esports: The missed billion-dollar opportunity for publishers and platforms

Page 1 of 8 Sections Edward Chang Wednesday 1st February 2017 esports: The missed billion-dollar opportunity for publishers and platforms The Chernin Group's Ed Chang sees huge potential in esports publishers fully embracing the third-party ecosystem SHARE THIS ARTICLE Recommend Tweet Share esports is no longer a secret. Every week there's a new report detailing how big the industry can really be, but there's also an elephant in the room. Startups and third parties are finding it hard to identify their segment of the space and monetise, due to a complex relationship with the companies who create the actual games - the publishers. Lay of the land The traditional sports ecosystem is dominated by three models of organisation. The most decentralised sports, like the PGA Tour or NASCAR, consist of largely independently organised competitions, which are sanctioned and governed by an administrative body and are open to any qualifying athlete. From there, we have typical leagues like the NBA or Premiership, which have a set number of recurring teams and players, and are extensively managed by a league front office that's owned by each team. esports are quite different. If you choose to race without NASCAR or play basketball without the NBA, there's nothing - and no official body - that can prevent you from replicating the experience. No one 'owns' racing or basketball, but someone does own Overwatch, and if you want to play you essentially have to go through that company. If you wanted to create your own esports league, your ability to market or represent it would be entirely dependent on the legal team of the game's publisher. Furthermore, the core experience is fully controlled by that publisher. "No one 'owns' racing or basketball, but someone does own Overwatch, and if you want to play you essentially have to go through that company" Leagues that are operated or endorsed by publishers can do unique things - e.g. item drops, exclusive/first-release capabilities, bundled original content - and offer unique monetisation opportunities. Three months before The International, the annual world championship for Dota 2, Valve sells interactive in-game items that directly contribute to the tournament prize pool. This model has been so successful that, in 2016, the prize pool reached $19.17 million. Most tier-one publishers also handicap the data streams that the public can leverage. Whereas in traditional sports there are multiple providers of a firehose of sports data, game publishers offer barebones APIs that allow access to little more than character information and select match data. Valve offers an open API but, as events this year have demonstrated, it can shut off access and change policy at any time. On the platform side, Twitch is miles ahead of its competitors in terms of creating an external ecosystem thanks to its two year headstart and passionate developer community, but it maintains an ever more precarious balance between build vs. buy. Because of these walled gardens, the investible opportunities within esports often end up being features not products, which set them and their investors up for more of an acquihire than a Twitch-esque exit. There's a strong argument to be made to publishers that working with third-party developers will lead to a stronger overall bottom line, foster innovation and provide defensibility. Economics 201

Page 2 of 8 It's no secret that being a top publisher is a lucrative business. Activision reported $1.57 billion in revenue for Q2 of 2016 and EA $1.271 billion. It's rumoured that Valve's 2015 revenues reached $3.5 billion in 2015, and Riot Games' over $1.6 billion. It's not hard to see why partnerships with third parties and external API infrastructure aren't a priority with so much money flowing, but that's shortsighted. As publishers start thinking about how to monetise beyond game licenses and IAP, every moment not spent developing the ecosystem is a wasted one. This isn't unparalleled, and we can see examples of where large platforms in other verticals have made the decision to invest in their future, often early on in their company lifecycle. Salesforce, an enterprise software company, has a market cap of $50 billion. A report last year by IDC put the opportunity front and center: the AppExchange currently generates 2.8x the revenue of Salesforce itself and is expected to grow to 3.7x the size of Salesforce. "As publishers start thinking about how to monetise beyond game licenses and IAP, every moment not spent developing the ecosystem is a wasted one" Slack, the enterprise collaboration tool darling, also gets it. Even before raising money in April 2016, at a $3.8 billion valuation and boasting over 1.25 million paying users, they announced the Slack fund in December 2015 - an $80 million investment into supporting new integrations. Slack and Salesforce could have gone the closed route and developed these integrations and products internally, but they understood that the immediate revenue trade-off was well worth the ability to focus on creating the best core product possible, in addition to leveraging minimal company resources. Now to everyone's favourite esports comparison : traditional sports. During the height of the daily fantasy sports craze in 2014/15, the NBA entered a multi-year partnership with FanDuel that gave it an ownership stake. The NFL expanded its partnership with Providence Equity in 2013, investing $300 million to participate in, "media and technology deals where it believes the league could help play a strategic role." And these are just a few examples. Partnering with and investing in new properties allows older, larger establishments to participate in the upside of nascent industries quickly and cheaply. Publishers are thinking about the shelf-life of games. The NFL and NBA will both be around in 25 years, but what about League of Legends or Counter-Strike? Opening up the ecosystem not only benefits players and fans by allowing them an outlet to interact with their favorite IPs, but ultimately enhances the core value of those IPs and gives publishers an opportunity for additional exposure through revenue share, API fees and strategic investments. Defensibility and innovation In addition to commercial benefits, let's look at network effects. Valve is the publisher of both Counter-Strike: Global Offensive (25 million+ copies sold, 8.2 million+ players in the last two weeks), and Dota 2 (87 million+ times downloaded, 11 million+ active players in the last two weeks.) While the titles have richer histories than virtually any other competitive esport, Valve's open API, developer tools and hands-off approach has contributed to their sustained success and status as two of the top esports titles.

Page 3 of 8 Twitch esports hours rankings for November 2016 (Credit: Newzoo) 1: Valve developer tools / Steam API: Valve has created a set of developer tools and an API that allows for custom creation of maps and in-game items, as well as access to match data and transaction facilitation. As a result, Workshop currently has 125k+ approved items for CS:GO and 50k+ for Dota 2. Valve's developer tools have also been the foundation of sustainable, revenue generating businesses that keep players loyal, like: FaceIt ($15mm Series A): 10mm+ game sessions/month ESEA (acquired by ESL): industry leader in professional CS:GO leagues and anti-cheat technology Kickback (YC W15): 8mm+ "money matches" played, 50,000+ players "Publishers are thinking about the shelf-life of games. The NFL and NBA will both be around in 25 years, but what about League of Legends or Counter- Strike?" For Valve, the boost in user acquisition, overall engagement and free marketing is well worth the short-term revenue trade-off. 2: Competitive ecosystem: Valve has taken a hybrid approach to competitive esports, where it has a handful of officially sanctioned major tournaments sandwiched between multiple leagues and LAN events. This has led to a very robust landscape, with events and leagues like the ESL Pro League, ELeague, FaceIt Esports Championship Series and Gfinity, ESL One and IEM. These streams of revenue have contributed to a high demand for professional CS:GO players, leading to lucrative contracts and opportunities. 3: The most lucrative has been the in-game skins economy, which allows players to purchase crates that contain different cosmetic versions of CS:GO weapons or Dota 2 items. During major tournaments, Valve has offered exclusive stickers that generate up to high sixfigures for qualified teams. Valve has also allowed free reign on opening up use cases within this skins economy, which led to wagering, gambling and marketplaces (Bloomberg estimated yearly transaction volume to be >$7 billion.) Variations of this model have since been followed very conservatively by multiple franchises, including Call of Duty, Halo, H1Z1 and Overwatch.

Page 4 of 8 TwitchCon 2016, held in San Diego. (Photo Credit: Twitch) On the platform side, Twitch's dominance in livestreaming can largely be credited to going all-in on esports first, but Twitch also has numerous native or platform exclusive features for its users. Diving deeper, this experience is powered by a blend of features that were built in-house or created by third parties. Examples include: Bits, preceded by Streamlabs and StreamTip: direct donations from viewers are one of the foundations of a streamer's income. Clips, preceded by Oddshot, Plays.tv and Forge: allows viewers and creators to efficiently capture highlights and share to different social media channels. Subscriptions / Partner Program and 3rd-party services (Revlo, Gamewisp and Curse/Discord integrations): subscriptions are another big source of income for streamers, and the third-party services all add further value to a sub and reduce churn. TwitchPlays: what started out as a fun social experiment (TwitchPlaysPokemon) is now its own category to interact with potential customers for publishers. Chatbots (Moobot, Nightbot and Xanbot): automated assistants that help moderate chat to prevent spamming and inappropriate behaviour. Facebook Live has launched to much fanfare, and given the massive distribution channel it will always be a huge threat. However, until it can get to feature parity Facebook Live will need to rely on traditional media partnerships or viral hits to create consistent content. These types of partnerships don't scale when we're talking about the individual streamers and professional players that have played a large part in getting Twitch to 100m+ MAUs, although the signing of G2 and Heroes of the Dorm is a good first step. YouTube Gaming is farther along and is doing a great job of starting to launch some analogous features. RELATED JOBS Senior Software Developer Scotland Senior Software Developer Scotland Concept Artist - Scotland UK & Europe Discover more jobs in games How, then, should publishers look to partner with entrepreneurs and third parties? I'd like to see publishers create a vehicle, individually or collectively, in the model of Disney Accelerator, to offer mentorship, funding and support to kick-start the next generation of esports

Page 5 of 8 businesses. Publishers should be developing their games as platforms, not individual entities - tons of data are being generated and archived and there is a treasure trove of use cases for them. I'm confident that we're slowly moving in the right direction. One day we'll see a truly open ecosystem with publishers and third parties living in harmony. Ed Chang is an entrepreneur in residence at The Chernin Group (TCG), a privately held, independent media holding company founded by Peter Chernin, based in Los Angeles. TCG has built, managed, operated, and invested in businesses in the media, entertainment, and technology sectors around the world since 2010. You can find him on Twitter @ed_chang. Sign up for The Daily Update and get the best of GamesIndustry.biz in your inbox. Enter your email address Subscribe RELATED STORIES The 100 most influential people in the British games industry After months of nominations, voting and interviews, here is the GamesIndustry.biz 100, in association with Amiqus By Christopher Dring YESTERDAY Overwatch League could bring in $720 million annually - Analyst Most bullish scenario from Morgan Stanley researchers puts game's esports revenues on par with WWE, 20% larger than MLS By Brendan Sinclair 8 DAYS AGO LATEST COMMENTS SIGN IN TO CONTRIBUTE Email address Password Sign in Need an account? Register now.

Page 6 of 8 Digital distribution may limit audience for games - Coldwood Unravel developer would love to see Yarny's adventures on a disc, says current digital storefronts are too obscure Brendan Sinclair Senior Editor Tuesday 4th April 2017 SHARE THIS ARTICLE Recommend Tweet Share GDC 2017 COVERAGE SPONSORED BY Last year's Unravel was a breakthrough title for Coldwood Interactive. After more than a dozen years as a work-for-hire outfit turning out little-remembered winter sports games and PlayStation Move titles, the Swedish studio struck a deal with Electronic Arts that would see the giant publish the heartfelt platformer while allowing the developers to retain creative control of the project. Speaking with GamesIndustry.biz at the Game Developers Conference last month, Coldwood creative director Martin Sahlin and technical director Jakob Marklund had nothing but good things to say about EA, but there seemed to be one thing they would have changed about its distribution. "I would want to see Unravel on a disc, on a shelf, in a store," Sahlin said. "The concept of Unravel had a really wide appeal. A lot of different people who weren't at all into games, or were actively disinterested in them, said it looked like something they would want to try. But all the means of actually getting the game are quite niche. You have to be in these obscure online stores, and the people who are not involved in games don't care about those. But if you could get it in the supermarket, that would be a different thing. I would rather do that." "It's good to include more people, and it's good to have the input of more people. So it would be nice if we tried to reach everyone instead of just trying to reach the niche." -Martin Sahlin He added, "It's not necessarily, 'Oh, it's an untapped market.' That's not really how I look at it. It's more that it's good to make gaming more diverse. It's good to include more people, and it's good to have the input of more people. So it would be nice if we tried to reach everyone instead of just trying to reach the niche." Marklund echoed the desire for a physical copy of the game, though his reasons were a little different. "Not all of us, but quite a few of us are failed musicians at Coldwood, so we'd really like having [a physical edition]," Marklund said. "It's nice to have a box. This is my game. I bought it and care about it." The discussion came up as a tangent to a line of questioning about the games-as-a-service model and how it's quickly becoming the norm, even in the packaged AAA industry. Sahlin wasn't especially thrilled with the trend, which Coldwood actually has a little experience with.

Page 7 of 8 Prior to Unravel, the company also worked on a free-to-play project called OnGolf. When asked about it, Marklund simply said it was a fun project, to which Sahlin laughed and responded, "It was super fun for me because I wasn't involved in it. I was standing on the side looking at it, going, 'Oh this is a train wreck.'" Marklund offered a more diplomatic assessment, explaining, "That was a VC-capital-financed project that had very ambitious ideas that weren't that realistic, to be honest." The motion capture studio Coldwood tapped for that project still uses it as a cautionary tale to developers and an example of how not to do mo-cap work, Sahlin said. "They still shudder when they talk about it," he said. "It had to have this perfect finger alignment and club placement... I don't know. They were like, 'People are not going to learn golf from this; don't worry about it.'" Asked what Coldwood learned about free-to-play from the project, Sahlin replied, "We learned you can dig a really big hole and just pour money into it and it never stops." "And never do it again," Marklund added. "Unravel was, in many ways, a game borne out of frustration: frustration with how we'd been doing things in the past and how previous projects had worked." -Martin Sahlin As for what they would do again, Coldwood's next game is another Unravel title. And while a sequel sounds more like the pragmatic sort of business decision the work-for-hire Coldwood of old would make, Sahlin sees it as an opportunity to revisit the world through a different lens. "We definitely want to say new, different things with it and try different things," he said. "Unravel was, in many ways, a game borne out of frustration: frustration with how we'd been doing things in the past and how previous projects had worked. Unravel was basically, 'Screw all of that, we're going to do things differently.' But now we have a completely different position, which means we can build the game based more or less on happiness, I suppose. So it's going to be quite different in tone." RELATED JOBS Senior Software Developer Scotland Senior Software Developer Scotland Concept Artist - Scotland UK & Europe Discover more jobs in games The way Coldwood works internally has also changed. Marklund said the studio has always welcomed people working beyond their core discipline (accepting creative input from programmers, for example), but added that the process is more formalized now. The studio's still small (about 17 people), but they're working harder at involving everyone and taking a consensus approach to development. "Unravel started out as something that was extremely personal to me, and then everybody added their own heart into it," Sahlin said. "It portrays the studio's ambition to really get it right. I think you can feel that in every single asset and feature, that somebody was really

Page 8 of 8 passionate about this and wanted it to come out great. And in our previous pragmatic games, you didn't see that because the goal was to get it done and keep the lights on." Marklund added, "We're in another position now, where we don't need to be so pragmatic. Before we had to do something to make a living. Now we can choose the projects we want to do, and people may trust us again because we've done something good, at least." Sign up for The Daily Update and get the best of GamesIndustry.biz in your inbox. Enter your email address Subscribe RELATED STORIES Unraveling Coldwood's change in design philosophy Martin Sahlin, Creative Director at Coldwood, talks about Unravel's reception and why it's a game he simply needed to make By James Brightman A YEAR AGO LATEST COMMENTS (1) Garry Williams Licensing Director, Sold Out Sales and Marketing Ltd 2 hours ago [Deleted for violation of our house rules: http://www.gamesindustry.biz/articles/2014-10-20-ourhouse-rules No soliciting please. - James] Edited 2 times. Last edit by a moderator on 4th April 2017 6:34pm 0 Sign in or Register to rate and reply SIGN IN TO CONTRIBUTE Email address Password Sign in Need an account? Register now.