Free-To-Play Looks To Be The “Biggest Gaming Trend of 2019”


The success of Fortnite’s free-to-play business model ($2.4B in revenue to date) has begun to negatively impact legacy gaming businesses. Despite posting a “record-setting” $7.26 billion in 2018 revenue, Activision Blizzard (ATVI) announced that it would be laying off +/- 800 employees (8% of workforce) and lowering 2019 full year expectations by -20% to $6.03B; should the company experience a -16% YoY decline, it would be the largest in their history. COO “Coddy” Johnson cited “weaker than expected retail demand” and the “slowing sales of micro-transactions” for the revised guidance. Fortnite’s cannibalization of the gaming sector has also begun to spawn successful copycats. Electronic Arts introduced a free-to-download, battle royale game entitled ‘Apex Legends’ that attracted 25 million players within a week of its release; for comparison purposes, it took Fortnite nearly 2 months to clear that benchmark.

Howie Long-Short: There is a case to be made that free-to-play games help to grow the overall gamer pool, bring younger gamers into the esports ecosystem and promote diversity amongst the gaming population, but let’s be clear – companies are moving towards the freemium model because “the most effective way to generate billions of dollars is to not require a player to spend a single one.”

The problem for legacy game-makers is that the free-to-play model relies on a game’s ability to draw mass participation, to keep gamers engaged and to monetize in-game add-ons, and historically, “legacy gaming companies have a hard time introducing games that have substantial and sustainable development.” Jefferies analyst Timothy O’Shea described the industry shift towards game-as-a-service, multiplayer titles as “the biggest gaming trend of 2019.” That’s a scary proposition for companies like ATVI that rely on upfront/one-time payment sales of marquee titles. Once consumer behavior changes, good luck getting gamers to “pony up and pay $60 for ‘Call of Duty’, when [competing studios] are offering high-quality games for free.”

ATVI failed to reach its “full potential” in 2018, but plans to double-down on its most successful titles – increasing developmental resources by +20% on Call of Duty, Candy Crush, Overwatch, Warcraft, Hearthstone and Diablo. It’s a risky decision because gamers have a finite amount of time to play and a limited budget to spend on games. If they’re invested in free-to-download games – as the trend indicates, sales are sure to languish; of course, what’s the alternative? The company is heavily reliant on those 6 titles to deliver sustained revenues. ATVI shares are down -35% since November 1st.

Apex Legends used “prominent video game streamers” to raise the game’s profile out of the gate – and the strategy worked, but the initial hype has begun to wear off and there are indications that the game won’t have the staying power; not uncommon for games that require minimal up-front investment from the player. Investors are yet to pick up on the trend, Electronic Arts’ (EA) shares remain +33% since the company announced Apex Legends had surpassed the 25 million player benchmark; they had declined -37% in the 6 months prior.

Fun Fact: Avatar is the ONLY movie to have grossed more than the $2.4 billion ($2.7 billion) Fortnite has brought in.

Fan Marino: One point that Howie missed, is that Fortnite’s cross-platform functionality (i.e. same experience available across all major consoles/PC hardware + mobile) has contributed to its massive success. Just about anyone can play, on any device; and the game allows for a shared experience, enabling any player to play with/against another (think: Drake/JuJu/Travis Scott/Ninja) – uncommon within the gaming world. As of November, Epic Games’ Fortnite had over 200 million registered users.

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Report Suggests Fortnite has Peaked, Trends Say Otherwise


StreamElements has published a report indicating that Fortnite streams have “reached peak viewership” after the number of hours watched (on Twitch) declined -30% over a recent 2-month period. Fans of the battle royale game spent 151 million hours watching their favorite gamers back in July, but Fortnite streamtime dropped -13% (to 131 million) in August and another -19% (to 106 million) in September as several other highly anticipated games were released. Despite the decline, Fortnite remains Twitch’s most-watched game, though World of Warcraft (+232.5% to 87 million hours) has closed the gap following its August Battle for Azeroth expansion release.

Howie Long-Short: I’m not ready to declare that we’ve reached peak Fortnite. World of Warcraft and the October release of Call of Duty: Black Ops 4 (which has a battle royale mode and was touted by pundits to be the “Fortnite killer”) took a temporary share of Fortnite viewership, but neither appears to be a long-term threat; 5 out of the 6 fastest growing channels on Twitch are playing Fortnite over everything else (Twitchmetrics) and the game just set a new concurrent player count record (8.3 million) last week (November 8th).

Fornite remains the title of choice for pro gamers because it’s the most lucrative to play. Daniel Conlan, editor at, told me “Fornite is already 5th in total prize payouts across all games, ever”; particularly impressive considering “the other titles in the top 5 are anywhere from 5-8 years old.” Fortnite was released in July ’17.

The StreamElements report uses Twitch data because the Amazon subsidiary continues to “dominate as a game streaming platform” (see: 813 million hours viewed in September). YouTube has experienced a rise in popularity, growing from 15% of all live stream hours viewed in March ’18 to 25% in September ‘18 (226 million hours), but that growth hasn’t come at Twitch’s expense; YouTube and Twitch prevent their stars from streaming on competing platforms, so “this is simply the market growing.” StreamElements CEO Doron Nir explained, “YouTube creators are starting to realize the potential of live-streaming (more dynamic, better audience engagement, more income per hour of work) and that’s what is largely driving them to stream more.”

World of Warcraft’s strong September has knocked Epic Games from its position as the most viewed publisher; with 5 of the 20 most watched games on Twitch, Activision Blizzard (ATVI) has regained the top spot for the first time since February. Rising viewership hasn’t kept ATVI shares from plummeting 25% over the last 30 days (to $55.01) though, news that their number of monthly active users declined for a 3rd straight quarter and Tencent’s pending roll-out of widespread restrictions, on online play time for kids in China, have spooked investors.

Fan Marino: Fornite has become a cultural phenomenon, but it’s important to keep sight of why the game has resonated with such a large audience; its virality. The game is as famous for its dances, as it is for its shootouts, eliminating the seriousness out of a last man standing apocalyptic adventure. In turn, that’s created a safe world for corporate brands to associate with and Fortnite has been no stranger to partnerships; Marvel Studios temporarily made Thanos a playable character in game (May 2018) and just last week NFL skins (cost: $15) were introduced to gamers.

Ninja’s rise to mainstream celebrity status (10 million followers) and the game’s inclusive nature (100 participants compete, low barrier for entry) have also helped Fortnite reach an audience beyond the hardcore gamer. Fortnite will peak, but only when the battle royale genre does…or if Ninja gets bored. You may recall Snapchat shares plummeting -7.2% (equating to $1.3 billion loss) when Kylie Jenner announced she had lost interest in the photo sharing app.

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Activision Blizzard Sells 2 Overwatch League Expansion Franchises


Activision Blizzard (ATVI) has confirmed the sale of 2 Overwatch League (OWL) expansion franchises, Atlanta and Guangzhou (China), and it’s been reported the company is in talks with McCourt Global (an LA-based holding company) to add a team in Paris; though the league has not confirmed that story. With the addition of Atlanta and Guangzhou, ATVI has now sold 14 OWL city-based franchises and it’s likely that number will continue to rise before the start of Season 2; ATVI eSports Leagues CEO Pete Vlastelica has stated it’s his intention to add 6 new cities (12 participated in Season 1) prior to the start of the ’19 season. The Georgia-based conglomerate Cox Enterprises (think: Cox Communications,, in collaboration with Province, Inc. (a consulting firm), will run the Atlanta franchise, while the financial and entertainment conglomerate Nenking Group bought the 2nd China-based OWL team.

Howie Long-Short: Each of the founding 12 city-based franchises paid $20 million for their spots. After a strong inaugural season (they sold-out the Finals at Barclays Center), the cost of participation has already risen by at least +50%; the next 6 franchises (including Atlanta and Guangzhou) to join the league will pay between $30 million-$60 million, depending on the volume of bidders, the market size and density of talent within the city.

Any concerns that the enthusiasm surrounding Fortnite would hurt Activision Blizzard were alleviated as ATVI reported record revenue and EPS for H1 ’18 on August 2nd. The company also set a record for mobile revenue in Q2 ’18 and grew net income +65% YoY (to $402 million) during the most recent quarter. The good times are expected to roll through H2 ’18, with several notable games scheduled for release including; Call of Duty: Black Ops 4, World of Warcraft: Battle for Azeroth and Destiny 2: Forsaken. Despite an earnings report that beat analyst expectations, ATVI shares are down 5% since; as the company’s full year forecast fell short of analyst projections. Activision Blizzard remains up 11% YTD, closing on Tuesday at $70.23.

Fan Marino: Did you know, Patriots owner Bob Kraft, Mets COO Jeff Wilpon, Rams owners Stan & Josh Kroenke, Sacramento Kings co-owners Andy Miller/Mark Mastrov, Texas Rangers co-owner Neil Liebman and the CEO of Comcast Spectacor (owns Flyers) Dave Scott are among the pro sports owners that have purchased (or made an investment into) OWL franchises? You can now add Nenking Group to the list, the company owns the Guangzhou Long Lions of the Chinese Basketball Association.

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OWL Sells out Barclays Center, Grand Finals to Air on ESPN in Prime Time

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The Overwatch League (OWL) Grand Finals, set for July 27th and 28th at Barclays Center, is sold out; the esports competition will determine the city-based league’s first World Champion. More than 20,000 fans are scheduled to attend the event. The two teams that reach next weekend’s Grand Finals will compete for a share of a $1.4 million prize pool, in addition to the Overwatch League trophy. League Commissioner Nate Nanzer was surprised by the interest, saying “we knew the Overwatch League had amazing, enthusiastic fans, but this is something else.” Tickets are reportedly now selling for upwards of a 300% premium on the resale market.

Howie Long-Short: Blizzard Entertainment put Grand Finals tickets up for sale on May 18th and announced the event was sold out just 2 weeks later (June 1st). While an impressive feat for a league in its first season, fan interest lags far behind that of League of Legends (LoL) and Dota 2. Those titles regularly sell-out marquee events within minutes. In fact, LoL sold over 80,000 seats to its ’17 World Championships within a minute. Selling out Barclays Center allows OWL to finish Year 1 on a high note after watching viewership steadily over the 2nd half of the season, from over 350,000 viewers in Week 1 to +/- 200,000 total viewers for the Quarterfinals.

Blizzard Entertainment (ATVI) is the publisher behind Overwatch and the OWL is their most ambitious esports endeavor. Back on May 3rd, the company reported record Q1 net revenue ($1.97 billion, +14% YoY) and profits that rose 17% YoY (to $500 million); particularly impressive considering they didn’t release any new games during the quarter and Q1 is typically the slowest time of the year as it comes on the heels of holiday season. Any concerns that Fortnite’s popularity would impact OWL profits have yet to be realized. ATVI shares are up 10% (to $80.61) since June 27th, hitting their 52-week high on Friday July 13th ($81.64). The company will report Q2 financials on August 2nd.

Fan Marino: Speaking of viewership, Activision Blizzard (ATVI) has signed a broadcast deal with ESPN to televise OWL action (Season 1 playoffs through Season 2); immediately becoming the esport’s highest profile broadcast platform (they also have a 2-year $90 million deal with Twitch). The newly signed agreement means that next weekend’s Grand Finals will become the first live gaming competition to air on ESPN, in primetime, and the first time an esports championship to air on ABC. For those wondering, last weekend’s quarterfinals on Disney XD drew +/- 127,000 viewers.

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Goldman Sachs Projects eSports Viewership to Rival NFL by 2022


Goldman Sachs published a note projecting eSports viewership would outdraw Major League Baseball and the National Hockey League in 2018 and grow to 276 million viewers by 2022, which is roughly the size of the NFL’s audience. The note cited increasing prize pools, the ubiquity of live streaming and improved infrastructure for pro leagues as reasons why the global esports audience would grow 14% YoY for the next 5 years. Goldman analysts added that “total esports monetization will reach $3 billion by 2022.”

Howie Long-Short: It’s hard to argue with any of the points Goldman made. The $100 million Fortnite prize pool recently announced rivals “nearly the size of the entire esports prize pool in 2017”, Epic Games and Activision Blizzard (ATVI) have both built out infrastructure for competition (see: North America and EU League of Legends leagues, Overwatch League) and ATVI has a $90 million streaming deal in place with Twitch. There’s also plenty of room for growth, as NewZoo data indicates that just 5% of the 2.2 billion gamers worldwide currently watch eSports.

Tencent Holdings, Inc. (TCEHY), which owns 40% of Epic Games (think: Fortnite), is also invested in online video platforms Doyu and Huya. The company reported Q1 ’18 net profit rose 61% YoY (to $3.6 billion) on $11.5 billion in revenue (+48% YoY), with mobile (revenue +68% YoY) gaming and video streaming (revenue +75%) driving the growth. PC gaming revenues were flat, but that’s mostly indicative of impressive Q1 ’17 figures and the fact the company has yet to monetize “PlayerUnknown’s Battlegrounds” or Fortnite in China. Asia’s 2nd largest publicly traded company recently released a 5-year plan to develop a $14.6 billion domestic (China) eSports business that includes electronic gaming centers and theme parks across the country.

While we focus on public equities at JWS, there’s plenty of private money being pumped into eSports too. In fact, the $1.4 invested YTD represents a 90% increase over all of 2017.

Fan Marino: Steelers WR JuJu Smith-Schuster has signed a 6-figure endorsement deal with HyperX, becoming just the 2nd NFL player with a gaming based endorsement (Nyheim Hines, Colts was 1st). You may recall, back in March we noted that Smith-Schuster joined Drake, Ninja and Travis Scott in Fortnite competition. The group set an all-time, non-tournament, record for concurrent viewers on a single individual’s (Ninja) Twitch channel (628,000, previous record 388,000). As part of the deal, Smith-Schuster will wear HyperX headsets during live streaming sessions, participate in marketing campaigns and appear at fan events.

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League of Legends Experiences “Biggest Setback Ever”, $100 Million Investment in Fortnite


Riot games has signed a non-exclusive multi-year deal with ESPN to broadcast live League of Legends games on their OTT streaming service, ESPN+. esports reporter Travis Gafford called the development the game’s “biggest setback ever”, because the deal marks the official end of the 7-year $300 million agreement Riot Games signed with BAMTech in 2016. The North American League of Legends Championship Series Summer Split beginning on June 16, will be the first tournament to air on the streaming service; the Summer Finals and World Championships later this year, are also set to appear on ESPN+. It’s worth noting that the 2017 World Championship drew upwards of 80 million unique viewers for a single match.

Howie Long-Short: In a vacuum, there’s nothing wrong with the deal; it should be profitable and expose the game to a new audience. The deal with ESPN+ was the final nail in the coffin, but the BAMTech deal died when The Walt Disney Company (DIS) acquired a 75% of the company back in August ’17. Under the terms of the BAMTech deal, League of Legends would have had an exclusive platform to deliver content (think: Yankees and YES Network) – the 1st exclusive media rights deal in esports history – as opposed to simultaneously broadcasting streams on Twitch, YouTube and ESPN+, as they’ll do now. The deal with ESPN+ will certainly result in fewer dollars, but it’s the validation (appearance of game warranting its own broadcast platform) that the BAMTech deal brought, that they’ll miss the most.

I’m not sure I understand this deal from the ESPN perspective. While it’s logical to diversify the programming offered on ESPN+, they won’t be adding subscribers with non-exclusive content that can be watched elsewhere for free.

Riot Games is a fully-owned subsidiary of Tencent, the world’s biggest video game publisher and Asia’s 2nd most valuable publicly traded company. In addition to owning Riot Games, the company is the majority owner of Supercell (Clash of Clans and Clash Royale), they own +/- 50% of Epic Games (see Fan below) and +/- 25% of Activision Blizzard (ATVI, Call of Duty, World of Warcraft, Overwatch, and Candy Crush).

Shares of TCEHY are down 14.5% (to $50.95) since March 15th, shortly after the company reported rising expenses during its Q4 earnings report. On May 16th, the company reported Q1 ’18 earnings. Profits rose 61% YoY (to $3.6 billion) on revenue that grew 48% YoY (to $11.4 billion). Gaming revenue spurred the growth, with smartphone gaming alone bringing in $3.3 billion (+68% YoY) in revenue. Looking for a reason to believe TCEHY can continue increasing gaming revenue? They own the rights to PlayerUnknown Battlegrounds in China and have yet to begin monetizing it.

Fan Marino: Epic Games has invested $100 million to fund Fortnite tournament prize pools, with the competition set to debut later this year. At $100 million, the prize pool is more than 4x greater than the 2nd largest sum ever offered in a competitive gaming prize pool – $23 million for DotA 2’s 2017 esports tournament. Of course, $100 million is just 1/3 of a single month’s revenue for Fortnite – the game generated $296 million in April, up a staggering 134% since February.

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Twitch Rewarding Gamers as OWL Viewership Declines, Activision Blizzard Hits 52-Week High

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Twitch (AMZN) has begun encouraging gamers to watch exclusive Overwatch League broadcasts, by awarding Overwatch League tokens that can be used to buy team-based character skins, as the live streaming video platform seeks ways to increase viewership. OWL’s opening day drew 408,000 concurrent viewers, but that figure has steadily declined in the weeks since; compelling Twitch to run a program that encourages OWL gamers (and fans) to watch more. Viewers will earn one token per live map finish (roughly 3-4/hour), with a “percentage” of those watching the conclusion of the final map randomly winning 100 tokens during the live cast. Skins (and team specific gear) will also be awarded to users who tip (with paid emotes) during live streams. For reference purposes, users need 100 tokens to unlock OWL skins; they have a cash value of +/- $5.

Howie Long-Short: Blizzard Entertainment (ATVI) is the publisher behind Overwatch and the OWL is their most ambitious esports endeavor. Once thought to be overpriced at $20 million/franchise, CEO Michael Morhaime said on the company’s Q4 earnings call that he’s “pretty confident” the price is going up for the next group of owners that buy in; indicating there’s been an increase in global demand for OWL expansion franchises. ATVI posted Q4 ’17 earnings on February 8th, reporting an 8% YOY increase in revenue (to $2.64 billion). The company hit a 52-week high Tuesday morning ($75.41), before closing the day at $73.92.

Fan Marino: To put OWL’s opening day success in perspective, you can compare it the viewership figures Amazon (AMZN) and Twitter (TWTR) received for their initial TNF livestreams. Amazon’s first TNF game drew 372,000 viewers per 30 seconds; Twitter saw just 243,000 viewers per minute, during their first broadcast. While OWL viewership has since declined, Blizzard Entertainment managed to negotiate a 2-year, $90 million deal to stream OWL Season 1 & 2 games exclusively on in English, French and Korean (they do not hold the rights to broadcast in Chinese).

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Twitch, Overwatch Agree to Biggest Deal in Esports History

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Twitch (AMZN) and the Overwatch League (OWL) have agreed upon a 2-year media rights deal worth at least $90 million dollars (the biggest deal in esports history); enabling the live-streaming video platform to broadcast all league matches, starting with the first match of the inaugural season tonight at 7p EST. Twitch will be the exclusive worldwide (minus China) digital provider of the league, broadcasting all regular-season, playoff and championship matches in 3 different languages (English, Chinese, French). To drive viewership and engagement, the league and its broadcast partner will introduce a program that rewards the league’s biggest fans and give them a chance to root on their favorite gamers/teams with OWL “cheermotes”.

Howie Long-Short: ATVI shares are up 480% (from $11.52 in ‘13) over the last 5 years (to $66.19 at Tuesday’s close), while most reporting a Q3 record $1.9 billion for revenue generated (+17% YOY) and raising full-year revenue guidance from $6.4 billion to $6.68 billion ($2.08/share), in early November. CEO Robert Kotick has tried to temper expectations for the Overwatch League saying, “the first season is really about building a solid foundation”; but news that the company has recently launched a consumer products division (which will sell OWL skins) combined with the newly signed broadcast deal, would seem to raise the bar.

Fan Marino: The league has announced 12 franchises (2 6-team divisions), with Patriots owner Bob Kraft, Mets COO Jeff Wilpin, Rams owners Stan & Josh Kroenke, Sacramento Kings co-owners Andy Miller/Mark Mastrov, Texas Rangers co-owner Neil Liebman and the CEO of Comcast Spectacor (owns Flyers) Dave Scott are among the pro sports owners that have purchased (or made an investment into) teams. Owners paid $20 million for the rights to participate in the new league.

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WSJ: Just 7 Ways to Publicly Invest in Sports, JWS: Not the Case


The WSJ published a recent story asserting there are few ways to directly invest in sports, a notion we dispute. The article deemed just 7 publicly traded equities to be sports-related and based their conclusion, that fans are better off watching and playing sports than investing in them, on the performance of 2 exchange traded funds; one of which (FANZ) has beat the S&P since its July ’17 inception, which would seem to counter to their argument. The article cites Matt Hougan, the CEO of Inside ETFs, and his belief that most of the economic value within sports (ownership and player contracts) “comes in private transactions”, to support the author’s thesis; but fails to pay consideration to the revenue streams that support those contracts (and generate ownership profits). It’s worth noting that JohnWallStreet follows over 100 sports-related equities.

Howie Long-Short: Sports teams generate revenue from 4 sources; broadcast rights, ticket sales, sponsorships and merchandising. Several publicly traded equities use a similar business model; Churchill Downs (CHDN), International Speedway (ISCA), Dover Motorsports (DVD) and Speedway Motorsports (TRK), and thus should also be included on the list. Others, like Acushnet Holdings Corp. (GOLF) and Callaway Golf Company (ELY), are undeniably directly tied to sports; and no one would claim your basket was unfocused if companies like Nike (NKE), Lululemon (LULU) and Fitbit (FIT) were to be included. Oh, and don’t forget Activision Blizzard’s (ATVI) new esports league (Overwatch); their inaugural season starts today.

Fan Marino: The story names the New York Knicks, New York Rangers (MSG), Atlanta Braves (BATRK), Manchester United (MANU) and Borussia Dortmund (BORUF) as the teams you can purchase equity in. The Toronto Blue Jays, Toronto Maple Leafs (RCI), Juventus F.C. (JVTSF), A.S. Roma (ASRAF) and SS Lazio (BIT: SSL) are also all publicly traded.

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Candy Crush Ice Cream and Overwatch Skins, Merchandising ATVI’s Next Revenue Frontier

Activision Blizzard (ATVI) has launched a consumer products division, as the company looks to turn more than 40 billion hours (across franchise games in ’16) of gaming in to merchandising revenue. The company has begun licensing characters and game brands; introducing Candy Crush ice cream, Overwatch computer accessories and plans for a movie based on their Call of Duty franchise. ATVI, which will also debut its Overwatch esports league on January 10th, will also sell team “skins” worn in competition and event-exclusive goods. There would seem to be a market for physical merchandise; more than half of the company’s ’16 revenue (+25% YOY to $1.4 billion) came from in-game purchases (see: loot boxes).

Howie Long-Short: ATVI competitor Rovio (HEL: ROVIO) turned their Angry Birds game in to a successful consumer franchise (’16 movie grossed $350 million); generating 21% of all corporate revenue from brand licensing over the last 12 months. ROVIO reported (on Nov. 23) spending 4x more (to $26.3 million) on gamer acquisition ($26.3 million) during Q3 ‘17, while Ebitda fell 29% YOY (to $7.3 million); sending shares tumbling 20%, to their lowest price (+/-$11.50) since the September ‘17 IPO. Shares have declined an additional 2.5% since.

Fan Marino: Never heard the term loot box? It’s a virtual item (purchased with real currency) that once redeemed gives the player random virtual items, often cosmetic (i.e. avatar or character options, costumes etc.); gaming companies use the feature to monetize games post purchase. Those opposed to loot boxes argue it forces gamers to gamble to maximize the gaming experience; though Overwatch loot box rewards do not effect gameplay. Think it’s all fun and video games? China, Japan and Australia are now regulating loot boxes under gambling law.

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