Overwatch League faces uphill battle to profitability - Pachter

Activision Blizzard's upcoming Overwatch League is by all accounts ambitious, but there's some disagreement among industry watchers as to just how fully the esports endeavor will realize those ambitions. Michael Pachter has his doubts, as the Wedbush analyst today released a note to investors saying, "While we think esports has great revenue potential, we are skeptical that the Overwatch League will achieve much success."

Pachter then presented a list of issues that could mute the Overwatch League's ultimate benefit to Activision Blizzard, starting with the game itself.

"In our view, Overwatch is difficult to watch, and its pay wall (the game's starting price is $40 on PC) limits its addressable market significantly, especially compared to free-to-play leaders League of Legends, Dota 2 and Counter-Strike: Global Offensive."

Despite its popularity, Overwatch boasts a global player base of 30 million, compared to League of Legends' 100 million active players as of last September (and 500 million lifetime). As for it being difficult to watch, Pachter noted that the game's frenetic six-on-six first-person shooter action and diversity of character abilities make it less approachable for newcomers who benefit from League of Legends' top-down view or Counter-Strike's straight-forward gameplay concept, where players who die are out of the match for good.

Pachter also said Wedbush believes "investors are overly optimistic about the revenue and profit potential for esports," saying teams will need considerable budgets for a roster of up to 10 players with salaries reaching six figures (and potentially some in the seven-figure range) and proper support expenses for housing, trainers, meals and travel on top of that. And that's only if the league is allowed to implement the sort of salary cap constraints traditional pro sports leagues have been allowed.

"Unlike traditional sports, which are provided an antitrust exemption in the US, it is not clear that the OWL will be able to enforce its plans to draft players and limit salaries paid by team owners," Pachter said. "The major sports leagues in the US are allowed to 'collude' with one another to some extent in order to limit player salaries; it is not clear that OWL will be subject to such an exemption, suggesting to us that a determined owner with a large pocketbook may be able to capture the world's best players by guaranteeing large salaries. In particular, it is not clear to us that the international OWL teams in China and Korea will be subject to US laws whatsoever, and it is not clear that without an exemption, Activision Blizzard will be legally permitted to regulate the salaries (and soft salary caps) it intends to enforce with its league."

Pachter also expects prize pools to wipe out much of the earnings potential of running live events (for example, a $2 million prize pool would soak up the gate from a 20,000-seat arena sold out at $100 per ticket), leaving much of the earnings potential down to concessions, merchandise sales, sponsorships, and advertising.

"The 'problem' with monetization through advertising is overcoming the huge first-mover advantage owned by Amazon's Twitch service," Pachter said. "Twitch is the ESPN of esports, and we estimate that Twitch captures over 50% of all esports eyeballs. In order for the OWL to develop its own audience, it must attract viewers who currently spend the bulk of their viewing time on Twitch. We do not believe that this will be an easy obstacle to overcome."

Activision Blizzard already owns its own streaming network in MLG.tv, but it has signed exclusive third-party streaming rights for many of its Blizzard games to Twitch through next year.