Activision Blizzard (ATVI -0.03%) CEO Bobby Kotick has a special knack for producing games that draw a mass audience. Throughout his tenure, Activision has consistently produced genre leading games.
Once again, Activision has found another big hit in Overwatch -- a multiplayer first-person shooter. All indications point to Overwatch generating revenue for years, maybe decades, similar to other Activision Blizzard franchises, World of Warcraft and Call of Duty.
These games have become cash machines for the company through sales of additional digital content -- new story quests, character outfits, or weapons -- that players purchase and download to whichever platform on which the game is played, such as a PC, Sony's Playstation 4, or Microsoft's Xbox One. Ongoing releases of digital content stretch the longevity of a title, turning a single game into a year-round revenue generator.
Video-game publishers have used digital content as a tool to increase player engagement in the past. Yet, more players are engaging with games as spectators than actually playing games. For example, Twitch has 9.7 million daily active visitors who watch more than 2 million other users stream live gameplay.
Activision Blizzard's Overwatch is one of the most-watched games on Twitch. During Activision's third-quarter conference call, Bobby Kotick said, "Overwatch was specifically designed to be the definitive competitive game." As a logical next step, Activision Blizzard has recently taken action to deepen player engagement by forming a professional gaming league around Overwatch.
The structure of Overwatch League
Overwatch League was announced in November 2016 and is planned to commence in 2017. It allows the best Overwatch players to join professionally organized teams and compete with each other in an annual playoff. Activision wants to expand the league worldwide throughout the Americas, China, Korea, Asia Pacific, and Europe. The goal is to have an Overwatch team represent every major city in the world.
Overwatch League will operate very much like the NFL, NBA, and other traditional sports leagues. There is team infrastructure and team roles. In addition to having Overwatch teams represent cities, teams will have owners. Bobby Kotick wants local entrepreneurs to own Overwatch teams. He clearly believes Overwatch League is not only a good investment for Activision, but for team owners as well. Furthermore, bringing in successful businesspeople to own teams will help maximize the long-term value of each team -- and the league overall.
Team owners will scout, sign players to their roster, and help foster the development of players' skills. Every player signed to a team's roster earns a contract awarding the player a salary with benefits. Contracts will ensure team and player stability, as well as allow players the freedom to hone their skills in the off-season.
To make a roster, players go to a combine similar to an NFL combine. The combine is the opportunity for top talent to showcase their skills in front of scouts who will assist owners in signing players to teams.
Once rosters are finalized, the regular season begins and will finish with a playoff at the end of the season. To keep fans engaged, there will be a dedicated website for teams and players.
The potential value of Overwatch League
The structure of Overwatch League is designed like a traditional sports league for a reason, and I think this is where Bobby Kotick is demonstrating keen business instincts. The structure of the league seems designed to take advantage of the lucrative revenue opportunities traditional sports team owners enjoy. According to Reuters, Activision Blizzard is expected to generate revenue from broadcasting, licensing, and sponsoring teams. Revenue will be split between teams and Activision Blizzard. Depending on the success of the league, over the long term, any line of revenue typically associated with a major sports franchise could be at play with Overwatch League.
We can begin to understand the potential value to Activision Blizzard shareholders when we consider that the viewership of the most popular eSports tournament, League of Legends, attracted about as many viewers as the NBA Finals (around 30 million).
Furthermore, let's consider the value of NBA teams. According to Forbes, the combined revenue generated by all NBA teams in 2016 was over $5 billion, and this translated to about $900 million in operating income. Remember, Activision wants every major city in the world to have an Overwatch team. Most of the revenue generated by NBA teams are from much smaller cities than the ones Activision is targeting around the world. The 20th largest city in the world has a population of nearly 15 million people, and 18 out of the top 20 are outside the United States.
At this point, we simply don't know the amount of revenue Activision will realize out of Overwatch League. The above information is meant to give us an idea of the potential, but it's best to keep expectations conservative. Nevertheless, it is very conceivable that Overwatch League represents a billion-dollar opportunity for Activision Blizzard. Investors should watch for more Activision games going forward that take advantage of the opportunities in eSports, especially if Overwatch League is a success.