I am working on a big report on a new subject for D2D – eSports, professional video game competition. I recognize this is a departure from my usual coverage area, but it is an interesting topic and not as far from my usual topics as one might guess. It is also makes for a fantastic study in strategy and industry formation. This is a brand new industry forming right before our eyes. As a student of strategy, I feel about eSports the way that geologists and vulcanologists must feel when some new volcano pops up in the middle of the ocean creating a new island.

MY report is coming soon (hopefully very soon), but the there has been some big news in the space over the last week, news that cuts right to the heart of my thesis so I thought I would cover that in a timely manner and tease the bigger report.

First, a quick background. eSports looks promising. It is a major audience draw, attracting hundreds of millions of viewers every year. That audience is relatively young, making it attractive to advertisers, and it is growing at a healthy clip.  However, there are still a lot of unanswered questions about the structure of the industry, because it is still so new. One of the biggest of those questions is who will hold the upper hand in capturing the big profit pools, notably broadcast rights for the championship matches. There are two constituencies in contention – the eSports teams and the game publishers who own all the IP of the games.

The consensus among many (especially on the Street) is that the game companies are going to end up controlling the whole eSports value chain. They have so many built-in advantages. No one owns the rules for football or basketball, everyone sets their own rules when they play. In eSports, the game companies make all the rules, and have big levers to pull to draw audience interest. Spoiler alert – in my upcoming report, I argue that the game companies may not be as strong as everyone is currently assuming.

Recently, this has been put to the test by Activision, a leading game company, who is jumping into eSports in a big way. Last year, they announced the formation of their own league for some of their games, including the consumer hit Overwatch. In physical sports, most professional leagues are owned collectively by the teams in the league. But there is no reason that has to be the case – newer sports leagues like US Major League Soccer have a very different league structure. Activision thinks that they can set up and totally control the Owerwatch League (OWL). They then set out to sell individual local franchises. These ‘opportunities’ do not come cheap. Franchise rights reportedly start at $15 million to $20 million, with larger fees in bigger markets. Activision appears to be having been seeking high net worth individuals to participate, with a special focus on people who own physical sports teams.

A big part of my report looks at the brewing conflict between team owners and the game companies.  Then last week, ESPN (who has great eSports coverage) broke the story that many teams are balking at signing up for Activision’s Overwatch League. The ESPN story noted that many of the leading, existing eSports teams (the ‘endemics’) are refusing to join the Overwatch League citing the high cost of entry and the lack of revenue sharing until 2021, as well as some other terms. The gist of the article was that new investors are experiencing sticker shock and existing teams do not like the terms either, opening the question as to how successful the League can be.

Yesterday, Activision actually released a statement on the matter. They did not refute any of the specifics of the original ESPN, but warned against taking ‘anonymous sources’ too seriously. It left me with the impression that there is some substance to the report, and I think this confirms my thesis that the game companies may not have the last word in the upcoming industry debate about revenue sharing and the economics of eSports.

As I said, the latest developments cut right to the heart of my analysis of the industry. There is a lot of change still to come to eSports.