A few years ago, CEO Bobby Kotick compared Activision Blizzard's (ATVI) esports opportunity to professional football in terms of scale. The esports industry is expected to grow 15% to reach a value of $1.1 billion in 2020. It's on pace to become a multibillion-dollar industry over time, but investors may be wondering how this is affecting Activision Blizzard today.

We'll look at four aspects of Activision Blizzard's esports business, including how much revenue it generates and the latest viewership trends.

A crowd at an Activision esports event.

Image source: Activision Blizzard.

1. What is Activision doing in esports?

Activision Blizzard publishes several games involved in esports, but the two biggest opportunities are Overwatch League and Call of Duty League.

Overwatch League launched in 2018 and was the first city-based esports league. It is similar in structure to a traditional sports league, only it's much broader in scope with teams representing major cities from around the world. Activision Blizzard has sold 20 teams to entrepreneurs, who get to take full ownership of their team and run it like a business. The Blizzard studio has organized the league to allow both the company and team owners to share profits as the league grows over time.

Another thing that makes Overwatch League unique is that it is fully owned and operated by Blizzard Studios, whereas many other esports tournaments are organized by third parties that don't own the content rights to the game. Blizzard's ownership of both the intellectual property (i.e., Overwatch and Call of Duty) and the league puts the company in the best position to capture value in the growing esports market.

Call of Duty League just kicked off its inaugural season in January with 12 city-based teams. Activision Blizzard's Hearthstone and World of Warcraft are also bellwethers on the esports scene, but the company is putting most of its investment behind the first-person shooters because it's a widely played gaming genre, and the action-based gameplay is more marketable to a mass audience.

2. How do esports generate revenue?

The growth of esports provides several ways for Activision Blizzard to make money. The main sources of revenue are advertising, sponsorships, team sales, sales of media rights, merchandise, and tickets. Of those, the two biggest components right now are advertising and sponsorships, and Activision Blizzard has attracted its share of top consumer brands to sponsor Overwatch League so far.

But media rights could emerge as the largest source of revenue across the industry over time, according to Goldman Sachs. One reason is that the big tech giants, such as Amazon (AMZN 0.56%), Facebook, Twitter, Microsoft, and Alphabet (GOOG 0.63%) (GOOGL 0.71%), all have their own game streaming sites, and have billions in resources to invest. These companies are trying to bulk up their content offering to grow their respective audiences and make money over time. With so many digital platforms popping up and fewer companies that control the content, the big game makers are in a good position to negotiate higher prices for media rights over time.

A few years ago, Activision Blizzard signed a two-year deal worth $90 million with Amazon's Twitch, but recently signed a new deal reportedly worth $160 million with Alphabet's YouTube. Now, YouTube Gaming is the exclusive place to watch live broadcasts of Overwatch and Call of Duty esports. As the audience for esports grows, those values should rise.

3. How much revenue is Blizzard making off esports?

It's clear Activision Blizzard is making some nice pocket change from esports, but how much?

While the company doesn't disclose specific numbers, it combines revenue from esports and its distribution business in a line item called "other" in its financial reporting. This totaled $648 million in 2019, which is an increase of 7% over 2018.

4. Latest viewership trends

The key to unlocking the full potential of esports is viewership growth. This looked good last year, with season two of Overwatch League experiencing an 18% increase year over year based on average minute audience, according to Nielsen.

But the first week of season three, which started on Feb. 8, was down from season two, according to data from analytical service Esports Charts. Week one of the 2019 season brought in 206,692 average viewers, while the 2020 season drew 87,652 average viewers in the first week. 

Meanwhile, Call of Duty League is off to a decent start. The opening weekend in January saw a peak viewership of 102,891. 

It's unclear what impact the move to YouTube Gaming had on Overwatch League's decline in viewership year over year. Amazon's Twitch is like the Facebook of game streaming, but YouTube is more like Twitter. 

Blizzard apparently went for the extra payday with the media rights deal with YouTube, but it might have left some viewers behind on Twitch. However, this supports Goldman Sachs' research that media rights are where the real money is.

The main takeaway

Even though viewership appears to be down for Overwatch League over the last year, Activision Blizzard will likely see its esports revenue increase this year. The addition of Call of Duty League gives the company a second major esports event that is bringing in revenue from team sales and sponsorships. 

Overall, however, there is not enough money coming in from esports to fuel returns for this growth stock just yet. Activision Blizzard still must rely on game spending to increase revenue and profits.

Nonetheless, investors should pay close attention to Activision Blizzard's esports business. As the company states in the 2019 annual report, "Our efforts to build these adjacent opportunities are still relatively nascent, but we view them as potentially significant sources of future revenues."