Can Video Game Companies Convince Advertisers to Buy Into Esports? — The Motley Fool

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Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take Two Interactive (NASDAQ:TTWO) have each launched professional esports leagues this year, while advertising and sponsorships are expected to make up three-quarters of the industry’s nearly $1 billion of revenue. And the recent announcement that Nielsen Holdings (NYSE:NLSN) will apply its TV rating expertise to Activision’s esport events could be the catalyst that unleashes a floodgate of media buying.

In this segment from Industry Focus: Consumer Goods, the cast discusses these latest developments and more.

A full transcript follows the video.

This video was recorded on May 22, 2018.

Vincent Shen: Investors are pretty fortunate with video games in that there are quite a few publicly traded companies targeting the esports opportunity. They also happen to be some of the leading names in the industry.

A lot of our listeners have probably heard of Activision Blizzard, ticker ATVI; Electronic Arts, ticker EA; Take-Two Interactive, ticker TTWO. Across the board, we’re seeing esports come up more and more in these companies’ press releases and their earnings calls. I’m going to share a few quotes from management teams. It’s not like I had to go digging to find these examples — these are all from the most recent quarterly investor calls.

From Activision Blizzard’s CEO Bobby Kotick, he says:

The inaugural regular season of the Overwatch League is progressing well with millions of viewers each week, an average viewing time of over an hour, which provides our multiple global broadcast partners and sponsors with access to a highly engaged and hard-to-reach audience.

The Overwatch League continues to thrive, and our players are getting even broader recognition of their incredible talents in mainstream media. We see even greater opportunity with the playoffs and grand finals still to come, and we’ve begun sales of our next round of Overwatch League teams.

Over time, we believe our esports initiatives could rival traditional sports for audience interest, advertiser interest, sponsors, ticket sales, and merchandise sales, both virtual and physical.

That’s really impressive. And then, as part of those efforts, the company’s also increasing their hiring of people with experience in sports and marketing and broadcasting.

I have another quote here from Electronic Arts CEO Andrew Wilson. He says:

In terms of esports, we’ve talked about this a little bit less this quarter. I mean, we saw tremendous engagement in both our Madden League and our FIFA League, up significantly year over year and breaking records in both broadcast television and on digital channels. We’re going to continue to double down there. We have an entire competitive gaming group that are pushing to grow that and really think about the ongoing evolution.

Those comments, again, are just from this month. I don’t think it gets any clearer that the leading industry players are taking the esports opportunity really seriously. And that doesn’t include other major video game publishers that are just not public companies.

So that everyone listening can keep track of what titles go with these companies as we discuss more recent progress and developments, for Electronic Arts, they have a lot of popular sports franchises forming the bedrock of their esports division. Across their esports franchises, they have over 100 million players with almost 20 million of them getting involved in their FIFA and Madden competitions. On top of that, they’re hoping to branch out from sports titles to some of their action games like Battlefield later this year.

For Activision, its major esports title is Overwatch, with 40 million registered players. A Call of Duty -based league is also in the works, and there we’re talking about an even bigger fan base with hundreds of millions of players. The company delivered a record Q1 2018, with almost $2 billion of revenue and double-digit growth for both the top and bottom lines.

We’ll take a deeper look at numbers, financial contributions from esports in a bit. But I’d like to offer some updates from the notable achievements in esports that we covered last summer. At the time, we talked about multi-million dollar cash prizes, growth in attendance at live esports events. John, what’s the latest news? I feel like the industry is constantly hitting new milestones at this point.

John Ballard: Overwatch League started in January. Of course, there was a big buildup with it last year. The company just kept talking about it on conference calls, and a lot of investors had high expectations. The league pretty much exceeded expectations. They had 10 million total viewers opening weekend. They’ve been averaging 200,000 to 300,000 average viewers per day. That’s the one making headlines, but they also have Call of Duty World League launching this year, and there could be other esport leagues coming in the future.

Then, you have EA, Electronic Arts, they have their FIFA, Madden, Battlefield franchises coming into esports this year. The viewership I’ve seen, those leagues aren’t probably doing, maybe, quite as well as Overwatch League. From the data I’ve gathered, they’re probably doing around 100,000, maybe a little less, in viewership.

Then, we have Take-Two Interactive. They’ve launched NBA 2K League this month in May. That game doesn’t have quite the wide viewership of Overwatch and FIFA. Some comments of people I’ve seen on Twitter mentioned it only got maybe around 10,000 viewers. But you have to understand, it’s also a game that doesn’t really rank very high on Twitch. Casual people tuning into Twitch to watch other people play it, there’s maybe 1,000 viewers a day, so it got a bump. Management, though, they say they’re happy about it, they’re still very enthusiastic about it.

But I think the heavyweights among the companies is the Overwatch League and probably FIFA and Madden after that, and you can see it in the way the companies talk about it. I found something interesting, EA and Take-Two aren’t being as proactive in releasing press releases giving information about what’s going on with their esports. Activision releases a lot of information. They’re telling you how much money they’re making on advertising, sponsorships. They’re telling you how many viewers they’re getting. They really speak a lot about it in conference calls. EA has mentioned some viewers, and they’re happy with it. But those companies aren’t really talking up their esports as much as Overwatch and Activision. Usually, as investors, when you see that, you think, maybe those companies aren’t doing so well, they’re not meeting expectations.

I think all eyes right now are on Overwatch League, because it just has an unprecedented structure in how it’s set up. The management is really ambitious about turning that into an NBA-scale type league. 2018 is the first year ever that all three of these publicly traded companies — Activision, EA, and Take-Two — have professional leagues launching, so this is really a big year for esports. It’s a real milestone.

Shen: Kind of a watershed moment, sure. Even for Electronic Arts, they’ve mentioned some things. They actually had the No. 1 esports program on television in 2017 with their MaddenChallenge special. They talked about their road to the eWorld Cup, that had 17 million digital views, so still some impressive numbers on that side, even if they’re not potentially touting it as much as some of the competition.

Just a couple of more minutes here. You shared some notes with me that had really impressive details about what professional gamers are getting from these contracts, partnerships with professional sports leagues. Could you share some of the developments there really quick?

Ballard: That’s one of the interesting things about esports. These players are getting signed to these contracts, and I think, in a lot of ways, as we monitor the progression of esports going forward, this is going to be a good way to monitor the magnitude of esports.

The minimum salary of Overwatch League is $50,000. These players are given health insurance and retirement savings plans over that. Each player gets 50% of their team performance bonuses on top of that for achieving certain things through the season, like winning little playoffs that happen in between stages of the season. The total of all of that is $3.5 million in team performance bonuses. Then, the champion of the whole season will get a $1 million reward on top of that, so there’s some money at stake.

Overwatch pros spend a lot of time practicing these games, and they’re being recruited for their skill, and they’re being put on these contracts so that they have the support from the company to spend all their time year-round playing these games.

Shen: These are people who are spending like 12 hours a day practicing, very much true to what an athlete would experience trying to reach the top of their game. Something else that I thought was really interesting and important to the big developments for this industry was something that you wrote about on Fool.com recently. That was a partnership that one of these companies had with Nielsen trying to get some legitimacy in terms of esports ratings and how important that is for advertisers. Could you talk a little bit about that?

Ballard: In order to attract advertisers, that’s going to be the big revenue driver for these professional esport leagues, along with sponsorships. That’s estimated to make up 77% of the esports market this year, so it’s a big thing. In order to get that advertising, there has to be verifiable data about who’s watching and for how long. Nielsen TV ratings, of course, those are the authority when it comes to this.

Very recently, Activision announced that Nielsen will provide its TV rating expertise to provide that data for the company’s esport events for specifically Overwatch and Call of Duty World League. This could really get the momentum going for esports’ ability to attract advertisers, which it’s going to need if it wants to reach that scale of the NBA. What Nielsen ratings measure is a percentage of the people watching between 18 to 49 years of age.

Activision, by doing this, is essentially putting those events against the biggest entertainment channels in the world. If you look at TV shows like The Walking Dead and Game of Thrones, the most popular TV shows, they generate millions and millions of viewers a week. Overwatch league is generating 200,000 to 300,000 average per day. That’s for matches held Wednesday through Saturday.

So we think, “Well, that’s nothing, why would advertisers be interested in 200,000 viewers?” That brings up another interesting angle about this. Activision executives have released all this information about what they’re seeing in engagement and viewership and the money they’re generating so far from this. They know they have something very valuable, and they wouldn’t risk doing this if Nielsen was going to put out a weak report. They knew there was a good chance that that would totally stop Overwatch League in its tracks, and it would probably ruin the growth opportunity for a lot of other esport events as well.

Shen: Yeah. I think a big part of that is the confidence that they have with getting into this partnership to show that, right now, it’s still in the early stages. They might not have those mega audiences that some of the traditional television networks might be able to command. But in the end, this is building up toward something that really can rival, maybe not the biggest shows, necessarily but a common series, maybe one or two million viewers, definitely reaching that point, so very impressive stuff there.





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