E-sports has grown from a largely ignored and occasionally lampooned hobby into a phenomenon that has attracted millions of fans online and at massive live events, as well as lucrative primetime television deals.
The question for videogame publishers is how they will take advantage of e-sports now and in the future.
Heading into the June quarter, it’s worth watching what executives from videogame giants Activision Blizzard Inc. ATVI, -1.56% , Electronic Arts. Inc. EA, -2.06% , Take-Two Interactive Software Inc. TTWO, -0.95% , say about the sector that is expected to be worth billions in a few years. But at the moment, most of the market is being captured by a few titles owned by even fewer publishers — though as a Deloitte report indicates there is still a considerable amount of room for growth.
“Right now, the entire e-sports business is under $1 billion,” said Take-Two Chief Executive Strauss Zelnick at a recent technology conference. “Small market. All of the money is going to League of Legends. So, you have all the money going to League of Legends, which, just as a reminder, we do not own, and then like $0.30 going to Overwatch, Dota, and a few other things, and then even less than that going to us. And that’s just the truth.”
Of the big three publishers, Activision is the only one that own major intellectual property in e-sports: Overwatch. Otherwise, privately held Valve Corp. owns the Dota intellectual property and League of Legends is produced by Tencent Holdings Inc. 0700, -1.32% -owned Riot Games.
Even though Take-Two isn’t making a ton of cash from e-sports at the moment, Zelnick says that in the near future, companies will have to determine via player and viewed demand what will make a strong e-sports title. “We do not think there is any room for, like, every one of your titles or our competitors’ titles turning into a professional e-sport, and we think it has to be pretty organic,” he said.
One of the most recent and popular entrants that has massive e-sports potential is the Epic Games Inc.-produced “Fortnite: Battle Royale” (Epic games is also backed by Tencent). The free game makes millions from cosmetic upgrades and season passes and has been the most widely watched game on Amazon.com Inc. AMZN, -2.69% videogame streaming platform Twitch. Last quarter, gaming executives faced numerous questions about Fortnite, which will may come up again considering its outsize success.
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Beyond e-sports, the key technology that videogame makers are looking at is cloud gaming, also known as videogame streaming. Essentially it’s tech that lets players buy and stream games like Netflix Inc. does shows.
Videogame streaming isn’t quite here because nobody has quite cracked the problem arising from the tiny delays arising from bits flying back and forth between a player and data center. But, EA, Nvidia Corp. NVDA, +1.28% , Microsoft Corp. MSFT, -0.97% and a slew of startups are making substantial bets that it is coming.
EA reports Thursday after the closing bell. Activision and Take-Two both report Aug. 2 after the closing bell.
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Here is what to expect
Electronic Arts: For most publishers, the June quarter isn’t a massive one in terms of new launches. But, EA has much to talk about in other aspects of its business. At a large videogame conference in June, EA announced a premium subscription gaming service that will give players access to a catalogue of the publisher’s titles that include new offerings — the key for EA is the access to new titles versus paying $60 outright.
Microsoft and others offer the service too, though it’s not acknowledged by everyone in the industry as the best idea.
Subscriptions offer the advantage of reoccurring revenue, but game companies risk hurting sales to some extent because they could sell fewer overall units. It’s likely to come up on EA’s call, especially in the guidance since the program will launch over the summer and is likely to appear in the next quarter’s results.
Activision Blizzard: Though some people are still reluctant to believe that esports is transforming into a massive, global business, a Blizzard announcement from earlier this month should make clear to even the sceptics that it is: ESPN, the Walt Disney Co.’s DIS, +1.66% flagship sports brand, is going to air Overwatch League during prime time on ESPN’s main station, as well as several other Disney-owned channels. Keybanc analyst Evan Wingren wrote in a note to clients that he expects the increased exposure to translate into increased sales for new teams.
Activision’s second quarter is typically its smallest in terms of earnings and sales. There weren’t any major releases, because as with other major publishers it plans to release titles in the fall. For Activision that means big games like the latest in the Call of Duty franchise, “Black Ops IV,” which the company showed off at a June gaming convention and includes a battle royale mode.
Though they often get less fanfare in gaming press, King Digital, the makers of the Candy Crush franchise, among other things, will likely offset some of the typical second-quarter slowdown, wrote MKM Partners analyst Eric Handler. Even though monthly active users has declined slightly, revenue will likely get propped up by an increased player spend. Also, King has been testing video ads for mobile games, which could bring in additional high-margin revenue.
Read: Activision shuts down sole U.S. distribution center and warehouse
Take-Two Interactive: As Take-Two kicks off fiscal 2019, analysts are looking toward the future. “Grand Theft Auto V” may well have been the highest grossing media title of all time, but its sales didn’t contribute to last quarter’s earnings to the extent they previously had and executives have guided in that direction for this quarter. Still, the company continues to manufacture more online content for the game — there was a new release July 24 — and it has proven resilient in the past.
Looking ahead, “Red Dead Redemption 2” is slated for an October release, which MKM’s Handler says will help drive earnings per share beyond $4.35 — the title is widely anticipated, as the last game was an unexpected success both critically and in terms of sales. Analyst estimates range from roughly 10 million to 20 million units in the fiscal third quarter.
Investors should also look for commentary around the company’s catalogue of evergreen sports titles such as “NBA 2K” and “WWE 2K.”
Take-Two’s Zelnick has said he doesn’t believe subscriptions are necessarily the industry’s future. It’s worth watching for any commentary that hints at a change in that view on the earnings call.
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