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5 September 2019

MTG esports gambit pays off as China’s Huya buys $30m stake

Sweden’s Modern Times Group (MTG) has bolstered its global esports ambitions by striking a deal with Chinese streamer Huya involving an exchange of equity with plans to create worldwide brands and competitions. The move in which Huya takes a $30 million minority stake in MTG’s esports company ESL (formerly Electronic Sports League), also known as Turtle Entertainment, vindicates MTG’s bold strategy in 2015 to switch focus from pay TV to esports.

The acquisition then of ESL was followed eventually by divestment of the larger and more profitable media business into Nordic Entertainment, which encompasses MTG’s pay TV activities as well as its Viaplay streaming service, which have been listed separately since March 2019.

Nordic Entertainment is on course for almost $1.6 billion revenues in 2019, at least four times what MTG will make from esports, which is barely yet profitable for the company. But MTG has been taking a long view and clearly investors agree that the Huya stake greatly enhances prospects as the company’s share price shot up 25% on the news. That view is predicated largely on the access MTG gains to the world’s fastest growing esports market, whose total revenues will rise over 7 times from $165 million in 2018 to $1.31 billion in 2024, according to the recent report entitled “Esports on verge of hypergrowth to $5bn plus gambling Revenue Forecast to 2024” from our research arm Rethink TV.

Revenues from media rights in China will reach $407 million by 2024 while associated advertising will generate $479 million by then, more than any other region including North America, Europe and the rest of Asia Pacific.

MTG’s thesis was that although its media and pay TV business was profitable its growth prospects were poor and the company lacked resources to expand significantly beyond its Nordic base. Esports on the other hand had prospects of rapid growth and MTG hoped would reward early movers into the field, as well as offering lower barriers to global penetration.

To a large extent the esports field has emerged in the form of regional silos that are now being connected up, although still with a dichotomy between China and the rest of the world. MTG and Huya have come together in large part out of belief that esports is on course to become a truly global “sport” in its own right to a greater extent than most traditional sports. Even association football is still relatively niche in the US and to an extent Canada, to the extent that it is still referred to as soccer there to distinguish it from the much more popular American Football. The initial focus of the deal is on facilitating expansion of ESL’s own offering in the Chinese market over Huya’s platform.

While Huya is acquiring just over 7% of ESL at a valuation of $425 million, MTG is at the same time issuing new shares worth $22 million to fund that expansion and its pro rata part of the new joint venture company. Huya is particularly keen to establish ESL’s Pro League in China as that has become one of the leading esports leagues almost everywhere else, with 16 teams in Europe, 16 in the Americas, 8 in Asia, and 8 in Oceania.

The deal is timely for both parties coming when esports has risen in public consciousness after several high-profile events. It also coincides with growing investment in China both from the government and large esports companies. For example, the Pudong New Area Government announced recently that it would support ChinaJoy, the largest gaming and digital entertainment exhibition held in China, to create a leading international platform in the industry. The government also announced intentions to upgrade the Mercedes-Benz Arena, the Shanghai Oriental Sports Centre, the Yuanshen Sports Centre, and the Shanghai Peral River Creative Centre to meet the rising standards of iconic international venues.

This is part of a Chinese government investment of 5 billion RMB ($800 million) over the next three years to support the field, including subsidies for esports organizations, companies, venues, clubs, streaming platforms, event organizers, and events.

Among private investments, NetEase, owner of Overwatch League franchise Shanghai Dragons, announced plans to invest around $900 million to build the NetEase Esports Park in Shanghai. The park will provide facilities for esports practitioners to research and develop products, establish teams, train esports talent and build further venues.

In fact, Huya has already tapped western esports organizers or content providers, having in June 2019 signed a deal with competitive esports organization Team Liquid, one of the world’s most valuable esports teams. This gives Huya a leg up into the North American esports market, which will still just be the world’s largest by 2024 generating total revenues then of $1.57 billion according to the Rethink TV report. But this is a one-year partnership where Team Liquid players will stream on 19 different channels on Huya in China, featuring popular games like Apex Legends and Riot Games’ League of Legends.

Huya is sometimes called the “Twitch of China,” in reference to Amazon’s platform dominating esports streaming in other regions. However, that analogy is misleading because while Twitch dominates esports streaming in Europe and North America with about 70% by unique viewers, Huya is actually slightly behind archrival Douyu in China, according to Rethink TV.

Also misleading is MTG’s own claim to be the world’s largest esports company globally, which is some distance off the mark. It is probably the biggest independent esports company in Europe but its total esports revenues are exceeded by various players such as Nintendo that play in the wider gaming field, even if we do not count China.