Esports Insights
Total Page:16
File Type:pdf, Size:1020Kb
GLOBAL eSports Insights Making Sense of the Economics There has been much discussion regarding eSports team valuation recently, particularly given that Blizzard is currently seeking franchise investors for its Overwatch League (LINK). In general, eSports franchise valuations have varied significantly, with estimated valuation ranges from $2m-$5m in non-major market to upwards of $30m in major markets. We expect valuations to continue to vary widely based on various factors, with roughly three distinct levels. (Keep in mind that much of the valuation is driven by Macquarie’s eSports Thesis the future expected revenue from sponsorship and/or tournament winnings). 1. eSports is becoming an important part of 1. Semi-pro level teams are valued from $1m-$5m USD. These teams have publishers’ product and marketing strategy. one or two years of track record and less mature organizational structure. 2. eSports to gain mainstream traction as Team Echo Fox (purchased by Rick Fox for $1-2m) and Cloud9 Challenger advertisers capitalize on the growing and engaged viewers. (purchased by Milwaukee Bucks co-owner Wesley Edens for $2.5m) are examples of this category. 3. Professionalization of eSports will lead to industry consolidation and greater media rights. 2. Pro level teams are valued from $5m-$15m USD. Recall that the 76ers 4. Pro sports teams to invest in eSports to hedge invested in Team Dignitas last September reportedly at these levels. Our against the decline in traditional sports viewing. conversations with industry professionals and eSports team owners suggested 5. eSports could gain Olympics status as the IOC that pro team valuations are approximately $10m USD. looks to add events that have global appeal. 3. Ultra-pro level teams could be valued at >$40m. These teams are run like 6. Mobile eSports will drive industry growth by any other professional sports organization. A good example of this would be catering to a broad audience with mass appeal. Fnatic ($42.5m valuation), widely considered the best team in the western world. 7. Virtual reality will enhance eSports viewing experience and competitive dynamic. Bottom line: Beyond Activision, we expect to see more publishers such as Thematic Reports Link 1, Link 2, Link 3 Nintendo and EA to also focus on their own eSports leagues (LINK). This will drive increased industry engagement, leading to higher revenue from game sales, tournaments tickets, media rights, team franchises, merchandise, and other. Analyst(s) Macquarie Capital Markets Canada Ltd. We have included a model on page 5 to give investors a better sense of the Jiang Zhang economic drivers behind the valuation of a typical eSports team. Key conclusions: +1 416 848 3549 [email protected] 1) eSports team economics are similar to that of professional sports and this is Greg MacDonald, CFA +1 416 628 3934 [email protected] attracting sports team owners that look to leverage their expertise in team Macquarie Capital (USA) Inc. management and player development as well as VC/PE investors that are looking to Ben Schachter capitalize on an emerging theme, and 2) publishers (and sports leagues) are best +1 212 231 0644 [email protected] Ed Alter positioned for the emerging economics of eSports leagues given their IP ownership. +1 212 231 1272 [email protected] Finally, our proprietary Twitch data (page 12) indicates that engagement Macquarie Capital Securities (Japan) Limited David Gibson, CFA gravitates towards consistent regular season games, evidenced by League of +81 3 3512 7880 [email protected] Legends’ LCS. We expect the upcoming Overwatch League to see similar Damian Thong, CFA viewership benefits from its weekly regular season once it scales up. +81 3 3512 7877 [email protected] Macquarie Capital Limited Key calls within Macquarie’s Global Coverage Universe Wendy Huang, CFA +852 3922 3378 [email protected] Activision, EA, Take-Two, Capcom, Nintendo, CyberAgent, NetEase and Hillman Chan, CFA Tencent among publishers given their IP and benefits from eSports media rights. +852 3922 3716 [email protected] Allen Chang Asustek, Sony and Lenovo in hardware & technology as key beneficiaries of higher +852 3922 1136 [email protected] Macquarie Capital Limited, Taiwan Securities Branch demand for gaming PCs and game consoles. Jeffrey Ohlweiler Facebook, Amazon, Google, and theScore in digital media due to rising +886 2 2734 7512 [email protected] Kaylin Tsai viewership and ad dollar flow into eSports. +886 2 2734 7523 [email protected] For a copy of our proprietary Twitch.TV data, please email us or contact your Macquarie account manager. 29 March 2017 Please refer to page 28 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. Macquarie Research eSports Insights Fig 1 eSports Cheat Sheet What is eSports? Popular and emerging eSports media platforms Competitive tournaments of video games, especially among professional gamers. - Dictionary.com eSports leagues and teams vs. professional sport League of Legends Championship - LA Staple Center (2013) eSports market size ($'mn)* eSports global viewers ('mn) ($'mn) ('mn) 6,000 600 5,000 +54% CAGR 495 5,000 500 +8% CAGR 4,000 400 365 3,000 300 2,000 200 892 1,000 100 0 0 2016 2020E 2016 2020E *Revenue estimate include sponsorship, advertising, prize pools, betting, ticketing, merchandise and media rights. ('mn) Viewership of major eSports events has surpassed that of major 114 120 league sports such as MLB, the NBA and the NHL. 90 Professional sports teams that have invested in eSports 60 41 36 28 30 20 20 15 6 0 Cup NCAA Series (Final 4) (Final (Game 5) (Game Basketball Rose Rose Bowl NBAFinals Legend MLB MLB World DOTA2 Super Bowl Super League League of NHLStanley Championship Championship eSports betting platforms Popular eSports ranking by prize payouts and their respective developers eSports and virtual reality themes mutually reinforcing Cyberith VR gear can tranform certain eSports genre to be more physical active vs. the existing passive game-play involving mostly keyboard and mouse. Other popular eSports include.... Key Macquarie Stock Calls on eSports Publisher(s): Activision, EA Games, Take-Two, Nintendo, Capcom, Tencent, NetEase Mobile Publisher(s): CyberAgents, GungHo Media Distributor(s): Facebook, Google, Amazon, Disney, theScore Hardware & Technology Innovator(s): Asustek, Lenovo, Sony Source: Activate, Superdata, eSports Earnings, ESPN, H1 Gambling Capital, Newzoo, Macquarie Research, March 2017 *Rev est. 29 March 2017 2 Macquarie Research eSports Insights Making Sense of the Valuation Sports Business Journal reported that Blizzard is conducting a road show for potential franchise investors in its upcoming professional Overwatch League (LINK) in which a franchise could sell for $2m-$5m in smaller markets and upwards of $30m in key markets such as LA. Recall that Overwatch League was first announced in the previous Blizzcon and is expected to be a world-class eSports ecosystem for professional Overwatch competition with the goal of fostering team sustainability and stability, and establishing career opportunities for players similar to that of the traditional sports. Fig 2 Overwatch League is part of Activision’s global eSports ambition Source: Company Data, Macquarie Research, March 2017 The league progression is similar to that of any other major league sport where Blizzard would host tryouts for teams that represent major cities across the US. Players accepted by the teams will be signed to a guaranteed contract that includes a baseline minimum salary and benefits packages. Once the city-based teams have been accepted by the league, Blizzard will look to give them an opportunity to develop their career as full-time Overwatch professional eSports athletes. Interest in joining the Overwatch league is high and professional teams such as Fnatic are already preparing for potential inclusion as indicated by the recent job posting for an Overwatch manager in LA (LINK). Besides bids from professional eSports organizations, we also expect both professional sports owners and investors to participate. Currently, notable team owners from the professional sports world include Rick Fox and Wesley Eden while other professional athletes such as Shaquille O’Neal, Gerard Kelly, Andy Miller, Mark Mastrov, Alex Rodriguez and Jimmy Rollins all have interest in the eSports organization NRG eSports, which participates in Overwatch competitions. Mark Cuban is also invested in eSports through the betting platform Unikrn and has historically refrained from team investment given the fragmentation. A more regulated league structure such as the Overwatch League could attract his interest in participating. We have tracked the eSports investments by professional sports teams and sports team owners for the past two years. Feel free to send us an email request if you would like to see the list. 29 March 2017 3 Macquarie Research eSports Insights To better understand the potential valuation behind these franchises, we classify eSports teams into three categories: Semi-professional, Professional and Ultra-Professional Semi-Professional Teams are typically regional teams that command a valuation range of $1m-$5m. Former basketball player Rick Fox invested in a League of Legends team for roughly $1m-$2m while co-owner of the Milwaukee Bucks Wesley Edens invested in Cloud9’s Challenger’s LCS spot along with four of its players for a total of $2.5m ($1.8m for the spot and $0.7m for the players - LINK). At the Professional Level, a typical team valuation tends to be from $5m-$15m. We note that the Philadelphia 76ers reportedly spent this amount for Team Dignitas and Team Apex last September. Teams that command higher valuation tend to be multi-title focused, and have a solid operational history and achievements. We note that Team Dignitas is a global eSports team headquartered in the UK and has been operating since 2003, competing in Counter-Strike (Valve), Hearthstone (Activision), Halo5 (Microsoft), Heroes of the Storm (Activision), League of Legends (Tencent), FIFA (EA) and Smite (Hi-Rez).