Overwatch has been a great success for Activision Blizzard (ATVI +0.00%), reaching over 30 million registered players in its first year since release. Now, the attention turns to Overwatch League -- a professional competitive gaming league based on the hit game.
Specifically, investors want to know: Is Overwatch League going to be profitable?
IMAGE SOURCE: PLAYOVERWATCH.COM
When will Overwatch League make money?
On their second-quarter conference call with analysts in August, Activision management gave its first guidance on when to expect revenue from Overwatch League, and they also gave some insight about the League's profitability.
First, let's review what they said about revenue.
Activision sold 12 teams for the inaugural season of Overwatch League. On the company's second-quarter conference call, CFO Spencer Neumann, speaking about the revenue opportunity from team sales, said, "we do expect some revenue upside to [the fourth quarter of 2017], but it will be modest given the recognition of team sale proceeds over multiple years."
Spreading team sales out over time will lessen the immediate impact esports will have on Blizzard's top line in the short term.
Turning to profits, Neumann essentially telegraphed to investors not to expect any profit any time soon. Here's what he said: "From an operating income perspective, the revenue recognition of team sales will be partially offset by the investment required to launch the league, including inaugural season marketing."
In addition, Neumann explained, "we see a number of important upcoming milestones, including standing up league operations, supporting teams development of player rosters, attracting sponsors, elevating the viewer experience and securing media distribution."
Neumann went on to explain that management is investing in Overwatch League for the long term and they see it as a "substantial long-term value driver for the business."
I interpret all of this to mean it's going to take at least a full year of operation for Activision Blizzard to get Overwatch League running smoothly, not to mention signing up more teams to get the League at a size it can generate enough revenue to matter for shareholders.
But, yes, it does seem from Neumann's comments that management is expecting Overwatch League to generate a profit, just not in the short term.
Management did not offer further specific guidance on Overwatch League during this week's third-quarter conference call, though they continued to talk optimistically of the endeavor.
Said Michael Morhaime, president and CEO of Blizzard Entertainment:
We're incredibly excited about the launch of the league on January 10. We really view this as sort of building a foundation for this league that we don't expect will scale overnight. Sports leagues take time to build. ... In terms of how the league might benefit the franchise overall, we really view that as being tied. What is good for the league is good for the Overwatch game as well. So incredibly excited about the inaugural season.
Overwatch League is uncharted territory
With generous play contracts, player benefits, retirement savings plans for participating players, and teams representing major cities around the world, there's never been an esports undertaking like this before. We won't know exactly what the magnitude of this league will be until it gets underway next year. Even then it may take awhile for esports to become a meaningful contributor to Activision's bottom line. It certainly has a lot of promise and investors will be watching closely.
