(Bloomberg) -- When Riot Games first decided to make a TV show inspired by its hit game League of Legends, the video game publisher took the unusual step of developing and financing the project on its own. While most of its peers license titles to Hollywood studios that have experience making TV, Riot wanted to maintain full control.The company envisioned the show, which streams on Netflix, as a gift to fans, one that would also drive more people to play League of Legends. Now 15 years old, that game remains one of the most popular titles on the planet, but its player base is slowly shrinking. Riot believed the show would be the first of many produced by its new entertainment division, which would transform the Los-Angeles based company into the next Walt Disney Co.
But Arcane went way over budget. Riot invested unprecedented sums and years developing the project. In addition to the production costs, the company put tens of millions of dollars more into marketing the show, as well as on a campaign for awards. All told, Riot spent about $250 million on two seasons of the series, League of Legends Executive Producer Paul Bellezza said in an interview with Bloomberg. Netflix paid Riot about $3 million an episode to air the show, with Tencent Holdings Ltd., the Chinese technology giant that owns Riot, paying an additional $3 million for the rights to show it in China, according to Variety. Those payments amounted to less than half the total cost.
Four people with knowledge of Arcane’s production said the company didn’t have a robust plan to recoup the cost of the show before it launched. A spokesman for the company said that while the show itself wasn’t profitable, it added to the business in other ways. The company had one of its highest grossing revenue periods in the past month. “Arcane was a success when we look across all our internal measures,” the spokesperson said, adding that the second season is “on track to be at least break-even for us financially.”
Riot fired 11% of its staff at the start of the year, saying it wanted to put games back at the center of its business. The company scaled back its Hollywood ambitions in recent months, ending Arcane and pausing development on other adaptations. Riot reorganized its entertainment division and president Shauna Spenley left, as did Ken Basin, the author of a book about how to make TV shows who served as head of operations for the film and TV unit.
“If they had seen an absolutely ginormous increase in revenue, in profit, they would have done more,” said Simon Pulman, who co-chairs the media and entertainment group at the law firm Pryor Cashman LLP. “It’s as simple as that.”
Video game publishers have turned their biggest hits into films for decades. The early results were poor. Nintendo Co. had such a negative experience with 1993’s Super Mario Bros. that it took the Japanese company three decades to allow another to be released. Yet, in recent years, the adaptations have started to win over audiences and critics. Universal Pictures’ take on Mario last year grossed nearly $1.4 billion at the box office.
Publishers have historically licensed their characters to Hollywood studios, offloading much of the financial risk. Lately, publishers have been mulling over how to bring those theatrical audiences back into their games, where they can spend money on digital items.
Riot has a history of spending generously on keeping its millions of players engaged and happy. Riot’s esports arm wasn’t profitable more than a decade after launching, for example.
The company decided to finance Arcane to ensure the quality of the project. In 2020, it hired Spenley, who previously worked at Netflix Inc., to build out its team. She then hired Brian Wright, another former Netflix employee. Riot doubled the size of the group charged with connecting its games to the entertainment industry to more than two dozen people. Managers expecting to bring in new employees were told to budget for $250,000 a person.
“For us, what’s most important is fostering long-term player engagement and retention,” according to a Riot spokesperson. “Riot’s focus has always been on creating games and experiences that players want to enjoy for years, and Arcane is part of that larger vision.”
Arcane’s very existence was controversial among some employees. Some Riot employees resisted the mandate to funnel resources into the show, according to six current and former staffers. The pricey passion project, backed by former Chief Executive Officer Nicolo Laurent, sapped precious resources from League of Legends, Riot’s most important business. Laurent was trying to increase Riot’s valuation by diversifying beyond games.
The first season of the show was a critical success, earning four prizes at the 2022 Emmy Awards. It also topped Netflix’s chart of the most-watched titles in dozens of countries.
Yet interviews with Riot Games employees and industry analysts indicate it was a commercial failure for the company. Riot spent so much of its own money developing and marketing the show that it didn’t make money from the production. The show also failed to convert many new players or get existing players to spend more money on League of Legends.
Leaders on Arcane’s first season didn’t give Riot’s in-game item designers enough time to make new, Arcane-themed items or characters for sale in the game. While new players signed up for free League of Legends accounts, not very many stuck around, according to two people with knowledge of signups. The game is famously complicated to learn and its community can be hard on new players.
“We were really surprised with the success of season one,” Bellezza, the League of Legends executive producer, said. That’s “why we probably missed an opportunity to do some in-game activations around it.”
Between its first and second seasons, Tencent started asking questions about what Arcane was adding to Riot’s core video game business, according to two people with knowledge of the relationship.For the show’s second season, Riot planned to redouble efforts to funnel Arcane fans into League of Legends, where they could purchase themed digital items. The game is free but earns billions of dollars yearly through the sale of in-game cosmetics and characters, according to current and former employees.
This time Riot gave employees two years instead of just a few months to produce digital goods players could spend on. Eight new costumes based on Arcane characters were released since November, each selling for between the equivalent of $10 and $14. One skin for protagonist Jinx, which players can purchase chances to win, may cost up to $250, according to some estimates. Another character, Ambessa, costs the equivalent of $9.30. A high-budget music video accompanied her launch. Many employees questioned whether Riot would have been better off just improving its video game and designing items employees knew players would like. Over the last few years, video-game companies are asking more questions about how to get fans of their games’ TV and movie adaptations to play their games, said Pulman.
Hasbro Inc. spent years producing and financing film and TV projects based on its toys, including the successful Transformers film franchise. While the company will still license its games for projects, it won’t fully finance them anymore. For its upcoming Netflix series based on the Magic: The Gathering card game, Hasbro is taking a more targeted approach to attracting new audiences.
“Just getting an epic show isn’t enough,” said Rebecca Shepard, vice-president of the Magic franchise. Hasbro is considering digital play experiences and merchandise for existing players as well as people who might be intimidated by the card game.
(Adds details on Netflix’s payments in third paragraph.)
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