Riot Games Denies It’s Slashing eSports Budget

Riot Games

Riot Games has denied accusations that the company is cutting its eSports budget, but does acknowledge the focus has turned from growing viewership to becoming a profitable endeavor. Derrick “FearGorm” Asiedu, Head of Global Events, Riot Games, said it’s the company’s preference “to invest even more than what we do now ($100 million annually), but only if it makes sense for the business and if revenues continue to increase”; if the company is unable to grow revenues enough to turn a profit, Asiedu said it will be forced to reduce its eSports budget “by some amount.” Advertising, sponsorships and “digital experiences” are expected to drive the bulk of the revenue increase.

Howie Long-Short: Riot Games made several recent decisions implying the company was reducing spending. The company announced the group stage of the League of Legends World Championships would be condensed from 2 weeks to 8 days and that English broadcasts of the event (taking place in S. Korea) would occur remotely (from a U.S. studio) through the semi-final round. I’m on board with the decision to condense group stage competition as that should provide meaningful cost savings and if Fox can get away with calling Russian World Cup games from a studio, I see no reason why American broadcasters need to be in S. Korea. Back in May, Riot held the group stage of a midseason tournament at its EU studio, a venue that failed to reflect event’s importance; the company has since said it would not do that again.

If you listen to Team Liquid owner Steve Arhancet, Riot Games shouldn’t have an issue boosting sponsorship revenue; Arhancet sees “an ecosystem where there’s substantial revenue still being earned within the space.” Newzoo projects $360 million will be spent on eSports sponsorships in ’18. While that figure reflects the potential upside for Riot Games, League of Legends currently maintains just one North American partner (State Farm); it’s fair to ask why the company hasn’t been more successful, in terms of signing partnerships for League of Legends, to date.

Riot Games is owned by Tencent (TCEHY). Company shares are down -10.5% (to $41.35) following recommendations made by China’s Ministry of Education to restrict the number of new video games, limit internet usage and explore an age-appropriate rating system for players; the Ministry blames video games and internet usage for the increase in reported cases of myopia amongst minors. Amidst heightened regulatory risk, it’s no surprise TCEHY reported a decrease in profits for the first time in 10+ years in Q2 ’18.

Fan Marino: The founding League of Legends franchises paid $10 million to join. It’s 4 newest franchises – 100 Thieves, Clutch Gaming (owned by Houston Rockets), Golden Guardians (owned by Golden State Warriors) and OpTic Gaming – paid a $13 million expansion fee. It’s certainly worth wondering if any/all would have made the commitment had they known Riot Games was talking about reducing its eSports budget.

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Goldman Sachs Projects eSports Viewership to Rival NFL by 2022

Tencent

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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Gaming Streams Outdraw Most Cable Programs as Nearly 9 Million Watch Friday Fortnite

Fortnite

More than 8.8 million unique viewers live streamed Week 4 of Friday Fortnite, an invite-only tournament for prize money hosted by well-known streamers (see: Ninja, Keemstar) and sponsored by UMG; making it the most watched gaming competition to date. To put that figure in perspective, 5.3 million people tuned into coverage of the 1st Round of 2018 NFL Draft, the 2017 MLB LCS averaged 6.3 million viewers, 7.9 million people watched the season finale of AMC’s “The Walking Dead” and the 2nd most watched NBA Conference Finals in 16 years drew just over 9 million fans. Moving forward, it’s expected that esports/gaming competition will continue to regularly outdraw traditional television programming; Statista projects the number of gaming viewers worldwide to reach 743 million people by 2019, up +22% from 609 million in 2016.

Howie Long-Short: Back in March, we wrote about Fortnite experiencing a “cultural moment”; Drake (rapper), JuJu Smith-Schuster (Steelers WR), Travis Scott (rapper) and Ninja (a pro gamer) set the all-time, non-tournament, record for concurrent viewers on a single individual’s Twitch channel (628,000, previous record 388,000) as they streamed themselves playing the game between 1-5a EST.

Both the live streaming video platform and the popular online survival game (45 million players) have only grown in popularity since that early morning in mid-March. Twitch now boasts of 3.2 million broadcasters (+60% since ‘17), with 49% of all broadcasts (less than 1% existed in Sept. ’17) on the platform built around “Fortnite” content. That’s a noteworthy stat, as no other game has controlled more than 40% of Twitch channels dating back to 2016. Of course, it’s not just Twitch benefiting from the Fortnite craze; the game now also “holds the record for the most video game-related uploads in a single month on YouTube.”

Fortnite was developed by Epic Games, a privately-held company that Tencent (TCEHY) maintains a 40% stake in. TCEHY reported in May that 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. Tencent plans to launch the games in the country in the coming months (see: upside). It’s worth pointing out that TCEHY is Asia’s 2nd most valuable publicly traded entity. As for Ninja, he’s making at least $500,000/mo. from subscription fees, game sales, brand deals and donations on Twitch.

Fan Marino: Epic Games has invested $100 million to fund Fortnite tournament prize pools, with the competition set to debut later this year; so, interest surrounding the last-man-standing, “battle royale” game is only going to increase. At $100 million, the prize pool is more than 4x greater than the 2nd largest sum ever offered in a competitive gaming prize pool, which was $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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BT Sport, “New Online Player” Land EPL Broadcast Rights at Discount Rates

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Less than four months after Sky (SKYAY) and BT Sport (BT) agreed to spend a combined $6.194 billion on the English Premier League’s five most valuable domestic broadcast rights packages, BT Sport and a “new online player” have agreed to purchase the rights to the last two available packages (F & G) at a discount rate. EPL clubs have decided to sell the rights bundles at a cut-rate price after each failed to meet their reserve prices in February’s auction and concluding that Executive Chairman Richard Scudamore overestimated the interest from non-traditional broadcasters (think: FAANG). Financial terms of the deals have not been disclosed, but the new broadcaster’s identity will be revealed at a club meeting on Thursday; speculation surrounds both Facebook and Amazon.

Howie Long-Short: Despite the decline in the value of domestic rights, Scudamore is confident overall media rights will increase “by a decent amount” during the next cycle (’19-’20 through ’21- ‘22). Any lost domestic revenue will be offset by skyrocketing international rights. NBC (in U.S. market), ESPN (Brazil) and SuperSport (Sub-Saharan Africa) have all committed to paying a significant increase for the rights to broadcast EPL games.

As we know, NBC is owned by Comcast (CMCSA), while ESPN is property of The Walt Disney Company (DIS). SuperSport is a subsidiary of the South African based internet and media group, NASPERS. The company trades on the Johannesburg Stock Exchange under the symbol NPN or OTC with the symbol NPSNY. Shares rose 71.34% in 2017 on the back of Tencent (TCEHY), as NASPERS owns 31.2% of the Chinese internet giant. NPSNY hasn’t performed as well in 2018 though; the stock is down -7% YTD, despite being +8% (to $52.38) since last Thursday’s close.

Fan Marino: Back in February, the EPL announced BT won package A ($409.3 million/season, which includes 32 games played on Saturdays at 12:30p GMT), while SKYAY took home packages B, C, D & E ($1.655 billion/season). Packages F & G each carry 20 live midweek and bank holiday matches per season. The addition of 20 more games will give BT 52 live broadcasts/season, up from 42 under the expiring agreement.

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

LoL

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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NBA Growth to Come from Southeast Asia, Asia-Pacific Region

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China is the NBA’s 2nd biggest market (behind the U.S.), but the league believes there is room for significant growth elsewhere on the continent; namely Southeast Asia and the broader Asia-Pacific region. NBA Deputy Commissioner and COO Mark Tatum (who leads the league’s international efforts) believes the Philippines (75% of homes watched an NBA game this season), Indonesia, Thailand, Japan and Australia are best positioned to become “big markets” for the league, as the game is “growing rapidly” in those countries and the NBA has widespread broadcast distribution (25 media partners) in region. To help cultivate fans (and perhaps a few future NBA players), the league is working with local governments to implement its “Jr. NBA” program; a series of clinics designed to introduce the game to kids. The program has reached 5 million kids in Southeast Asia to date and the league hopes to reach 20 million by the end of 2019.

Howie Long-Short: Broadcast distribution was a key factor in the NBA growing so rapidly in China. The league’s partnership with Tencent (TCEHY) enables Chinese basketball fans to watch upwards of 600 league games/year via League Pass. You can’t develop a fan base, without your target audience getting to see the product.

TCEHY owns China’s top social network (WeChat) and is the world’s biggest video game publisher (think: League of Legends, Clash of Clans), but shares are down 12% to $52.41 since March 15th.  The decline started shortly after the company reported rising expenses during its Q4 earnings report.

As we noted back in October, Rakuten (RKUNY) signed a comprehensive media partnership worth a reported $225 million to become the league’s exclusive distribution partner for live game broadcasts in Japan. The company’s instant messaging platform Rakuten Viber (the official IM platform of the NBA) distributes league content to its 900 million users. The deal should result in rapid growth of the Japanese fan base.

RKUNY is best known for its Japanese e-commerce business, despite a diversified portfolio that includes banking, insurance, sports and leisure ventures. In fact, the company grew Q1 revenue +14% on the back of their Fintech business (securities). That didn’t impress investors though, who remain concerned about the company’s competition (think: Amazon); shares of the stock closed on Friday just above their 52-week low at $7.20.

Fan Marino: The globalization of the NBA hasn’t just resulted in an increase in fans, it’s been a source of player development for the league as well. The 2018 Playoffs had a record 62 international players (from 33 countries) participating. All 16 teams had at least one foreign born player, with more players coming from France and Australia (7 each) than anywhere else in the world.

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MLB, Tencent Partner to Grow Sport of Baseball in China

Tencent

MLB has partnered with Tencent (TCEHY) to grow the sport of baseball in China. As the Official Digital Broadcasting Partner of MLB within the country, TCEHY will live stream 125 games (including the All-Star Game and every game of the Postseason/World Series) exclusively on Tencent PC, Mobile and OTT platforms. The technology giant has also committed to broadcasting a series of MLB highlight shows and supporting/broadcasting youth baseball and developmental events. Super Baseball Week (April 4-8) will kick off the new partnership; 5 straight days of games featuring the league’s biggest stars (see: Trout, Judge, Bryant).

Howie Long-Short: Tencent Holdings Limited (TCEHY), one of 50 constituent stocks making up the Hang Seng Index (largest companies on HKSE, represent +/- 58% of HKSE cap), is a leading provider of comprehensive internet services in China. The company’s social messaging app WeChat has more than 1 billion users. TCEHY was recently named China’s most valuable brand for a 4th straight year, with WPP and Kantar Millward Brown assessing its brand value (how a brand powers business) at $132.2 billion (+25% YoY). Just how big of a global player is Tencent? The company’s market cap is $496 billion, $30 billion more than Facebook (FB).

Fun Fact: Just one sports related brand made the Top 100 most valuable Chinese brand of 2018 rankings, Anta Sportswear (ANPDY) at #78.

Fan Marino: MLB opened an office in China in 2007 and has maintained 3 Development Centers within the country (Wuxi, Changzhou and Nanjing) since. The fruits of those labors have started to pay off. 3 players have graduated and gone on to sign MLB contracts (“Itchy” Guiyan – O’s, Hai-Cheng Gong – Pirates and Justin Qiangba – Red Sox) and another 12 are currently playing professionally in China. The success can’t just be measured by players on the pro level, though. Since 2014, 36 players have graduated from the program and gone on to play collegiate baseball.

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Gaming Experiences “Cultural Moment”

Fortnite

Last Wednesday night, between 1a-5a EST, Drake (rapper), JuJu Smith-Schuster (Steelers WR), Travis Scott (rapper) and Ninja (a pro gamer) set an all-time, non-tournament, record for concurrent viewers on a single individual’s Twitch channel (628,000, previous record 388,000) as they streamed themselves playing Fortnite; a popular online survival game with 45 million players. Curious viewers followed along (many chiming in with funny one-liners) as the foursome navigated last-man-standing, 100-man, “Battle Royales”. Despite the late start, the virtual collaboration garnered mainstream attention (see: Chrissy Teigen’s tweet); the significance of which was not lost on Twitch SVP of Marketing Kate Jhaveri who called it “a cultural moment in terms of building awareness around the appeal of social video.”

Howie Long-Short: Fortnite was developed by Epic Games, a privately held company that Tencent (TCEHY) maintains a 40% stake in. TCEHY reported in November that YTD profits were up 69%, with mobile and PC gaming driving the revenue growth; but, those figures don’t account for the recent success of Fortnite. We’ll need to wait for Q4 ’17 and Q1 ’18 financials to see the game’s impact. As for Ninja, he’s making at least $350,000/mo. in subscription fees streaming Fornite on Twitch. TIME pegged the figure at $560,000/mo. I’ve heard the number estimated to be as high as $1 million/mo.

Fan Marino: The City of Arlington and Esports Venues, LLC are investing $10 million into Arlington Convention Center to create a 100,000 SF esports stadium, the largest venue of its kind in North America. Their goal is to bring the “biggest tournaments in the esports industry to Arlington”, a potentially significant financial boon for the city if successful. How big is the opportunity? An old industrial city in Poland, with a population of 300,000, drew 113,000 people for the “World Cup of esports” last year.

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Juventus Building a Global Brand

Juventus Football Club (JVTSF) is looking to build its brand internationally, authorizing the sale of licensed team products in Japan, China and Australia. The Serie A champions are introducing several new product categories as part of the global expansion, including bespoke leisurewear, an exclusive luggage collection and car accessories. All products will be available on e-commerce platforms, like VIP.com, and within select brick and mortar retailers within each region.

Howie Long-Short: VIP.com is a subsidiary of the Chinese corporation Vipshop, which trades on the NYSE under the symbol VIPS. VIPS shares are up 42% since news broke Sunday evening that Tencent Holdings (OTC: TCEHY) and JD.com (JD) are investing $863 million in to the company. TCEHY is putting up $604 million for a 7% stake, while JD spends $259 million for a 5.5% stake. The companies paid a 55% premium for the shares, in what is being perceived as an aggressive attempt to defend against BABA.

Fan Marino: President Andrea Angelli had the one-year ban for his role in a mafia related ticketing scandal lifted, but Italian Football Federation doubled the club’s fine (to $710,000) and will force the team to play its January 22nd match vs. Genoa, with one of the stadium’s main sections closed. Losing the advantage of a rowdy home atmosphere could alter the league’s final standings. The club currently sits one point behind 1st Place Napoli and one point ahead of 3rd Place Inter Milan.

Juventus introduces licensed products in Asia and Australia as part of global expansion

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ALIBABA ACQUIRES MOBILE GAMING COMPANY, LAUNCHES DIVISION TO DEVELOP OWN TITLES

Alibaba (BABA) Digital Media and Entertainment Group has announced the acquisition of mobile gaming company Ejoy and its plans to launch a new games division; just 6 months after laying out plans for a $145 million venture into mobile gaming distribution. The new division will develop its own titles and leverage the resources of BABA sister platforms, like online videos and movies, to push its way in to the world’s largest gaming market. The Chinese online gaming industry was last estimated to be worth $11.8 billion and is expected to grow to $27.5 billion by the end 2017.

Howie Long-Short: While late to the game, Alibaba is not new to the gaming sector. In 2014, the company made a $120 million investment into mobile gaming co. Kabam, the developer behind Marvel: Contest of Champions and Kingdoms of Camelot. The expected growth within the industry certainly provides BABA the opportunity to carve out market share, but they have some ground to make up; competitors Tencent (OTC: TCEHY) and NetEase (NTES) currently bring in 70% (41.2% and 28.5% respectively) of all Chinese online gaming revenues collected. It is worth noting that online gaming revenues accounted for 47% of TCEHY’s 2016 total revenue.

Fan Marino: Retired gamers and nostalgia junkies spent last weekend on their couches, as Nintendo re-released its classic Super NES system on Friday September 29th. The console, originally released in November 1990, includes 21 games including classics; “Super Mario World” and “Yoshi’s Island”. The biggest complaint I’m hearing about the re-released version? The controller wires are still too short! The more things change, the more things stay the same.

Alibaba Is Making Bold Moves in Online Gaming With Newest Acquisition