Is eSports, YouTube and gaming the future of entertainment?
Modern Times Group’s leadership certainly believes that this is where the growth will be. Following the decision to split MTG in two, CEO Jørgen Madsen Lindemann said that the move would create greater focus and flexibility and enable more growth, higher profits and increased shareholder value.
The ‘new’ MTG will comprise ‘eSports activities ESL, DreamHack and ESEA, online gaming units InnoGames and Kongregate, and digital video content units Zoomin.TV and Engage Digital Partners. It will also include minority holdings in Comosa and Bitkraft. The other part of the business, Nordic Entertainment Group, will comprise broadcasting, digital communication and content production activities.
MTG’s enthusiasm for the eSports, digital entertainment and gaming part of the business was clear from its statement on the split, with a promise that MTG would be “well funded” for growth while Nordic Entertainment Group is promised only an “appropriate capital structure” to deliver further expansion and shareholder return.
The new digital business areas that MTG has invested heavily in since creating MTGx in 2013 have certainly delivered higher growth rates than the traditional pay and free TV broadcast business. Last year MTGx delivered 37% organic revenue growth and became EBITDA profitable for the first time. According to MTG, the unit would have delivered positive EBITDA of SEK180 million (€18 million) on sales of SEK3.7 billion if InnoGames and Kongregate had been consolidated from the start of the year.
Nordic Entertainment meanwhile delivered a respectable 7% organic growth and 15% profit growth in what the group described as “a highly competitive industry”.
It is no secret that traditional free-to-air broadcast and pay TV business models are under increasing pressure from the web and OTT TV. For MTG’s management, it is clear which way the wind is blowing. The group is not the only media company to diversify into eSports and multichannel networks, but it’s moves to sell off the ‘traditional’ part of the business entirely show how much further it wants to go to transform itself. While other companies are attempting to diversify by investing in digital to complement their existing activities, MTG wants to be an all-digital company. Nordic Entertainment Group is only being created in the first place because Danish telco TDC pulled out of its plan to buy the broadcast assets after Macquarie made the latter an offer it couldn’t – in the interest of shareholders – refuse.
Macquarie conveyed to TDC’s management that it wasn’t interested in MTG’s broadcast assets, and in doing so signalled its conviction that the infrastructure business, with its predictable cash-flow, was the business to be in. Any kind of content play is higher risk than infrastructure. For MTG however, the high-risk – and high-reward – parts of the content business itself are the more attractive parts, and don’t necessarily need to be balanced against more predictable, but lower growth, pay TV and advertising revenues. This is despite the fact that Nordic Entertainment last year still accounted for 65% of the group’s revenues, compared with the 20% contributed by MTGx.
MTGx itself comprises three pillars – eSports, digital video or multichannel networks, and online gaming. The company is a market leader in eSports through its ownership of ESL and Dreamhack. eSports viewership among both enthusiasts and occasional viewers is growing at 20% a year. MTG believes that this is a billion dollar industry in the making, with an expected compound annual growth rate of 32% between 2016 and 2020. The lion’s share of that is sponsorship revenue, followed by media rights. Other elements, such as advertising and ticket sales, are growing more slowly.
Gaming meanwhile is expected to deliver global revenues of US$113 billion (€91 billion) this year, with a compound annual growth rate of 7%. Innogames – an online and mobile games developer – delivered revenues of US$130 million last year, while Kongregate – a publisher and developer – is expected to deliver US$50 million this year.
These are clearly high-growth businesses. But the risks are also high. While free and pay TV both face significant challenges, they are still delivering growth. TV advertising is still a powerful business and pay TV still has plenty of room for growth, particularly in emerging markets.
Despite the international dimension of both eSports and gaming, MTG’s strategy in some respects seems highly local. Having progressively withdrawn from international markets – in the case of Russia, with little choice – the traditional entertainment part of the company is now once again an essentially Nordic business. And perhaps the Nordic markets are likely to be among the first to experience a migration of consumer attention away from plain old TV to shiny new forms of digital entertainment. For the moment at least few European and US media companies seem set to follow it by ditching the TV business entirely.