Activision Blizzard (NASDAQ:ATVI) recently established a new e-sports division to capitalize on the rapid growth of competitive gaming. The game publisher has hired Steve Bornstein, former CEO of Disney's ESPN and the NFL Network, as the unit's new chairman, and Major League Gaming co-founder and president, Mike Sepso, as its senior VP.
In a press release, Bornstein declared that e-sports "will rival traditional sports leagues in terms of future opportunities", and that there will be "tremendous growth areas" in advertising, ticket sales, sponsorships, and merchandising. Let's take a look at how quickly the e-sports industry is growing, and how Activision's investment could pay off in the near future.
The business of e-sports
Research company Newzoo expects the size of the e-sports market to more than double from $194 million in 2014 to $465 million in 2017. Today, about a third of that revenue comes from advertisers. Most of the remaining revenue comes from direct investments from game publishers, which recoup hosting expenses through game sales.
Newzoo estimates that as the e-sports market matures, companies will buy more ads, while more networks like Amazon's Twitch will pay for broadcast rights. This could cause the revenue mix of the e-sports industry to shift closer to traditional sports, which generated 57% of its revenue from sponsorships and media rights last year.
Non-gaming companies like Red Bull and Nissan already sponsor e-sports events, which suggests that paradigm shift is already happening. Nonetheless, the e-sports industry remains dwarfed by the traditional sports industry, which was worth about $124 billion last year.
The rise of the "digital athlete"
Still, the growth of the e-sports industry shouldn't solely be measured in advertising potential or media rights revenue. That's because the events and their streams are potent forms of advertising that are tough to quantify.
Between 2012 and 2014, the number of e-sports viewers worldwide surged from 58 million to 89 million, an annual growth rate of 21%. A total of 205 million people either watched an e-sport stream or actively participated last year. For publishers, these events generate much more publicity per dollar than traditional ads since they convince more spectators to buy or continue playing the featured games.
For Activision Blizzard, hosting e-sports events can boost the longevity of aging core franchises like Call of Duty, which still generates a large percentage of the publisher's revenue over a decade after the first game's release.
Why e-sports matter to Activision
Activision Blizzard was an early adopter of e-sports with StarCraft and World of Warcraft. But in recent years, Riot Games' League of Legends surpassed those games as the top e-sports title in the world. In 2013, League of Legends' Season 3 World Championship set an all-time e-sports viewership record, with 32 million viewers and 8.5 million simultaneous streaming viewers. By comparison, the live online stream of Super Bowl XLVII that same year only attracted three million simultaneous streaming viewers.
Activision's establishment of an e-sports division can be seen as a response to Riot's disruptive growth. It also complements the summer launch of Heroes of the Storm, Activision's MOBA (multiplayer online battle arena) rival to League of Legends. MOBA games are considered easier for non-gaming audiences to follow and understand than more technical games like Starcraft II.
Earlier this year, Activision launched a college-level telecast for Heroes of the Storm, titled Heroes of the Dorm, on ESPN2. The company also hosts annual international championships for Call of Duty, for which it created the first Call of Duty World League.
Since its launch last September, Activision's Destiny also become the most-watched console game on Twitch. Those spiking spectator numbers likely contributed to the record-breaking sales of the game's third expansion, The Taken King, earlier this year.
Electronic Arts should pay attention
Activision's biggest rival, Electronic Arts, hasn't established a dedicated e-sports unit yet. EA already hosts worldwide tournaments for popular sports games like FIFA. Speaking to Red Bull last year, CEO Andrew Wilson praised the creation of social connections through e-sports and noted that expanding into the industry might represent "an opportunity in the future".
Now that Activision has hired ESPN's former CEO and the MLG's co-founder to refine its e-sports strategy, EA might need to get aggressive to avoid being left behind in the new age of digital sports.
Leo Sun owns shares of Walt Disney. The Motley Fool owns shares of and recommends Activision Blizzard, Amazon.com, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.