eSports: Quite Possibly the Next Big Thing in Media/Entertainment

Relatively unknown outside of video game circles, eSports is one of the fastest
growing segments of entertainment and media, set to jump from a few hundred million
dollars this year to roughly $1 billion in 2018. We see significant opportunity for monetization
in tournaments, advertising/sponsorship, broadcasting, fantasy/wagering. In this deep-dive
industry primer, we provide a broad overview of eSports, with the primary beneficiaries, in
our view, being key game publishers (e.g. ATVI, EA, TTWO), hardware platforms (MSFT,
SNE) and online streaming sites (AMZN, GOOG).
The biggest media and sports growth opportunity you’ve never heard of. We believe
that eSports is on the cusp of reaching mainstream adoption, reaching 200 million active
participants as early as next year, with popular video game titles such as Call of Duty
launching with expanded eSports functionality, and with game publishers committing
significant resources to build out eSports infrastructure. As one gauge of the burgeoning
opportunities in eSports, we note that venture funding of eSports companies over the past
18 months (approximately $175 million) exceeds all prior funding to-date. While game
developers/publishers such as Activision, EA, Take Two and UbiSoft are natural
beneficiaries of the eSports trend, we note there are also significant opportunities for online
streaming platforms (Amazon, Google), platform holders (Microsoft, Sony) and high-end
PC/component manufacturers.
eSports combines some of the best of sports and media. From a social and competitive
perspective, eSports shares much in common with traditional sports: social interaction,
competition, thrill of victory, interest in spectating/watching others, learning how to play and
fantasy. Importantly, we also see multiple potential incremental revenue streams coming
from eSports, including: online and in-person tournaments, advertising, sponsorship,
broadcast rights, royalties/rev. shares, fantasy leagues and wagering.
Moving from engagement tool to monetization tool. eSports is still primarily a tool to help
engage and retain core gamers. However, we expect this to change quickly, with publishers
focusing as much on incremental revenue opportunities and increasing ARPU. Importantly,
video games are one of the only forms of media that is generating higher rates of
monetization with online disruption, rather than declining rates (e.g. print, cinema, music,
video).
Potential to drive P/E multiple expansion. While investors remain largely focused on the
pace of growth in the console cycle, we believe this misses two key growth opportunities in
1) back-end online monetization; and 2) eSports. We believe that significant growth in either
or both of these areas would drive earnings multiples in the sector another leg higher.
INDUSTRY UPDATE
Prices as of 10/01/2015
Ticker Price
Mkt Cap
(mil)
Rating Risk
ATVI $31.46 $23,595 O A
EA $66.49 $21,077 O A
TTWO $29.39 $3,209 N A
Baird covered companies
October 2, 2015 Baird Equity Research
Technology & Services
Interactive Entertainment
eSports: Potentially the Next Big Thing in Media & Entertainment
Colin Sebastian
csebastian@rwbaird.com
415.364.3350
Benjamin C. Gaither, CFA
bgaither@rwbaird.com
415.364.3318
Andrew Lee
awlee@rwbaird.com
415.364.3344
[Please refer to Appendix
- Important Disclosures
and Analyst Certification]

Details
What in the World is eSports?
In this deep dive industry primer, we provide a broad overview of eSports, a fast-growing phenomenon
that has its roots in core gaming circles, but importantly, is starting to gain traction among mainstream
gamers. In short, eSports adds many of the features and content found in traditional sports to the video
game sphere, and is the gaming equivalent of organized and professional sports leagues. In fact, from a
social and competitive perspective, eSports shares much in common with traditional sports: social
interaction, competition, thrill of victory, interest in spectating/watching others, learning how to play, etc.
From a monetization perspective, eSports includes hosting amateur and professional games and
tournaments (both online and offline), spectating, sponsorship and advertising, broadcasting
rights/revenue share, fantasy and wagering. While still a nascent industry, eSports viewership is already
significant, with some estimates exceeding 200 million annual watchers, and over 100 million eSports
“enthusiasts”. We note that this “enthusiast” demographic represents less than 7% of the approximately
1.7 billion global gamers, representative of what is still a large market opportunity. As an audience,
eSports viewers are highly engaged, and time spent watching eSports is expected to expand nearly
three-fold to 6.6 billion hours (~26 hours/viewer) by 2018, according to IHS.
Figure 1: eSports links video games, sports, and fantasy/wagering
October 2, 2015 | Interactive Entertainment
2Robert W. Baird & Co.

Source: R.W. Baird
Figure 2: Expect strong rise in eSports playing/viewing
0
50
100
150
200
250
300
350
400
2014A 2015E 2016E 2017E 2018E 2019E 2020E
Viewers(Millions)
Source: R.W. Baird estimates
Massive incremental revenue opportunity for video game developers and content distributors .
We believe that eSports is on the cusp of rapid user adoption and exponential growth with new revenue
streams for video game developers, publishers, and content distributors – in addition to the “prize
money” awarded to gamers themselves. Overall, we estimate that eSports is on pace to generate nearly
$300 million in revenues worldwide this year (including up to $100 million in North America and Europe),
and is set to reach $1 billion in revenues by 2018, and reach nearly $2 billion in annual revenues by
2020 (46% CAGR) – see Figure 14. We assume that the number of eSports viewers will increase more
than 20% annually over the next 4-5 years, with monetization (ARPU) more than doubling. Importantly,
we believe that our estimates could prove conservative; depending on how aggressively game
developers build eSports features into popular video games. Eventually, in our view, most new video
games will offer some features of eSports; but for now, companies that appear to be best-positioned to
capture outsized revenue streams from eSports include Activision Blizzard (Call of Duty, Hearthstone,
Starcraft), Valve (Dota 2, Counter-Strike) and Riot Games (League of Legends); while Amazon (Twitch)
and Google (YouTube) are already key viewing platforms. In addition, we note that platform holders
including Microsoft and Sony are tip-toeing into eSports with As one gauge of the burgeoning
opportunities in eSports, we note that venture funding of eSports companies over the past 18 months
(approximately $175 million) exceeds all prior funding to-date (see Figure 3).
Figure 3: eSports venture funding on the rise

$9 $10
$15
$1
$46
$18
$-
$21
$64
$35
$77
0
5
10
15
20
25
$-
$10
$20
$30
$40
$50
$60
$70
$80
$90
Millions
Funding (Left) Deals (Right)
Source: CB Insights
Brief History of eSports
The genesis of popularized eSports lies in Korea, and specifically the years following the Asian financial
crisis of 1997. During this time period, the South Korean government overhauled the country’s
telecommunications and internet infrastructure, creating an environment where Internet cafés, rather
than basketball courts, became the most popular hangouts for large numbers of young people. At the
same time, popular games such as Starcraft and Counter-Strike embraced organized game-play,
offering both online and in-person tournaments. Eventually, Korea also became the first major region to
offer regularly televised eSports via dedicated TV channels (e.g. OnGameNet and MBCGame). More
importantly, this also marked one of the first successful attempts to monetize eSport content via a
mainstream distribution channel. According to the Korea eSports Association, OnGameNet and
MBCGame generated $200 million in eSports revenues in 2007.
Figure 4: eSports competitive landscape

Source: R.W. Baird
Current State of the Market
Today, eSports are dominated by two primary categories of games: Multiplayer-online battle arenas
(MOBAs) and first-person shooters (FPS). League of Legends (Riot Games) is the most popular eSports
game in the world as measured by game-play, and reported that over 27 million people watched the
2014 LoL World Championship, which is more than the 2015 NBA Finals (19.9 million) and 2014 World
Series (15.8 million). Dota 2, another popular MOBA, recently hosted The International tournament,
which boasted a prize pool of over $18 million, including $6.6 million awarded to the first-place team. For
the most part, popular eSports games today are “free-to-play” and “free-to-watch”. As Figure 5 and 6
show below, eSports prize pools have grown exponentially in the last five years, and live attendance is
an increasingly popular pastime. More importantly, we note an increasing trend within developer circles
to bring eSport tournaments in-house (i.e., Riot, Valve, Activision), and correspondingly adding new
revenue streams through entry fees as well as valuable ad and sponsorship revenues. Longer-term, we
expect additional monetization through broadcast/viewing royalties, subscription revenue shares, fantasy
and wagering.
Figure 5: Rise of global tournaments driving larger prize pools

Source: eSports Earnings
Figure 6: League of Legends World Championship live attendance growth (2011-2014)
Source: Riot Games
eSports is a key marketing and user retention tool. While eSports viewership continues to grow at an
impressive rate, we note that most eSports ventures may not yet be reaching profitability on a
stand-alone basis, with much of the direct monetization potential likely to stem from new platform
initiatives. As such, eSports is still primarily a marketing, engagement, and retention tool, helping to
increase the longevity of games. Beginning next year, we expect this to change, with publishers focusing
as much on incremental revenue opportunities as they do user retention.
Figure 7: eSports: An increasingly well-known phenomenon

0
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100
2012 2013 2014 2015
Google Searches for "eSports"
League of Legends Championship
32M unique viewers League of Legends Championship
27M unique viewers
Source: Google Trends
Advertising and Sponsorships may be key to monetization. Overall, eSports viewers are young,
more educated, and better off financially than the population as a whole (Figure 8). According to MLG,
22% of eSport "enthusiasts" are considered "big spenders", in comparison to 8% of all gamers. We note
there remains significant opportunity for advertising in the eSports market, with most games providing
valuable access to an increasingly elusive young adult demographic (more specifically, 18-35 year-olds),
which are almost twice as likely to be “cord cutters” than the general population. According to Experian
Marketing, 13.5% of people in the 18-34 demographic have broadband, but no pay TV, in comparison to
approximately 7% of the U.S. population. George Woo, Intel’s Event Marketing Manager, has stated that
eSports enthusiasts are “web-savvy people who…do not watch TV, use ad block in their web browser,
and consume their entertainment almost entirely on-demand.” In response, Intel created the Intel
Extreme Masters, one of the premier gaming tournaments in the world, and Intel has stated that IEM
“has proven more than worth the spend.”
Figure 8: eSports viewers are a valuable advertising demographic

0%
10%
20%
30%
40%
50%
60%
Full-time Job High Income Bracket
E-sports Viewer Total Population
Source: Newzoo
Video streaming bringing eSports into the “mainstream”. In our view, the on-demand nature of
streaming platforms such as Twitch and YouTube Gaming are key drivers of eSports growth.
Live-streaming enabled major tournaments to reach the general public, and significantly extended reach
beyond live (in-person) events. Over time, we expect advertising dollars to follow as eSports hits key
inflection points in viewership. According to SuperData Research, gaming-related video content is
already a $3.8 billion industry, with the vast majority of revenues generated by advertising ($2.9 billion).
In 2014, Twitch (acquired by Amazon) recorded 100 million unique viewers per month (66% increase
from 60 million in 2013). Additionally, engagement is particularly impressive, with the average Twitch
viewer logging over 2.5 hours per day on the platform. However, we note that streaming platforms are
particularly regional, with Twitch being the most popular in North America and Europe, while Afreeca
and Douyu are the most popular in Asia. In the U.S., YouTube is the only major competitor to Twitch for
gaming video content; however, monetization remains low, as it is primarily on-demand, rather than live.
Nevertheless, we note there is potential for YouTube to usurp Twitch in the long-run as a destination for
gaming content, as YouTube gaming channels already generate over 3.5 billion views per month.
YouTube draws 72% of gaming video content viewers, while Twitch generates 43% of gaming video
content revenue, according to SuperData Research (Figure 10).
Figure 9: Twitch concurrent viewership continues to rise
Source: TwitchApps

Figure 10: Gaming video content revenue by platforms
36%
43%
6%
2%
5%
YouTube Twitch ESL Azubu MLG
Source: SuperData Research
Imagining the Future of eSports
New broadcast networks and fantasy sports increase engagement and monetization. With Turner
Broadcasting and video game developer Valve recently announcing a Counter-Strike Sports league to
be aired on TBS, we expect a further push of eSports content into mainstream broadcast media. For
example, there would be significant benefits to traditional cable and satellite companies in gaining
relevance and viewership among younger demographics by becoming the aggregators and distributors
of eSports content. We view this in parallel with the content also moving “over the top”. As mentioned
above, cable broadcasting of Starcraft in Korea generated $200 million in 2007 alone, and given the
increasing accessibility of eSports and the growing audience of highly engaged “enthusiasts,” eSports
programming monetization potential has increased materially. We also see potential for content (IP)
owners (e.g. video game publishers) to control their own distribution channels. According to Newzoo,
40% of all eSports viewers do not play any of the top eSports franchises, which draws a favorable
parallel to traditional sports and indicates eSports possesses significant commercial potential as a
“spectator sport.” We also note a growing interest in fantasy eSports. For comparison, the U.S. fantasy
sports market has over 56.8 million participants and is valued at roughly $20 billion annually, according
to the Fantasy Sports Trade Association. In our view, fantasy eSports has the potential to expand
eSports monetization meaningfully through additional marketing and increased user engagement, as
evidenced by Riot Games’ launch of an in-house fantasy League of Legends platform.
Figure 11: Number of fantasy sports players

Sources: FSTA, R.W. Baird
Daily Fantasy eSports is also beginning to gain meaningful traction, as evidenced by Fanduel’s
acquisition of AlphaDraft, a leading DFeS platform, and Draftking’s launch of an in-house DFeS platform.
According to Eiler’s Research, daily fantasy eSport sites will collect approximately $20 million in entry
fees from 600,000 active users in 2015. Drawing parallels to traditional sports, we believe DFeS has the
potential to materially expand monetization, as shown in Figure 12 below, the average player now
spends approximately $257 annual on daily fantasy sports (vs. $5 in 2012), which is also more than
$162 annual spend on traditional fantasy sports.
Figure 12: Number of fantasy sports players
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
2012 2015
Materials Daily Fantasy Sports Traditional Fantasy Sports
Source: FSTA

Revenue opportunity and biggest winners. In order to frame the revenue opportunity, we attempted
to estimate the revenue per fan each sport generates. We combined the revenues generated from
various professional sports leagues (>$50M revenue) with the estimated global fans for the respective
sport. Naturally, major sport leagues are monetizing significantly better than the nascent eSports market,
predominantly due to cable/broadcasting deals (Figure 13). According to Newzoo, the average eSports
“enthusiast” currently generates ~$2.
Figure 13: Revenue per fan of various sports ($ in Millions)
Sport Revenue* Fans (Ms) Revenue/ Fan
Football $11,335 400 $28
Basketball $5,077 400 $13
Baseball $10,315 500 $21
NASCAR $3,100 75 $41
eSports $192 101 $2
Sources: R.W. Baird, Company reports, Deloitte, Newzoo, Topend Sports
Off the heels of a strong 2015, we see meaningful opportunity for fan monetization to increase in 2016
due to an increasing number of catalysts. In terms of sizing the eSports opportunity, we assume that
growth will be driven by an increasing number of games that are eSports enabled, and a corresponding
increase in players and viewers; for example, the recently announced Call of Duty World League and
Turner’s Counter-Strike cable program. In addition, we expect a variety of new ways of monetizing
eSports, including more events, in-game content, advertising, sponsorships, fantasy and wagering.
Finally, we expect a broad increase in the number of points of distribution of eSports content, including
new media networks. While there are a number of independent “eSports” leagues and competitions
today, we believe it is very likely that at least some game publishers will decide to “in-source” or
“verticalize” eSports content, although there would be significant benefits in utilizing media distributors
(e.g. cable/satellite/OTT providers) to reach a broad (mainstream) viewer base.
Figure 14: eSports on pace to hit $1 billion in revenues by 2018
B ase Case 20 14A 2 015 E 2 016 E 2 017 E 2 018 E 2 019 E 2 020 E CA G R
World Population 7,266 7,349 7,433 7,515 7,597 7,678 7,758 1%
Y/Y Growth 1.2% 1.2% 1.1% 1.1% 1.1% 1.1% 1.0%
To tal N u m b er o f Ga m ers 1 ,77 5 1,9 84 2,2 30 2,4 80 2,6 59 2,8 41 2,9 48 9%
% of Population 24% 27% 30% 33% 35% 37% 38%
eSp o rts view ers 10 1 1 39 1 78 2 23 2 66 3 13 354 2 3%
% of Global Gamers 5.7% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0%
Y/Y Growth - 38% 28% 25% 19% 18% 13%
ARPU $1.90 $2.10 $2.50 $3.00 $3.75 $4.50 $5.25
eSp o rts R even u es $19 2 $2 92 $4 46 $6 70 $9 97 $ 1,4 06 $ 1,8 57 4 6%
Y/Y Growth 52% 53% 50% 49% 41% 32%
Sources: R.W. Baird, UN, Spil Games, SuperData Research, Newzoo
Bull/Bear Scenarios:
In our bull case, we assume that eSports viewer monetization will reach ~30% of the monetization of
major sports, while our base case assumes a steadier ramp. Overall, the simple point is, even with
relatively conservative assumptions on user growth and increased monetization, it is not difficult to
foresee eSports being a $1 billion industry by 2018.
Figure 15: eSport industry Bull/Bear case

B u ll Case 20 14A 2 015 E 2 016 E 2 017 E 2 018 E 2 019 E 2 020 E CA G R
eSp o rts view ers 10 1 1 39 1 78 2 23 2 66 3 13 354 2 3%
% of Global Gamers 5.7% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0%
Y/Y Growth - 38% 28% 25% 19% 18% 13%
ARPU $1.90 $2.10 $4.00 $6.00 $7.00 $8.00 $8.50
eSp o rts R even u es $19 2 $2 92 $7 14 $ 1,3 39 $ 1,8 61 $ 2,5 00 $ 3,0 07 5 8%
Y/Y Growth 52% 145% 88% 39% 34% 20%
B ea r Case 20 14A 2 015 E 2 016 E 2 017 E 2 018 E 2 019 E 2 020 E CA G R
eSp o rts view ers 10 1 1 39 1 78 2 23 2 66 3 13 354 2 3%
% of Global Gamers 5.7% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0%
Y/Y Growth - 38% 28% 25% 19% 18% 13%
ARPU $1.90 $2.10 $2.50 $2.75 $3.00 $3.25 $3.50
eSp o rts R even u es $19 2 $2 92 $4 46 $6 14 $7 98 $ 1,0 16 $ 1,2 38 3 6%
Y/Y Growth 52% 53% 38% 30% 27% 22%
Sources: R.W. Baird, UN, Spil Games, SuperData Research, Newzoo
Developer support an important leg of the eSports stool. Of the leading western game publishers,
we see Activision Blizzard as best leveraged to eSports growth for a number of reasons. When you look
at the history of eSports, the top games grew out of hyper-competitive grassroots community (Halo,
Super Smash Brothers); Activision Blizzard has a number of games with a large competitive community
(Call of Duty, Starcraft, Hearthstone), and increasingly appears to be developing games with competitive
design in mind (Overwatch releasing in 2016). However, looking back historically, the real inflection point
for an eSports game growth is when developers prioritize support for tournaments (i.e., Riot Games,
Valve). For example, Super Smash Brothers has been a staple in the eSports industry since its initial
release on Nintendo 64; however, Nintendo has done very little to support matches until hosting the
Super Smash Invitational at E3 this past year. With Nintendo’s support, the Super Smash Brothers
Invitational proceeded to break the all-time concurrent viewership record for a fighting game tournament.
As such, we believe that Activision’s future prospects in eSports are very positive, as the company
appears to be a few steps ahead of other publishers in eSport investments, as illustrated by the
company’s yearly world championships at Blizzcon, as well as the company’s previously mentioned Call
of Duty League. We also believe that Electronic Arts will eventually launch greater eSports features
within a number of its core franchises, even after ceasing support for EA Sports Arena last year.
Figure 16: Layers of eSports Monetization
78%
4%
7%
7%
5%
Broadcasting,
Advertising,
Sponsorships
Tickets
Fantasy
eSports/Wagering
Merchandise
Other Tournaments
Sources: R.W. Baird, SuperData Research

Appendix - Important Disclosures and Analyst Certification
Covered Companies Mentioned
All stock prices below are the October 1, 2015 closing price.
Activision Blizzard, Inc. (ATVI - $31.46 - Outperform)
Electronic Arts, Inc. (EA - $66.49 - Outperform)
Take-Two Interactive Software, Inc. (TTWO - $29.39 - Neutral)
(See recent research reports for more information)
Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
0
8
16
24
32
40
2013 2014 2015 2016
08/02/13
O:$19
02/07/14
O:$22
08/06/14
O:$26
05/07/15
O:$27
08/05/15
O:$30
09/22/15
O:$36
Rating and Price Target History for: Activision Blizzard, Inc. (ATVI) as of 10-02-2015
Created by BlueMatrix
Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
0
20
40
60
80
2013 2014 2015 2016
04/03/13
N:$19
07/24/13
N:$25
03/13/14
N:$33
05/07/14
O:$37
07/23/14
O:$43
10/29/14
O:$45
01/28/15
O:$56
05/06/15
O:$75
07/28/15
O:$80
Rating and Price Target History for: Electronic Arts, Inc. (EA) as of 10-02-2015

Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3
0
8
16
24
32
40
2013 2014 2015 2016
02/06/13
N:$13
05/14/13
N:$17
07/31/13
N:$19
05/14/14
N:$20
08/06/14
N:$21
10/30/14
N:$25
02/04/15
N:$34
05/19/15
N:$33
Rating and Price Target History for: Take-Two Interactive Software, Inc. (TTWO) as of 10-02-2015
1 Robert W. Baird & Co. Incorporated makes a market in the securities of ATVI, EA and TTWO.
10 Robert W. Baird & Co. Incorporated and/or its affiliates have been compensated by Electronic Arts, Inc. for non-investment
banking-securities related services in the past 12 months.
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