major trend over the past fifteen years has been the evolution of major sports teams into true media companies. Whereas previously sports teams’ media presence was limited to appearances during live games on broadcast television, today’s top teams, from Real Madrid and Manchester United to the New York Yankees and Dallas Cowboys, are creating and distributing content via YouTube, Instagram, Snapchat and, in some instances, their own dedicated cable television channels. In doing so, they have grown from sporting organizations into bona fide content producers and entertainment brands.On the other hand, esports teams – teams of video gamers who play video games competitively on a professional level for massive online audiences across the globe – have embraced this trend from their inception. Whereas traditional sports teams have had to work hard to understand the new rules of media exploitation, esports teams (with players, audiences and, in some instances, leadership composed predominately of millennials) have intuitively embraced their roles as media companies and entertainment brands.
In addition to livestreaming their matches and other gaming activities, esports teams are creating content for exploitation across platforms that is designed to generate revenues, enhance their brands and increase engagement with their growing international fan bases. In many instances, the diversity and reach of esports teams’ online media activities transcend even the biggest traditional sports teams with respect to their target audiences. While YouTube and Twitch remain key distribution platforms for eSports content, some of the content produced by esports teams has value in the secondary market (for example, for international distribution or exploitation via secondary mobile and/or digital channels), and certain esports teams are experimenting with transactional and subscription-based business models. These evolving trends necessitate more sophisticated deal-making and contractual complexity.
With this background, here are some things that esports teams should consider when crafting media deals:
The Financials.
First things first: money. Licensing and distribution agreements typically contain either or both of two forms of financial compensation – upfront payment (often called an “advance” or a “minimum guarantee”) and contingent compensation (such as a royalty, revenue share or performance bonus). Currently, upfront payments in esports content deals, if any, are small – especially if the deal is non-exclusive, but this may change as viewership increases and new business models are proved successful. Teams should therefore concentrate on negotiating robust revenue shares that accord teams a significant portion of net revenues and limit the deductions that partners can take “off-the-top” before splitting revenues. It’s also possible to negotiate for bonuses based upon content reaching certain levels of views and engagements (although it is important to note that buyers are often reticent to agree to bonuses because audience metrics can be fuzzy and there is high potential for fraud). For any deal including contingent payment terms, teams should make sure that they obtain regular accounting rights and a customary right to audit. An experienced agent and attorney are invaluable in obtaining these and other protective rights.
Term.
With the money squared away, teams must determine the duration of the content distribution deal. Currently, most content distribution agreements in the world of esports are short (often a year), for good reason – nobody knows how big the market is going to be and neither the content owners nor buyers want to lock themselves into a bad deal. Terms may increase in the future, but for now, teams should examine the auto-renew and termination provisions of their deals to make sure they are not inadvertently bound to stay with an underperforming partner.
Territory.
The esports market is genuinely global in nature. While the market is currently more mature in Europe, North America and parts of Asia, the rest of the world will likely catch up. That means that there are opportunities for teams to reach developing markets early on by securing content deals with partners in those markets now. For certain teams (and certain games), this strategy may allow for an “early mover” advantage. However, teams need to pay close attention to the territorial definitions in their content agreements to make sure that partners are only given rights in territories that they can actually exploit, and that teams do not mistakenly enter into conflicting agreements.
Rights and Exclusivity.
The topic of rights can be extremely complex, and there are too many nuances to cover in this short article. At a basic level, esports teams should think in terms of (a) platforms and media, and (b) exclusivity. The former is ostensibly simple – on which platforms and in which media can the content partner exploit? However, with the proliferation of online and digital platforms, this question can get confusing quickly. Teams should be aware that in addition to distinguishing platform based on screen (e.g., television, mobile device, gaming console), content licensors and licensees also often distinguish between business models (for example, subscription-video-on-demand (“SVOD”) platforms such as Netflix and Amazon Prime, as distinguished from transactional-video-on-demand (“TVOD”) and electronic-sell-through (“EST”) platforms such as iTunes and Google Play).
Teams should also pay close attention to exclusivity. There is a business case for making content available on as many platforms and through as many providers as possible in order to maximize eyeballs, but buyers will often pay more (or provide more favorable terms) for exclusive content. This issue is at the heart of the digital creator’s dilemma – how to maintain audiences while maximizing revenues – and the failure of recent challengers (such as Vessel, which proposed that viewers pay a monthly fee for access to temporarily exclusive content from key online creators) to cannibalize YouTube’s business by using a different “disruptive” model is one reason for YouTube’s continued ascendency among online video platforms. In any event, teams and other content owners should not proceed with any off-YouTube (or, indeed, YouTube Red) deal without engaging a lawyer.
Delivery and Clearances.
While the four points above represent some of the most important threshold business terms that esports teams need to consider when negotiating content deals, there are two further contractual provisions (among many others) that teams should pay attention to. The first is delivery. In dealing with any content partners, teams will need to deliver materials (video, audio, etc.) in a particular format and specification for each publisher. Teams should make sure they can comply with these technical and legal requirements before signing any deal.
The second issue is clearances. Content partners will ask teams to make certain representations with respect to their content – for example, that the content does not infringe on the rights of third parties and that all materials contained in the content has been cleared. This is generally not an issue with respect to game assets (most game publishers are supportive of streaming and other forms of expression by gamers, although others are not, so teams should beware); where it is more likely to become an issue is with respect to music, trademarks, logos and other intellectual property included in content. Teams should also ensure that they have the right to use the names and likenesses of their players (and other featured personnel) in a manner and scope consistent with the terms of the distribution agreement. Accordingly, teams should ask their lawyers to provide a guide to best practices for content creation and clearances, and make sure that all agreements are thoroughly reviewed and negotiated by an experienced attorney.
The Interaction Between Teams and Leagues
Of course, in instances where a team is part of a league, the team must also scrutinize the league charter and rules to ensure that its media and content distribution activities are not in violation of those guidelines. Teams must ensure that, in seeking to grow their own brands, they do not inadvertently place themselves in breach with the league (or its sponsors). For example, in certain instances, certain media rights may flow through the league, which then negotiates directly with media outlets on behalf of itself and the teams. In such instances, negotiations with the leagues become particularly important (and the ecosystem will become further complex if and when players elect to unionize). Stay tuned for further developments in this burgeoning new marketplace.
Filed in: Legal Blog
December 15, 2016