RockWater 2020 Predictions
1. The eSport-ification of Traditional Sports Will Accelerate
Esports is growing at an incredible clip. Newzoo forecasts 2019 esports revenues of $1.1bn, growing to nearly $2bn by 2022, and forecasts total esports viewers to be 557mm by 2021 vs 335mm in 2017.
There are many factors driving esports market growth (digitally native IP, gameplay relatability, Internet connectivity, mobile phone adoption) though one factor in particular that must be heeded by traditional sports broadcasters is esports’ hyper-engaging features re content and community interactivity.
In 2020, the majority of OTT sports broadcasters will start showcasing (or at least investing in) interactive technology and UX that will allow them to cultivate their next generation of fans.
Planned tactics will include:
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Enhanced Personalization: Allowing viewers to select their preferred camera angle and announcers, track players of interest and personalize graphical and statistical overlays (and maybe even ‘skin’ teams in their favorite uniforms!). Fun fact: a lot of esports fans’ viewing habits stem from wanting to learn and optimize their own gameplay…will traditional sports viewers use personalization tech to optimize the game ‘story’, or might they exploit it for learning and instruction? We believe it will be the former due to lack of gameplay relatability vs that of esports. Therefore, a challenge could arise in that traditional sports viewers may not be the best programmers. This anecdote from the finale of the Counter-Strike: Global Offensive tournament explains how hard it is to program a premier event with a vast amount of camera options. At the least, we’ll be sure basketballs fans won’t opt for this angle.
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Gamification: Rewarding viewers for interacting with the stream (e.g. gameplay predictions like ‘Who will score the next touchdown?’). Viewers will also be able to test their knowledge against other fans (e.g. trivia), allowing them to score points, rank on a leaderboard and even win prizes without leaving the broadcast. Of note, Amazon’s Twitch has already experimenting with quarterly game predictions and fan leader boards for its Thursday Night Football forecasts, a definitive inspiration for many other traditional sports streamers.
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Social Interactivity: Driving fandom around teams and social engagement among fans by encouraging viewers to cheer and react to the game using team-specific Bits (virtual currency that enables mini donations by viewers) and Emotes (small pictorial glyphs that fans pepper into text) inside a chat window. Streamers will reward this engagement by allowing participants to unlock special Bits and Emotes used to increase friendly competition within the chat (if any readers have an an updated estimate on the total Twitch Bits ‘cheering’ revenue for Blizzard’s Overwatch, please share with us. The most recent estimates we see are in the six figures back to 2018…it must be many multiples of that by now).
2. The Development of League Infrastructure Will Help eSports Close The Monetization Gap
As traditional sports become more similar to esports, esports will also begin to mirror their traditional peers. Although esports attract massive viewership (557mm viewers estimated by 2021), the new leagues fail to monetize their fan bases as effectively compared to traditional leagues (esports earn $1 per viewer per season, whereas the NFL earns $20 per viewer per season). This monetization gap will narrow over time as video game publishers and other esports-organizing entities continue to develop the league-level infrastructure typified by traditional sports.
This development will result in:
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More Media Rights Revenue: Game publishers and IP-owners will build out sophisticated licensing departments, including initiatives to power collective bargaining leverage on behalf of teams. As a result, esports leagues will execute landmark digital and linear live-rights deals with distribution platforms and networks, which will help close the significant monetization gap between esports and traditional leagues (the average major US pro sports league generates 37% of its revenue from media rights, while esports media rights currently account for only 14% of revenue). These efforts will build upon early deals, like that in January 2018 when Twitch paid $90mm to Activision Blizzard for the English, Korean and French streaming rights to season 1 and 2 of the Overwatch League.
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Increased Localization: While traditional sports teams strive to transcend regionality, esports teams will increasingly invest in local audiences and the fan ‘stickyness’ generated by hometown pride. In traditional sports, localization cultivates loyal and highly engaged multi-generational fan bases both in-market and beyond (e.g. migratory fans). In turn, esports teams will realize a significant monetization opportunity that comes with regional identity. This will include hometown arena ticket sales (so yes, there will be a build-out of more arenas / partnering with traditional sports teams who have arenas), home venue concessions, merch to home fans and local media rights. Localization will be accelerated as more traditional sports teams (with local resources like stadiums and RSN relationships) begin to own more esports teams – NBA teams have been very aggressive esports acquirers, and Philadelphia sports and venue juggernaut Comcast Spectacor has also made an esports acquisition. Of note, the increased adoption of franchising models by esports leagues make professional sports teams even more likely esports team acquirers (and franchise founders), since professional teams are well versed at navigating and monetizing the franchise business model.
3. Quibi Capital Will Dry Up Qui-ckly, But Its Studio (Not Financial) Investors Will Still See a Positive ROI
Quibi is leveraging its prestigious Hollywood DNA (and its $1.4bn in funding) to acquire a premium slate of video programming, spending up to $150,000 per minute across 7,000 pieces of content. This premium content investment aligns with other major streamer bets, as Netflix, Amazon, and Disney+ have demonstrated that buzzworthy original content can successfully bring users behind a paywall. (Sidenote: of this peer group, Disney represents the new streamer guard, and has impressively generated 41mm sign-ups just 60 days post launch. This success builds off one of the highest episodic TV budgets ever…and of course, an incredible Q4 marketing push estimated at $250mm+).
Between A-List celebrities with loyal fan bases (like Chrissy Teigen, Idris Elba, Zac Efron, and Jennifer Lopez), and prestigious Oscar-winning filmmakers (Steven Spielberg, Guillermo Del Toro, and Antoine Fuqua), Quibi is betting that its productions with Hollywood’s finest can generate enough buzz – critically and culturally – to achieve customer acquisition at scale. Given the fact that Quibi has already sold two thirds of its $150mm in ad inventory (we assume this means marketer commitments IF Quibi can deliver the promised viewership scale, as Vessel had similar posturing back in the day), it seems like some of the marketplace agrees.
However, while buzzworthy new shows like Netflix’s “Stranger Things” and Disney+’s “The Mandalorian” can successfully help bring users behind a paywall, classic licensed shows like “The Office”, “Friends”, and “Seinfeld” are critical to user retention. This last point explains why the rights to these shows were recently acquired by large SVOD platforms for $500mm (NBCU’s Peacock), $425mm (Warner Media’s HBO Max), and $500mm (Netflix’s Netflix), respectively.
We believe Quibi will produce some breakout hits for the 7am-7pm daytime viewing window, and it will deliver meaningful innovation in mobile-optimized product and content (e.g. ‘Turntable’ viewing, novel development and production processes). We also believe Quibi will gain an exciting distribution deal (a la Disney / Verizon). We predict sign-ups will be below company expectations, but will be above the Hollywood ‘whisper numbers‘….signaling there may be a ‘there there’ to Katzenberg’s quick bite, lighter fare hypothesis.
But, Quibi will not have enough mobile-optimized library content for user retention over the next couple years, and will have incredibly high churn. Slower than expected sign ups and lack of customer stickyness will scare off follow-on investment, and Quibi’s death spiral will commence. But alas, disaster will be avoided when Katzenberg, the ultimate Hollywood salesman, finds an international buyer for Qubi’s team / tech / partnerships / JK affiliation. As a result, Quibi’s studio investors (a long list including Disney, WarnerMedia, Liberty Global, MGM, Fox, more) will fully recoup their invested capital via a mix of XX cents on the dollar sale proceeds and new output deals with the new acquirer (financial investors, who we believe are writing the biggest checks and who fortunately don’t sell content, won’t fare as well).
This leads to a quick reflection on Katzenberg…
Companies can realize investor liquidity three different ways…a sustainable business model that cash flows, an exit with good market timing, or both. Without offering a POV on ability to build sustainable business models, we can definitively say that Katzenberg’s sales orchestration and market timing is exceptional…just look at the $650mm valuation for AwesomenessTV when Verizon invested in 2016 (the < $25mm firesale to Viacom was well after Katzenberg’s departure), and the $3.8bn Comcast NBCU paid for DreamWorks Animation when Katzenberg was at the helm. JK is a Hollywood force of nature even when internal and external forces are working against him, and explains why everyone refuses to bet against him…
We believe Katzenberg will face his greatest challenge yet with Quibi (it feels like the SVOD competitive environment exponentially increases by the day), so it will will be fun to watch the Hollywood mogul go for the half decade hat trick 😉
4. 5G Will Power an Uptick in Game Publisher M&A…and Eventually, AGOD
Although existing cloud connectivity can support video and music streaming at scale, video games require enhanced connectivity to enable the seamless, latency-free gameplay that users have come to expect. 2020’s expansion of 5G connectivity will finally level up cloud-based gameplay to that of its gaming console peers and drive ‘game-changing’ user activity. Industry research indicates there will be a 57% CAGR for online gaming traffic by 2021, and that by 2024 there will be more than 42mm active cloud gaming users, resulting in $4.5bn of new revenue.
As the explosion of 5G powers the rise of cloud gaming, business models in the gaming industry will evolve along the same trajectory that we’ve observed in OTT video. Cloud gaming will decouple games from consoles, rendering physical game disks as outdated as DVDs and CDs. And, as we saw in film / TV / music, subscription services will emerge as the predominant gaming model.
Consumers will want to experience games the same way they experience TV and films – instant access to a breadth of new content and old favorites, seamlessly across all devices. To this end, the race to be “The Netflix of Gaming” has actually already begun (the concept is nearly a decade old).
Playstation (Sony), XBox (Microsoft), Nintendo, Stadia (Google), and EA have all launched subscription gaming services. Further, Apple recently launched Arcade, Amazon is likely launching one later this year, and Square Enix will likely also enter the race. With similar underlying dynamics to the OTT ‘streaming wars’, all game studios will have to decide whether to launch their own streaming services (cannibalize their existing businesses and bet on the long term win via customer proximity) or license their libraries to other services (generate near term cash but risk being commoditized in the gaming supply chain). As we’ve observed in the SVOD space, the stakes are high and making a decision with buy-in from investors and company leadership is just one of many tough steps…successful execution against said strategy is a whole other beast (and there is only one Bob Iger).
In 2020 ambitious subscription platforms will pursue vertical integration by acquiring game IP and studios. This will build off 2019 momentum, as there was $3.8bn in gaming investment and M&A in 1H 2019 alone – Tencent (as part of a Luxembourg consortium) recently acquired the majority share of Clash of Clans game developer Supercell at a valuation of $10.2bn, and Microsoft has spent millions on acquiring game studios in an attempt to fill out its Game Pass catalog. Just like in the video streaming wars, companies will aggressively combine to exploit the near term customer land grab opportunity since there will be a massive shakeout after the dust has settled in a few years time. The few winners will reap the prized majority market share (scraps will be available for niche operators, but market participants with 9-10 figure investment bets aren’t in pursuit of small scale wins).
And where there are premium subscriptions, opportunistic marketers will be circling…we therefore look forward to the scaled rise of AGOD (perhaps a bit after 2020)!
With advertisers wanting to participate in premium content environments with scaled audience, increasing user subscription fatigue, and an incredibly high AND growing volume of premium scripted narrative within game IP (some estimate that there are more gaming content hours than that of traditional entertainment), streaming gaming will be an exciting new frontier for Madison ave.
5. How Smart Speakers Will Cause Podcast Shrinkage via Audio Microcasts, and Who Will Win Big?
It’s estimated that over 100mm smart speakers were sold in 2019, increasing the total global install base to over 200mm. By 2021, there will be more smart speakers than tablets.
As smart speakers proliferate and there is increased innovation in audio channel hardware and UX, a new opportunity to reach and engage audiences is rapidly growing in the form of ‘microcasts’, or short-form podcasts. Microcasts are high-intent and high-focus content formats that cater to routine home or workplace user activity, with format length < 7-10 minutes.
Compelling microcast content doesn’t require premium production processes nor budget, enabling a much more rapid and frequent publishing schedule, which translates to greater user engagement. These dynamics drove incredibly rapid user adoption of Instagram Stories, and we believe setup microcasts to be a lucrative new audience building and monetization opportunity for publishers and brands.
However, programming for smart speakers is not as simple as replicating traditional podcast feeds for a new device, and requires insight into how the audience can interact with, and derive value from, the device throughout the day.
In 2020, brands and creators will meaningfully invest in microcast programming, leading to short-form audio innovation in the following ways:
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Routine-based programming (morning horoscopes, sports summaries, bedtime meditation).
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Morning / nightly news wrap-ups (we love the 15 minute version of Robinhood’s Snacks Daily, but would always welcome innovation here from the brilliant minds of creators Jack and Nick).
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Instructional / advice programming; i.e. an audio version of the popular ‘how-to’ Youtube format, as smart speakers are often in rooms where people are performing DIY tasks (e.g. imagine cooking / crafting in the kitchen with Joanna Gaines from Magnolia, home improvement in the garage with the Property Brothers, cosmetics in the bathroom with Kylie Jenner).
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Interactive content (call-and-response party games, instructional and responsive cooking shows).
So who will be the leading pioneers and big winners of the microcast movement?
Looking beyond the brands and publishers, we look to two of the audio juggernauts.
Spotify is a safe bet, especially considering its understanding of contextualized audio (as evidenced by its focus on playlists that are based on situations rather than genres, like its Daily Drive initiative). Further, Spotify, thanks to its 2019 M&A spending spree, can pull levers across the entire microcast user experience and supply chain (from tech / UX and user data to premium and UGC content) to learn, iterate and optimize for incredible future microcast growth.
However, we at RockWater believe that Amazon will be an incredibly strong contender to lead this space. The company clearly sees the value in short form audio for its user base, as highlighted by the launch a few years back of Alexa ‘flash briefings’. Further, we know that Amazon has the will and wherewithal to make massive multi-billion dollar content bets that service much broader company ambitions (i.e. Amazon Prime Video in support of Prime Channels, Amazon.com, and more).
By enabling and producing more innovative audio programming built around the growing functionality and use cases of its Alexa devices (e.g. voice-enabled commerce and search, AI, skills, more), Amazon could use microcasts to make its smart speakers more relevant and useful to an even wider range of consumers…and thus make the Amazon-verse a more broadly adopted, stickier and highly monetizeable user ecosystem.
6. The Evolution of Food Media Will Catalyze ‘Pivot to Commerce’ 2.0
Many next-generation media brands (and their investors) are unsatisfied by business models built solely on advertising revenue, and have therefore been diversifying into direct-to-consumer commerce sales. Of this cohort, food-centric lifestyle brands represent a vertical uniquely conducive to commerce success. In 2020, we expect 8-9 figure rounds of growth capital will aggressively flow towards some of these brands to enable the next step of their commerce evolution.
However, ‘pivoting to commerce’ is a broad term that oversimplifies both the journey and the destination.
The past few years of said pivot have been primarily defined by learning; starting with high volume, low risk experimentation in order to prove food media’s ability to convert viewers into buyers. The standard business model here is affiliate links and referral programs. Then, within the past 18 months, select publishers with higher value brands / IP have initiated more meaningful commerce bets.
Specifically, Buzzfeed’s Tasty partnered with Walmart on 90 branded kitchenware SKUs in 2018 that have sold more than 5mm units to date. Similarly, Complex’s Hot Ones franchise partnered with hot sauce purveyor Heatonist to sell over $7mm in custom branded hot sauces in 2018, and Barstool Sports partnered with the pizza delivery app Slice to power its “One Bite” pizza review app (over 175,000 downloads and 10,000 pizza deliveries ordered within one month of launch). Other examples of more meaningful D2C evolution include Time Out’s six food halls around the world (by the end of 2020, food halls will account for 60% of Time Out’s total revenues) and the New York Times Food Festival (which had 54,000 attendees over two days).
We at RockWater assert that these data points reflect only partial commerce / D2C wins, and do not yet reflect the material profitability transformation that some (definitely not all) of these media brands can achieve. Therefore, despite many investors’ current aversion to digital publishers, opportunistic funds with a keen understanding of IP market value, purchase conversion potential and leadership quality will make targeted strikes and put some real capital to work.
Some recent data points stand out from one of our favorite media investors, The Chernin Group.
In September 2019 Food52 sold a majority stake to TCG for $83mm after 11 years of deliberate and focused commerce evolution. Unlike most media brands that only offer affiliate links or sell products through brand-licensing partnerships, Food52 is the ‘merchant of record’ on all transactions, and has developed its own line of original private label products (called “Five Two”) that are exclusively available through its online marketplace. Store exclusivity is part of Food52’s Amazon defense strategy, with 50% of the 3,000 products on Food52’s platform exclusive to said marketplace, which in aggregate generated $30mm of 2018 sales (75% of Food52’s total revenues). Unlike many of the more de-risked and turnkey commerce models pursued by many of its competitors, Food52 has created a unique path-to-purchase experience that it fully controls.
We believe the sequencing of Food52’s financial and business model over the past 11 years signals how the rest of the media-to-commerce marketplace will begin evolve:
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2008 – Blog launch
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2011 – $750k seed round
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2012 – Tested commerce via affiliate fees
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2012 – $2.3mm Series A
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2013 – Online marketplace
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2014 – $6mm Series A
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2017 – $4.3mm Series B
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2018 – Surveyed the F52 community for product development ideas → Made first product line via crowdsourced information (Food52 now derives 75% of its revenue from sources other than advertising)
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2019 – Sold a majority stake to The Chernin Group for $83mm.
(NOTE: in October 2019, and within a month of the Food52 investment, TCG also put $50mm into MeatEater for an apparel brand acquisition in support of a deeper deep push into commerce monetization).
Similarly to how marketers have begun launching in-house content studios rather than going through agency or production partners, in 2020 digital media brands (especially in the lucrative food space) will employ a similar approach for commerce. The goal will be to have more control in defining and customizing product development, supply chain and user purchase pathways…and in turn better delight for (and monetization of) their audiences.
It will be a meaningful and transformative step that will land us in ‘Pivot to Commerce’ 2.0….and maybe, just maybe, some digital business model sustainability 😉
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