently. Betting is known from sports already as an old, tight knit industry and it’s dark parts. May that be money laundering, match fixing or other operations. Now in esports this is also a sensitive topic, since the one who is supposed to provide the odds and handle the bettors, is also the one who owns the data, the licenses, the odds, handles the teams, seeding the brackets, decides any disputes, sets the rules and so on.

What might look like a nice “turnkey” is a hellhole of conflicts of interests and as the industry grows this will also be something looked at closer by regulators or any other organisation tasked with upholding integrity.

Federations are no different and maybe even worse. Most of these aspiring governing bodies around the world are there for their business interests. Often not openly, often not all of their members but also quite often the intentions are clear, both of the bodies and the members.  If a federation reaches a certain status, there is no monitoring structure over them, other than the government of the respective country or the unlikely scenario where the publisher will interfere. Publishers working with federations is also a huge issue, one that many people do not recognize.  Esports is still relatively young, however, the issues are becoming bigger with each year, because the speed of regulating cannot match the speed of innovation. The battle of the Tencent-backed GEF vs other structures in the world is something very exciting but also scary to observe. The only true solution would be an all-encompassing federation, fairly representing all local members, not running for political or financial gains and including all publishers relevant to the space. If those criterias are not met, the federation space will be one of the biggest sources for conflicts of interests for years to come.

One of the last structures I’d like to take a look at are investor networks and portfolio networks. Naturally investors, VCs, IPOs or similar vehicles are trying to create a portfolio that synergizes and each puzzle piece should be complementary at least, cross-accelerating at best . However, while on that mission there are also a few lines not to be crossed. All the examples mentioned in this article apply of course and a few more come on top. Some of these investments try to establish localized monopolies and that’s why now in 2020 it’s in some national esports scenes close to impossible to have a “breakthrough”, without using or partnering with the given network created by these investors. When the circle from grassroots to pro circuit is closed and under the umbrella of just one network, it is absolutely open to abuse of power. Investors, both individuals or institutions, also have power over many people without a direct association. Most investments don’t happen through just one single name but are consortiums of many individuals and firms. The mere fear of disgruntling investors and not receiving the investment needed for a company or project creates a very one-sided power dynamic. There are strong forces in esports at work that with a single phone call can start or end careers, could take down an uncomfortable, investigative article or can disrupt partnerships in a heartbeat. That’s the power of investment capital in an industry that is heavily under-monetized and often needs that capital to get to the next milestone.

So many examples listed, so many more in the shadows. The gold rush that esports is will not just be a battle for monetization and recognition, but how can we sustain rapid growth without throwing ethical values overboard. The constant fight of the market vs the regulators is nothing new or surprising in other industries, but in esports we are not even sure yet what the market is, how big it will be and who will be our regulators. Exciting times ahead.

About Affiliate Grand Slam:

Affiliates are gold in the iGaming industry and the SiGMA Affiliate Grand Slam is our own bespoke Affiliate Club that gathers all major, upcoming and affiliate startups within the industry.  Being part of the SiGMA Affiliate Grand Slam will ensure that as an affiliate you will automatically qualify and benefit from what we at SiGMA, being the world’s largest iGaming festival, can provide you with. It’s free to join the SiGMA Affiliate Grand Slam. Affiliates requesting to join will be vetted through a membership application process upon submitting a request to JOIN.