Back in mid-January, Microsoft (NASDAQ: MSFT) announced it would be buying Activision Blizzard (NASDAQ: ATVI) in a $68.7 billion all-cash transaction (pending an FTC anti-trust review). While much has been made about the scope of the deal and MSFT’s desire to take greater share of the video game business, there has been far less discussion about what the deal means for the Call of Duty League, Overwatch League (OWL), and the collective of big four sports team owners who own franchises in those leagues. Microsoft did not respond to request for comment. But the former CEO of one esports organization says industry insiders are generally optimistic about MSFT bringing the game publisher under its umbrella. Both leagues have generally underwhelmed from a ROI standpoint, and there is hope the tech giant will expedite the ongoing shift towards a league model that leans into the games’ robust player community, driving growth in league and team values in the process.
JWS’ Take: Considering MSFT has historically rejected the professionalized esports model that ATVI has built CoD League and OWL on, changes might appear to be on the horizon for both leagues. But Mario Stefanidis (VP, equity research, Roundhill Investments) reminds the esports leagues represent a “relatively small part of the Activision pie,” and for that reason it is unlikely Microsoft will make a dramatic pivot.
The former team executive we spoke to agreed that changes in the CoD League and OWL were likely to happen with or without MSFT’s acquisition of the game publisher. He explained that over the last half-decade, insiders have learned that trying to transpose a big four sports league model (think: franchises, salary caps, revenue sharing) on an esports league will result in a bunch of “translation errors.” So the next half decade was always going to be about optimizing the business of the two leagues. “That was going to happen in the coming years regardless of who the owner [of the publisher] was,” he said.
When big four sports team owners (see: Kroenke, Kraft, Wilfs and Wilpons) bought into the two ATVI leagues back in the late 2010s, many did so based on an undifferentiated hypothesis (think: a huge fan base generating gate receipts and TV ratings). But over the last half decade, insiders have learned the community structure within esports is different than that of stick-and-ball sports. The audience is significantly younger, and it prefers to engage digitally with the players and games, as opposed to in person or on television.
Because the community is not constructed to draw tens of thousands of local fans to an arena night after night, top esports leagues—like the Call of Duty League, Overwatch League and NBA 2K League —have begun to migrate away from the traditional city-based approach found in big four sports and toward more of a tour-based model (like professional golf and tennis). It should be noted that esports has proven capable of selling out Olympic-size stadiums for big events.
If MSFT ends up adopting a tour-based model for the CoD League and OWL, Microsoft could choose to dismantle the city-based franchises and embrace the decentralized model built around the games’ top amateur players and celebrity gamers (see: Premier Halo Championship League). Remember, it is the massive amateur player bases and the pool of content creators who engage with games that differentiates esports from traditional sports fandom.
While organically engaging the gaming community may provide the league and its investors with the greatest upside, doing so would mean walking away from well-capitalized, professional investors who generally remain bullish on esports and team investments (at least in part because of the digitally native revenue streams unavailable within traditional leagues).
It would also require some time and money to unwind the obligations ATVI has to the league and its teams. “The way they set up CoD League, where you have these $25 million [franchise fees], means the economics are pretty entrenched… Just do the math, 25 million times 12 is a real, substantial number,” Stefanidis said. While one could argue the teams are worth less today than when the owners bought in, good luck getting any to agree to mark those investments to market.
The most likely scenario moving forward is that MSFT pushes the leagues towards more of a hybrid model. It would be foolhardy to turn its backs on the well-funded franchise model and a professional circuit that draws big eyeballs and sponsorship dollars. The franchise model, which guarantees a team a spot in the league year after year, also ensures the owners will continue to invest heavily in the teams and the game. Expect a set of traditional franchises to remain locked into both leagues.
But don’t be surprised if MSFT creates a number of opportunities within its leagues to embrace the massive amateur player base (think: open circuits). In the esports world, it is not uncommon to see gamers earn spots in world championship level events by winning challenger brackets.
The knee-jerk reaction would be to assume the adoption of a hybrid model would tank franchise valuations. But that logic may be naive. If the overall value of the league grows, so too should the value of its franchises (as long as the number of clubs remains fixed).
While esports insiders are generally optimistic about the prospective change in ownership, there are concerns about embattled ATVI CEO Bobby Kotick leaving the company in ‘23. Many of those who invested in OWL, and to a lesser degree the Call of Duty League, did so based on their confidence in him (he is a champion for esports). But Stefanidis says the leadership change is no reason to fret. “I don’t think there is any reason to think Microsoft is going to shy away from [the leagues] given how they’re supporting Halo currently.”