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Activision’s YouTube Moment

In January, 2016 Activision purchased MLG for $46M and it's looking like a great move.
Activision_MLG

On January 4th, 2016 Activision confirmed that it had acquired the assets of Major League Gaming (MLG) for a reported $46M. The acquisition, which was covered by both the Times and WSJ, effectively dissolves MLG as a company while absorbing its production and employees1. The strange quirk here is that the acquisition actually represents a 31% down round for MLG, which was last valued at $67 million according to the Wall Street Journal. The reason this is of note is that eSports, and in particular the broadcast portion of the industry, is ascendant.

But that’s not what I want to focus on here; what I believe is more interesting is the parallel between Activision’s acquisition of MLG and Google’s acquisition of YouTube in 2006 (and to a lesser extent Amazon’s 2013 acquisition of Twitch).

First, let’s rewind a decade and put the YouTube acquisition in context. At the time of the acquisition Google:

  • Had a market capitalization of roughly $127 billion v. $497 billion today;
  • Generated net income of $3 billion v. $14.5 billion in 2014; and
  • Had total assets of $18.5 billion v. $131 billion today

The announced purchase price for YouTube was $1.5 billion and thus represented 1.3% of Google’s market cap, 54% of net income, and 9% of total assets. With eye-popping numbers like these it’s not surprising that, at the time the deal, Google was attacked as paying too much for too little. What’s more, many questioned the board’s (and Eric Schmidt’s) business judgement. Of course over time the naysayers would be proved wrong but that’s beside the point.

Comparing the same metrics for Activision shows that the MLG acquisition represents 0.2% of market cap, 5% of net income, and 0.3% of total assets. Not exactly bet-the-farm numbers but viewed from a maturity perspective Activision’s purchase is a close parallel to Google’s purchase of YouTube.

Ahead of the Curve

Founded in 2002, MLG was ahead of its time in several ways. First, it operated for at least 3 years before online video sites like YouTube allowed gamers to build a community of their own. Second, the firm launched ahead of Sony and Microsoft making online, interactive gameplay common to their platforms. And lastly, the rise of freemium games like League of Legends has only served to increase the total number of gamers and thus total potential viewership. Since MLG launched prior to being able to ride any of these trends I’d argue that they were truly ahead of the times.

As a side note, the rise of games like League of Legends is particularly important to the development of eSports overall because they are being treated by their developers as traditional sport. I think this idea is neatly summed up by what an executive at Riot Games told me a few months ago: “[W]e are working to make League of Legends a multi-generational game like football or basketball. That means the rules will remain the same and that’s reflected in the care we take to changing something as simple as the color of trees in the game.”

However, MLG struggled to monetize its gaming content and thus couldn’t gain significant scale. Over the last five years, CEO Sundance DiGiovanni successfully launched a streaming platform and was gearing up to launch a set of original programming. Because of MLG’s inherent niche focus (vs. YouTube, for example) it wasn’t ever going to gain the same type of valuation as YouTube, even if it had a similar value proposition.

All of this is to say that MLG, in the grand scheme of OTT eSports network development, is still an infant. And that being the case, I believe MLG will be to Activision what YouTube was to Google.

Dr. Frankenstein’s Monster

Activision Blizzard Media Networks, which was initially launched with the assets of IGN’s Pro League, is now being propelled forward with the assets of MLG. Tying these together into a coherent strategy – a task not unlike Dr. Frankenstein’s – won’t be easy. However, if we step back and consider the context the monster becomes a little more defined.

Specifically, the acquisition dovetails well with Blizzard’s recent launch into film making by introducing an owned-network capable of two things. One, acting as an outlet for additional original programming (i.e. no need to license content to fill airtime). And two, offering advertising in a market where advertisers are can reach a hard-to-reach audience. This is critical to building the business side of the sport – something that, in an earlier piece, I outlined as a vital in how ESPN built its network.

But what remains to be seen is how Activision ties together game development (IP creation), retail selling, and game support while leveraging it’s OTT play in a way that increases the lifetime value of each game player and attracts audiences worthy of premium CPMs. YouTube did this successfully with the introduction of ad-supported content, which fed into Google’s main business of gathering data on individual preferences. Activision faces a tougher challenge, but with built-in IP and a robust distribution outlet (MLG) the path forward seems brightly lit and exciting. Game on.

Notes:

[1] The press release stated that certain events along with MLG.tv will retain the MLG name


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