About a year ago, Take-Two Interactive (NASDAQ:TTWO) CEO Strauss Zelnick was skeptical of the potential of esports to be a profitable business and looked at it as nothing more than a marketing tool to increase awareness of certain games. Speaking to gamesindustry.biz, Zelnick said at the time, "[W]e have yet to see [esports] as a stand-alone profitable business. We see it more as an adjunct to consumer engagement in our titles."
Fast-forward a year, and Take-Two has partnered with the NBA to create a professional esports league based on its popular basketball series, NBA 2K, and Zelnick appears to have raised his sights for esports' profit-making potential. On Take-Two's fiscal 2017 fourth-quarter conference call, Zelnick expressed what appears to be a changed opinion of esports' potential: "We believe that the NBA 2K esports league has a long-term potential to generate significant revenues and profit through broadcasting rights, ticket sales, pay-per-view events, sponsorships, advertising, and merchandise, just like any other professional sports league."
Zelnick's new opinion, based on the above quotes, may reflect two developments over the last year. First, Activision Blizzard announced its esports ambitions with Overwatch League, which is clearly set up to generate a profit over the long term. As one competitor makes a move, it can stimulate other companies to reevaluate options. Second, another year has gone by with the esports market blazing a trail of rapid growth and growing popularity. Market researcher Newzoo estimates esports revenue will grow 41% in 2017 to $696 million and will reach $1.5 billion by 2020. This revenue is primarily brand investment on advertising, sponsorship, and media rights. Ticket sales and merchandise are expected to make up only $64 million of esports revenue in 2017. This is roughly proportionate to a traditional league like the NBA, where ticket sales and other revenue items generated in arenas is only a small percentage of a team's total value.
We've also seen major tech companies like Facebook, Alphabet's YouTube, and Amazon.com's Twitch.tv continue to make serious efforts to be key players in streaming competitive gaming events as well as offering a social destination to allow individual gamers to hook up, chat online, and stream games. Esports isn't just about video game tournaments, cash prizes, etc. -- it's contiguous with social media. Game companies are in a sweet position in that they own lucrative game brands that can serve as the nucleus of mini social media networks.
Investment is what esports needs to be profitable
On Take-Two's recent conference call, Zelnick also added that the profit opportunity for the NBA 2K League will be realized only with the right partner. There is no better partner than the NBA to help make the NBA 2K League a very profitable one for Take-Two over time, as several of the participating NBA team owners have previous experience making investments in esports tournaments.
Take-Two's CEO is now in agreement with Activision Blizzard CEO Bobby Kotick in how they see the future of esports as potentially a profitable endeavor. Given the savvy capital allocation decisions of Zelnick and Kotick, the commitment from both of these companies to esports could be a sign that the fast-growing market of competitive gaming is crossing a major threshold toward profitability in the coming years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Ballard owns shares of ATVI. The Motley Fool owns shares of and recommends ATVI, GOOG, GOOGL, AMZN, FB, and Take-Two Interactive. The Motley Fool has a disclosure policy.