Antitrust Law and the Internet: The Case Study of eSports

Posted By: Andrew Thiery

ESports_LogoCompetitive video gaming, colloquially termed “eSports,” is nothing less than a modern gold rush. eSports represents a massive global industry that is expected to generate one and a half billion dollars by 2020. More and more companies, including traditional sports organizations, are getting involved, each trying to claim a segment of the industry for their own. New companies are forming, existing ones are moving in, and those already involved are organizing and coordinating their efforts. In the last several years, multiple major governing bodies have been formed with the goal of standardizing and professionalizing eSports, including WESA (World eSports Association) and PEA (Professional eSports Association).

If history is any guide, there is a narrow line between standardization and monopolization. The same tools that good-faith actors use to lend standards and structure to an industry can be used by bad-faith actors to control and restrain it to their own ends. To combat such monopolistic tendencies. Congress enacted the Sherman Act, which outlaws “[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations.” Although the eSports industry has not yet attracted the attention of American antitrust law, this is most likely only because of the relative youth of the industry. Given the rate at which eSports audiences and businesses are expanding, such intervention is likely to happen sooner rather than later, and it is not difficult to extrapolate what such a case might look like based on the robust antitrust jurisprudence with respect to traditional professional sports.

According to the US Supreme Court in Klor’s, Inc. v. Broadway-Hale Stores, Inc., in order to present a case under section one of the Sherman Act the plaintiff must first show that the defendant organization is operating commercially, either as a for-profit or not-for-profit institution. There is little question that any regulations WESA or PEA would impose on their members would qualify as a commercial action. These organizations have made it their business to govern eSports competitions, and any rules that they make will directly affect how the leagues, teams, and players under their influence are able to perform their functions within the eSports industry.

The second threshold issue under section one of the Sherman Act is that the challenged conduct must govern more than just the “rules of the game,” as laid out in Blubaugh v. American Contract Bridge League. Due to the unique nature of eSports platforms, the “rules of the game” can be hard to define. A typical game platform used in eSports competitions consists of many layers of systems between the human player and the computer, all of which interact and obey certain rules. At the highest level, a “rule of the game” may be that only a certain mode within a game will be used, or that certain maps, characters, abilities, or elements are “off-limits.” This “game surrounding the game,” or “meta-game” as it is commonly known, refers to the process of discovering the optimal method of ensuring victory in a given scenario and is a common area of regulation in eSports. Depending on the game being played, there is usually a general knowledge that certain elements of the game tend to give certain players slight advantages over others. In a space where the tools at a player’s disposal and the circumstances in which they are placed are determined entirely by a machine simulation, it can be difficult to ensure that the metaphorical playing field is completely level, or to use the popular colloquialism, “balanced.”. This problem is exacerbated by the “hotfix” model of game development adopted by many developers. The fact that software transactions are held almost exclusively over the internet means that developers can constantly make changes and adjustments across their entire platform. These changes, or “patches,” can range from small alterations to the mathematics of an ability or interaction, often in an attempt to better “balance” the game based on player feedback, to entirely new content such as playable characters, items, and maps. Thus, it is common for certain elements of a game to be placed off-limits for specific competitions, either due to there being accepted as “imbalanced” or because they are too recent for a stable “metagame” to have developed around them. This poses an interesting legal question, whether the governance of the rules of the meta game constitutes governing the rules of the game itself.

At the other end of the spectrum are the rules of the code being run on each machine to generate the gameplay, render visual models of the game, and calculate their interactions based on player input. While the “under-the-hood” elements of a game are exclusively the province of its developer, it is not inconceivable for WESA or PEA to insist that games be developed for a certain hardware platform, or using a certain programming language to qualify for use in their events.

In between these two extremes are many other layers that could potentially be regulated. While it has already been established that a tournament organizer could insist on the use of specific hardware components as long as it has a pro-competitive justification for doing so, it is less clear whether this exception also applies to the more unique infrastructure requirements of organizing and running an eSports event, such as requiring certain networking standards to be met, the inclusion of certain statistical or spectator features, or integration with third-party software such as streaming services.

These exceptions aside, there is much that WESA or PEA could do to regulate the behavior of their teams and players that would be easily outside the rules of the game. WESA has already mentioned that part of their mission will be to facilitate and control player transfers between teams, and PEA has outlined a very progressive compensation structure for their teams and players. Such regulations, should they be put in place, are prime examples of the sorts of collective actions that would fall under antitrust scrutiny.

Assuming that an antitrust action is brought and that it passes the threshold issues of section one of the Sherman Act, the next question is which model of analysis a court would apply.

In order to bring a case under section one, a plaintiff must also satisfy the single entity test by demonstrating that the entities being accused of collusion are sufficiently economically independent of each other to be viewed as independent entities capable of conspiring with one another. There are a few additional factors to consider when applying the single entity doctrine to eSports cases. First, it is important to recognize that many eSports teams, and sometimes leagues as well, are widely distributed across the eSports industry. Many of the largest eSports companies have diversified themselves horizontally across a number of different games and platforms. For example, the popular team “Cloud9” includes players and teams competing in 7 different games, as well as affiliate streamers, who create gaming related content full-time on the livestreaming website Twitch. Whether or not the Cloud9 CS:GO team is an economically independent entity from the Cloud9 League of Legends team may not be a straightforward determination. Recently there has been a trend toward vertical market expansion among the largest eSports companies. Publisher-run leagues are a prime example of developers expanding their market influence by increasing their involvement in “downstream” activities, such as organizing and sponsoring events. Developer Blizzard/Activision recently implemented a native streaming service to their proprietary client. As an extreme example, viewers of the inaugural season of the Overwatch League are now able to watch a game that was developed by Blizzard, being played in a tournament organized by Blizzard, by players salaried (indirectly) by Blizzard, via a livestream delivered by Blizzard. While it is still unclear to what extent Blizzard and the Overwatch League are economically independent, the pervasiveness of vertical integration in the eSports industry will certainly muddy the application of the single entity doctrine.

Per se illegality

The first mode of analysis, that of per se illegality, is reserved for cases involving conduct that a judge can easily identify “plainly anticompetitive,” in that the conduct facially appears to be one that would always or almost always tend to restrict competition and decrease output. The definitions of “competition” and “output” in the context of eSports are not much different than in other industries. Since the business of eSports revolves around specific, revenue-generating events, “competition” in the eSports industry is most accurately described by the ecosystem of players, teams, sponsors, and other entities vying to participate in those events. Whether an action would always or almost always tend to restrict competition or decrease output would depend on the scope of the action. Traditional examples of per se illegal conduct include price fixing, geographic market division, and group boycott. However, the notions of price fixing geographic market division and group boycott may need to be relaxed in the context of the internet. Since the major source of revenue for eSports companies are corporate sponsorships and not consumer purchases, price fixing is unlikely to cause any serious antitrust issues. Sponsor companies contribute funds to eSports teams and leagues on an at-will basis in exchange for market exposure as part of a larger marketing portfolio. If eSports leagues or teams decided to collude together to force sponsor companies to artificially raise their contributions the outcome would be straightforward, the sponsors would discontinue their contributions and seek out marketing opportunities elsewhere. In the past, two competing companies agreeing to segregate their markets along geographical borders was a clear sign of anti-competitive collusion. However, there are many reasons why similar eSports organizations may decide to operate in physically separate markets. These reasons could include the presence of language barriers, differences in time zones, or even the limitations of the physical information-transfer infrastructure of the internet. Similarly, there are plenty of reasons why eSports leagues and tournament organizers may collectively decide to boycott certain teams, players, or sponsors. Leagues may choose to boycott a certain player if they have been accused of cheating or abusing performance-enhancing drugs, and they may choose to boycott a certain team in the case of unfair or unethical player treatment. Due to the relative youth of the industry, the lack of jurisprudence, and the fact that judges are generally unlikely to be familiar with the industry, courts need to be careful when determining whether to apply per se illegality to an antitrust case involving eSports.

Quick look doctrine

The traditional quick look doctrine will probably be difficult to apply to the eSports industry, as it is unclear whether a “rudimentary understanding of economics” is sufficient to determine whether certain actions by eSports companies would have any anticompetitive effects on consumers and markets. The economics of the eSports industry are very complex, for all of the reasons stated above. There are many unique dynamics, and characteristics that distinguish it from traditional athletics, in the same way that traditional athletics themselves are given unique treatment under the quick look doctrine. For this reason, a court may apply the modified “Quick Look for Defendants” doctrine to antitrust cases involving eSports companies. Many of the behind-the-scenes decisions that go into running an eSports team or league can appear rather opaque to an outside observer. Since many fans of eSports tend to support individual players rather than whole teams, the mercurial transfer of players between teams and the accompanying realignment of loyalties in the fan-base may appear to be attempts to consolidate market interest in certain teams, or they could simply be due to the ubiquity of short-term player contracts. The tight schedules of tournaments and league seasons may appear to be attempts to maximize the number of sponsorship dollars per player, but may also be artifacts of an online industry where players compete in virtual arenas and spectators can watch from anywhere in the world. The dominance of a certain player or team may appear to be the result of collusion, but is more likely caused by periodic trends in the metagame. Given the unique characteristics of the eSports industry, it can be difficult for an outside observer to determine whether or not a decision or action is globally beneficial, and courts may decide to defer to defendants when applying the Quick Look doctrine.

Rule of reason

The final mode of analysis offered by the 2nd Circuit Court of Appeals in MLB Props., Inc. v. Salvino, Inc. is the “Full Rule of Reason,” which places the burden on the plaintiff to prove that the challenged conduct involved concerted action and resulted in an antitrust injury and market-wide harm. Proving market-wide antitrust injury requires proof of either the actual anticompetitive effects of the defendant’s actions or proof of the defendant’s ability to unilaterally reduce output, raise prices, or exclude competition.

Proving that an action taken by eSports organizations is truly concerted may not be as easy to prove as it would initially appear. eSports markets are often highly fragmented, consisting of a large number of small organizations. This fragmentation means that there is often no official or unofficial figurehead organization to lend guidance and stability to the rest of the market. Thus, general trends within these markets are highly dependent on, and often dictated by external economic, political, or cultural forces. Since eSports markets are often divided along physical geographical lines or according to the game platform being used, economic changes in a certain region or the decisions of a game’s developer or publisher can have widespread influence on large segments of the eSports industry. Thus, it can be difficult to determine whether large-scale changes in an eSports market are caused by artificial collusion between organizations or simply a collective reaction to natural market phenomena. Also, the relative lack of transparency in the eSports industry will most likely increase the burden of proving the presence of concerted action. Organizations such as WESA and PEA are still very early in their development, and are consequently very careful about keeping their inner-workings hidden from potential competitors and the public as a whole. However, corporate secrecy must always be balanced against corporate integrity, and it is imperative that these organizations begin to offer a level of transparency appropriate for their level of involvement in the eSports industry.

Proving an antitrust injury would likely be equally difficult to prove for a plaintiff. These challenges stem once again from the general volatility and instability of eSports markets. Many of the telltale signs of an abuse of market power, a reduction of output, an increase in prices or an exclusion of competition, can be mimicked by natural marketplace phenomena. In the eSports industry, “output” may be defined as the number of events produced in a given time period or the number of audience members engaged by each event. Obviously, these metrics depend heavily on factors such as consumer preferences and, since most consumer engagement occurs over the internet, the practices of content delivery services such as Twitch and YouTube. Since many of the consumer-bases of eSports platforms overlap, the relative popularities of each game, league, or tournament depend heavily on each other. This is especially true given the “hotfix” model by which game developers can coordinate improvements to their platforms on a global scale. This often results in periodic fluctuations in consumer engagement, with large segments of consumers migrating between platforms as new content is implemented. The release of a new Hearthstone expansion or a major DOTA2 balance patch is capable of temporarily attracting a large amount of casual and competitive players, at the expense of platforms and events that would otherwise compete for their attention. An extreme example of this phenomenon was the eclipse of perennial eSports monolith League of Legends by newcomer Overwatch in the Korean market.

Since eSports companies earn most of their revenue from sponsors and advertisers rather than direct sales to consumers, the “prices” that are relevant to an antitrust inquiry in the eSports industry are those that league and event organizers can exact from their sponsoring brands. Of course, the value of a sponsorship or advertising space for an event depends on the amount of consumer exposure the brand can expect from it. Thus, the prices eSports organizations can charge their sponsoring brands are just as volatile as the attention of the consumers they are attempting to reach.

Competition between eSports organizations is equally susceptible to external market influences. The most obvious example of this can be found in the practices of the services that facilitate consumer engagement with events. The algorithms that websites such as Twitch and YouTube use to attract new users, retain existing ones, and introduce existing users to new content channels can easily influence consumer engagement with eSports. These websites often suggest channels to users based on their existing popularity or as a part of special events or promotions. This results in a funneling effect that directs viewers to already popular channels, consolidating the consumer base and increasing the barrier of entry for smaller organizations and events.

Regardless of the method of analysis a court applies to an eSports antitrust case, there are many important factors that judges and lawmakers must keep in mind when deciding whether challenged conduct violates section one of the Sherman Act in order to ensure that the eSports industry is governed fairly and effectively. First of all, these cases require a sound understanding of the unique challenges of operating in a digital space. Secondly, lawmakers must encourage transparency from eSports organizations. Finally, laws and judicial opinions must be written flexibly, with the knowledge that an industry built on online competition can change rapidly and without warning.

The eSports industry has many unique features that differentiate it from traditional sports. Most importantly, competition in a virtual environment requires a radically different commercialization strategy. The primary sources of income for eSports organizations are not the people watching their events, but the companies that sponsor them. Since these companies don’t have to rely directly on their audience for income, their interaction with consumers is often limited. Thus, traditional economic concepts such as price-fixing must be reevaluated. Collusion among eSports organizations may not manifest itself in the traditional economic metrics of market shares and commodity prices. As these relationships are largely contractual, market harm can be much more difficult to detect if it occurs. Plaintiffs attempting to prove actual antitrust injury in an eSports-related case may have to rely more heavily on anecdotal evidence such as the testimony of players, team or league owners, or outside professionals rather than traditional statistical evidence. For this reason, lawmakers and courts may need to consider allowing broader ranges of evidence and possibly even attenuating the burden of proof placed on plaintiffs in eSports antitrust cases.

The unconventional economics of the eSports industry is not the only thing obscuring its inner workings. The age of online anonymity poses yet another barrier to the effective litigation of eSports antitrust cases. While individual actors can hide behind avatars and pseudonyms, entire corporations can easily conceal their motivations and decisions from the public eye behind virtual storefronts and walls of text on a webpage. While conventional corporations and sports teams enjoy some degree of anonymity, eSports are unique in that at no point during their operation is face-to-face interaction between competitors, teams, leagues, organizers, and consumers required. It is possible that many potentially anticompetitive actions can be dissuaded if lawmakers preemptively insist on increased transparency from members of the eSports industry.

Finally, judicial and legislative decision-makers must be prepared for the rapidly changing competitive and economic landscape of the eSports industry. The rate at which information and opinions can be disseminated over the internet means that the popularity of certain games, players, leagues, or even entire genres of competition can shift in a matter of days. The rate of player turnover within teams is also much higher for eSports than in their traditional counterparts, primarily due to the sheer number of active teams for popular games, and the much smaller roster sizes of each. Ultimately, developers and publishers have the final authority on how, where, and by whom their games are played, broadcast, licensed, and monetized. Thus, effective regulation of these competitive platforms may necessitate cooperation between the governmental entities responsible for promoting public policy, and the corporate entities responsible for shaping the topography of the eSports industry.

The eSports industry is growing exponentially, but is still in a very vulnerable position. All it would take is a single misguided law, or misinformed judicial opinion to topple a movement that represents a source of employment for myriad professionals, and entertainment for many more the world over. When approaching eSports, legislators and courts need to be aware of the unique nature of the industry and adjust their analysis accordingly. The law does not need to be an obstacle to the growth of the eSports industry. With increased expertise, an emphasis on encouraging transparency, and built-in flexibility, the legal professionals can help eSports professionals continue to climb the ladder of global success.

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