There are plenty of signs that the esports market is continuing to represent a substantial long-term growth opportunity for Activision Blizzard (NASDAQ:ATVI). The value of media rights deals is pointing higher, as total hours watched across the big three streaming platforms -- Amazon.com's Twitch, Alphabet's YouTube, and Microsoft's Mixer -- have been trending higher over the last few years. 

Another positive indicator is the increase in total prize money, which increased from $150.8 million in 2018 to $167.4 million last year, according to market researcher Newzoo. Global esports revenue is expected to climb 15.7% in 2020 to reach $1.1 billion. 

The total esports market represents a small percentage of Activision Blizzard's revenue, and so the Overwatch maker is likely not generating much revenue from esports yet. While the company doesn't disclose specific amounts, there are clues in its annual report that esports revenue is growing roughly in line with the overall market.

A large crowd packed in an arena to watch Overwatch League.

The 2018 Overwatch League Grand Finals at Barclays Center in Brooklyn. Image source: Activision Blizzard.

Esports revenue is piling up

Buried deep in its 10-K filing with the Securities Exchange Commission, also referred to as a company's "annual report," Activision Blizzard provides a table that highlights its revenue by distribution channel. The company generates about three-quarters of its annual revenue from digital online channels, including digitally distributed subscriptions (e.g., Blizzard's World of Warcraft), downloadable content, microtransactions, products, and licensing royalties.

The game maker generated less than $1 billion last year from sales of packaged games through retail channels, as the table shows.

Net revenue by distribution channel 2019 2018 YOY Change
Digital online channels $4.93 billion $5.79 billion (15%)
Retail channels $909 million $1.11 billion (18%)
Other $0.65 billion $0.61 billion 7%
Total revenue $6.49 billion $7.7 billion (13%)

Data source: Activision Blizzard 2019 10-K. YOY = Year over year.

The only sales channel that increased last year was "other." This sales channel includes revenue primarily from the company's distribution business in Europe, in addition to revenue from Overwatch League, as the company discloses in its annual report. 

The "other" sales category generated $356 million in 2015, so it has nearly doubled in the last four years. Although we don't know exactly what percentage esports comprises in this sales channel, we can trace the year-to-year change in sales of "other" since 2015 to get an idea of what effect Overwatch League has had on its growth.

A lucrative new business is taking shape

Between 2015 and 2016, there was virtually no change in "other," which improved slightly from $356 million to $357 million.

In 2017, "other" saw a dramatic jump in sales, growing by $148 million for a 41% increase to reach $505 million. What happened?

Overwatch League didn't launch until January of 2018, but during 2017, Activision Blizzard sold its first 12 teams for nearly a quarter of a billion dollars, as CEO Bobby Kotick stated in his 2017 shareholder letter. The company also sold more than $100 million in broadcast rights and sponsorship sales. The two-year broadcast deal with Twitch was reported to be worth $90 million. 

We don't know how those transactions got accounted for on the books, but it seems that these deals contributed to the 41% growth of "other" in 2017.

In 2018, the "other" sales channel experienced another significant increase of 20% to reach $607 million. That year's increase was smaller likely due to the fact that the company only sold eight additional teams before the second season of Overwatch League. 

In 2019, the "other" line item improved by 7%, or by $41 million, to reach a total of $648 million. Activision sold the first 12 teams for Call of Duty League. Plus, there were big sponsorship deals announced earlier in the year with Coca-Cola and Anheuser-Busch Inbev for Overwatch League, which likely contributed to growth that year.

Keep in mind, from 2015 through 2018 the "other" line item included revenue from Activision's Studios business, too. Studios had been working on the Skylanders TV show for Netflix, as well as other projects in film and TV. The Skylanders show ran for three seasons through 2018 but was not renewed for a fourth season. If it had, the increase in "other" for 2019 probably would have been bigger. 

What this all seems to suggest is that the growth in the "other" sales channel in recent years has primarily come from esports. 

An Overwatch fan at a league match holding up a sign and wearing a team jersey for the Shanghai Dragons.

Image source: Activision Blizzard.

Catalysts for continued esports growth

Activision Blizzard will likely see continued growth this year for its esports business. The company just inked a reported $160 million multi-year deal with YouTube Gaming to broadcast Overwatch League and Call of Duty League matches, including other esports tournaments from the company. 

The company's goal is to grow Overwatch League to 28 teams, so there could be more team sales announced at some point, as well as additional team sales for Call of Duty League. Activision Blizzard also launched home-stand matches for Overwatch League this year, which opens the door for higher merchandise sales in local markets around the world. 

These developments position this growth stock well in the burgeoning esports market. Home-stand games will allow fans more ways to show support for their favorite Overwatch esports team through merchandise sales. Growth in the fan base and streaming viewership should grow the value of future media rights deals, as well as advertising revenue.

However, as the numbers show, investors shouldn't buy Activision Blizzard stock solely for esports. This is still very much a growth story about making games and attracting more players.

The COVID-19 pandemic could potentially cause some disruption to growth this year, but it's still too early to know what impact, if any, there will be. Generally, the bulk of esports revenue comes from sponsorships and media rights deals, and those were locked in before the outbreak. The benefit of esports is that games are streamed online, so Overwatch League, for example, is not dependent on a live audience buying tickets to venues.

If anything, ad buyers might be more interested in this environment to invest in esports with more gamers engaged at home. As such, the long-term growth curve should remain intact. If Activision Blizzard continues to experience growth in esports and its mobile gaming initiatives, this game maker will be a much different business in 10 years.