The maker of hit videogames thinks the "Overwatch" e-sports league could be the key to its future.

By Michal Lev-Ram
June 7, 2017

Activision Blizzard built a videogame empire around bestselling titles like Call of Duty and Warcraft. Now it wants to become the ESPN of competitive gaming. Will audiences play along?

A diapered dragon hatches from a polka-dotted egg. Casting off the speckled shards of its shell, it toddles out of its nest and crawls around curiously, flapping a pair of adorably tiny purple wings. Seconds later, a trio of extraterrestrial troublemakers appear, taunting the mythological infant. “I looove baby dragons,” their three-fingered ringleader says menacingly as he and his cohorts encircle their prey. “Especially medium-rare ones.”

The diminutive dragon abruptly lashes out, disabling his opponents with a surprisingly forceful flame. “Oh yeah, Spyro wins!” he gloats, trampolining on one of the fallen aliens with his chubby, clawed legs. Out of nowhere, a tall wizard with a Viking helmet appears and offers him a half-eaten corn dog. “It’s barely touched,” he says.

At this point, I’m completely lost (a sensation that will recur several times while I’m reporting this story). But were I quite a few years younger—and a gamer—I would have recognized the creatures on my screen as characters from Skylanders, a $3.5 billion “toys-to-life” franchise created by videogame powerhouse Activision Blizzard atvi . The Southern California company publishes several of the most popular titles in gaming history, from multiplayer combat series like World of Warcraft to smartphone time-suckers like Candy Crush Saga. The Skylanders franchise, which launched in 2011, has sold 300 million action figures and other toys in six years.

The only part of this scene that might have struck my hypothetical gamer self as remotely odd is that, well, none of it took place during a game. Rather, I’ve just watched the opening two minutes of the first season of Skylanders Academy, a TV spinoff that made its debut on Netflix nflx in October. That program signals a new chapter for Activision Blizzard, a gaming Goliath that is attempting to hack-and-slash its way into becoming a more diversified—and even more gargantuan—entertainment juggernaut.

The company’s growth to date, on games alone, already belongs on some sort of high scorer honor roll. In its last fiscal year, Activision Blizzard reported record revenue of $6.6 billion, up 42% from the year before. Over the past five years, its stock price has risen more than 400%. The leader behind that performance, CEO Bobby Kotick, is now the longest-serving head of any publicly traded tech company—and one of the highest paid. According to a recent New York Times report, Kotick was the 10th-best-compensated CEO in the U.S. last year, with a pay package of $33.1 million, nearly $25 million of it in stock. (Kotick is also dating one of the most powerful leaders in tech, Facebook COO Sheryl Sandberg.)

This year, Activision Blizzard earned a spot on the Fortune 500 list for the first time in the company’s 37-year history. In this industry, that’s very rare air. Only two other videogame-centric companies have ever made the Fortune 500: Electronic Arts ea and industry pioneer Atari. And neither had staying power: Electronic Arts graced the list just once, in 2010, while ­Atari lasted two years—1988 and 1989. (After several ownership changes and a bankruptcy, Atari is now part of a French media company.) The takeaway: Gaming may be mainstream entertainment, but game companies are hit-driven—and none has successfully expanded beyond videogames.

Activision Blizzard's 2017 rank in the Fortune 500.

Activision Blizzard hopes to be the first. It’s not just dragon-centric TV shows that are being spun out of its massive vault of proprietary characters, which also includes heroic Scottish snipers and a fallen arch­angel named Tyrael (players of the “dungeon crawler” game ­Diablo go fanboy when he shows up). There are multiple movies under development, loosely based on the bestselling war-game franchise Call of Duty. There’s a newly launched consumer products division, tasked with developing everything from comic books to apparel based on Activision Blizzard’s intellectual property.

And most notably, there is an “e-sports” empire in the works—a major foray into the booming world of competitive videogaming. That genre, once merely a niche, is reaching a tipping point. About 385 million people worldwide are expected to view e-sports events in 2017—mostly online, but increasingly on cable television and at live competitions. Revenue from e‑sports will approach $700 million this year, according to research firm Newzoo; by 2019 it should crack $1 billion.


FOLLOWING THE MONEY, BEYOND GAMES

Activision Blizzard aims to design franchises with potential for revenue outside of game sales. The company’s newest title, Overwatch, is an example of the business model in action.

Game Sales

Activision Blizzard

Overwatch launched in May 2016. So far, more than 30 million ­gamers have paid a total of $1 billion to play online on their PCs or gaming consoles.

e-Sports

Activision Blizzard

The Overwatch League will go live this year, with teams competing at live events. The e‑sports industry will collectively earn about $700 million this year from ticket sales, advertising, and digital and TV distribution rights.

Movie/TV Spinoffs

Activision Blizzard

Three movies based on Call of Duty are in development, and Overwatch could follow suit. A 2016 movie version of the game Warcraft (licensed by Blizzard but produced by others) made $433 million globally.

Merchandising

Activision Blizzard

Think T-shirts, comic books, and eventually jerseys and other ­apparel that tie in to Overwatch League teams and players. A benchmark: Disney earned about $5.5 billion in 2016 from such consumer products.


Activision Blizzard makes some of the games played in today’s e‑sports leagues. But it is no longer content to have a spectator role—and the industry is still small and fragmented enough that a company of its size can commandeer it. Last year the gamemaker acquired Major League Gaming (MLG), a creator and distributor of e‑sports events. “It is like ESPN for videogames,” Kotick tells Fortune.

MLG is still light years away from ESPN-level domination. But if anything, Kotick’s analogy actually undersells his ambitions: It might be more accurate if ESPN not only distributed football games but also owned the National Football League—and made all the footballs in the world as well. Later this year, Activision Blizzard will launch the Overwatch League, based on one of the company’s hottest new titles. The league will essentially control all the competing teams and the distribution of all the games. Activision thinks that these opportunities, combined with sponsorships and advertising, not to mention Overwatch-branded merchandise like T-shirts and hats, could bring the company billions in annual revenue as the e‑sports audience grows. As a benchmark for how big it could get, the company notes that the NFL generates $12 billion in revenues, including $6.1 billion in media rights sales, from an audience of about 240 million. “Ten years from now, the role models in e‑sports [will] be like the stars in traditional sports,” Kotick says.

Player Marcus Tan Sin Yik on Team Singapore Overwatch at BlizzCon 2016, a gathering of fans of Blizzard Entertainment games.
Courtesy of Activision Blizzard

These are just aspirations for now. MLG, like the company’s other recent undertakings, hasn’t yet resulted in new operating profits. And even if it were an instant hit, its revenue would be a teeny fraction of the NFL’s. Still, Kotick, 54, has had his share of touchdowns. In 26 years as CEO, he has transformed Activision Blizzard from a financial mess nearing extinction into a behemoth with a $45 billion market cap and 17 gamemaking studios around the world, aggressively buying up other gamemakers and continually expanding its franchises.

Relevancy demands constant growth and constant hits, and Kotick’s latest strategy, finding new ways of milking profits from his IP, is one way of extending Activision Blizzard’s dominance. If the idea sounds Disneyesque—well, Disney dis experts would agree. “The approach he is taking leads them down a road similar to the one Disney has been on in the last 15 years or so,” says Tom Staggs, the former COO and CFO of Disney and a longtime friend of Kotick’s. Indeed, Kotick has hired a host of Disney veterans to help him execute his vision.

Fans gathered at BlizzCon 2016.
Courtesy of Activision Blizzard

Still, Kotick’s playbook has downsides. Activision Blizzard has long been criticized for focusing on existing franchises instead of investing in new and innovative products. There is a fine line between breathing new life into your franchises and pumping them so hard for profits that you suck the life out of them—and drive away your fans. As Atari cofounder Nolan Bushnell points out, “The financial strategy for these big blockbusters can lead to things getting stale because you want to do Rocky No. 247 instead of innovate … But entertainment is ultimately about novelty.”


Do even a cursory search of gamer blogs and you’ll see some colorful vilifications of Kotick. (Univision-owned blog Kotaku once called him “the most hated man in videogames,” though the writer also said he had a “delightful chat” with the exec.) Much of the animosity comes from ROI-minded things that Kotick has told the investment community—he once said at a conference that his focus was taking “the fun out of making videogames.” But no one disputes his success.

The college dropout got his start as a developer for the Apple II in the early 1980s. At just 19, he founded a software company, Arktronics, with funding from Las Vegas developer Steve Wynn—the two had met at a party in Texas. Arktronics eventually went out of business, but in 1990, when Kotick was 27, he convinced Wynn and another partner to buy a controlling stake in Activision, a gaming company founded by four former Atari programmers. Activision was a pioneer—it was the first gamemaker that wasn’t owned by a console provider—but it was mired in bankruptcy proceedings related to a patent-infringement lawsuit. For $500,000, Kotick and his team snapped up a 25% stake. By 1991 the determined entrepreneur was the CEO.

Kotick quickly reorganized the company. In an ecosystem where new games are generally created by startups, Kotick proved adept at spotting companies with great ideas and sustainable profitability—and then gobbling them up—staff, IP, and all. Over the ensuing decades, Activision grew primarily through acquisitions, including those of Raven Software and skateboarding gamemaker Neversoft. In 2008, Activision merged with the gaming division of French media conglomerate Vivendi. Blizzard was one of the studios within that portfolio: It had an impeccable reputation for quality and a loyal following—among other titles, it published the popular Warcraft franchise. Activision Blizzard was formed, with Kotick still at the head.

Like all companies vying for consumers’ attention, Activision Blizzard now faces more rivals than ever. “That includes people watching shows on Netflix, movies, or anything else,” says Brian Nowak, a Morgan Stanley analyst who covers the company. Anything else includes “casual” mobile games played on smartphones. While it typically takes multiple years and tens of millions of dollars to design a graphics-heavy standard videogame, mobile games are fast and cheap. Activision Blizzard has managed not only to mitigate those threats, but also to thrive. (Its most significant recent acquisition was Candy Crush maker King Digital Entertainment, in 2016.) It can also now deliver many of its games online—allowing for faster, cheaper updates and, importantly, for in-game purchases and upgrades.

CEO Bobby Kotick, photographed at the offices of Activision Blizzard subsidiary Sledgehammer Games in Foster City, Calif.
Photograph by Cody Pickens

Still, some flagship titles are showing their age. Call of Duty, a franchise in its 15th year, maintained its position as the bestselling videogame in 2016, according to research firm NPD Group. But analysts say that edition sold less than its predecessors. Set in outer space, the installment was criticized by fans of the franchise for being too futuristic. This year’s Call of Duty title (a new version is published each year) will go back to the game’s World War II roots.

“We should have done more work thinking about how much of a departure from the franchise going to space would be,” admits Kotick. But the mini-uprising also underscores the fickle nature of the business—and the importance of extending durable brands in new ways.

It’s a warm afternoon in mid-May when I meet Kotick at Blizzard’s studio in Irvine, Calif. As at many Silicon Valley companies, the studio’s workforce is mostly young and largely male. But there are a lot more tattoos and purple hair than you’d find at, say, Facebook’s fresh-faced HQ. It isn’t as bright and cheerful here, either—game developers and designers, it turns out, have a penchant for dungeon-like lighting. Seated in a corner of the cafeteria, Kotick stands out. In khakis, brown loafers, and a button-down shirt under a sweater vest, he looks less like a tech mogul and more like an off-duty attorney visiting his coding-crazy kid at work.

Kotick’s voice is so low and muted that I have to lean in to hear him (my recording would barely pick up his answers). His ambition, however, speaks loudly. “The fact that we can entertain people in every country, everywhere in the world—that was always an aspiration I had,” says Kotick.


SQUEEZING CASH FROM BLOCKBUSTER GAMES

Characters from an array of Activision Blizzard games.
Courtesy of Activision Blizzard

Activision Blizzard’s success has been driven by smart repetition: It builds (or buys) games with great hooks, then franchises them like crazy. Here are its five most popular brands.

Call of Duty (2003–present)
Elite soldiers do battle, occasionally in outer space. The franchise has about $15 billion in sales to date.
Total no. of releases: 14
Units sold: 250 million

Guitar Hero (2005–15)
Simulate rocking out to your favorites, on guitar and other instruments—to the tune of $2 billion in total revenue.
Total no. of releases: 7
Units sold (est.): 25 million

Candy Crush Saga (2012–present)
Tetris meets tooth decay in a “­casual mobile” game; Activision Blizzard bought its creator in 2016.
Total no. of releases: 3
Daily active users: 93 Million+

World of Warcraft (2004–present)
A role-playing game set in an ever-expanding online universe. Orcs and trolls abound.
Total no. of releases: 7
Online accounts (est.): 100 million+

Skylanders (2011–present)
A $3.5 billion “toys-to-life” series that includes games and action figures—and more recently, a Netflix TV series.
Total no. of releases: 6
Toys sold: 300 Million+


Indeed, while games provide the vast majority of Activision Blizzard’s revenue, the pedigrees of Kotick’s recent hires hint at how eagerly he wants to establish the company as a mainstream entertainer. Steve Bornstein, a former CEO of ESPN and cable’s NFL Network, is the chair of Kotick’s e‑sports division (former Fox Sports EVP Pete Vlastelica, meanwhile, is its CEO). A former Disney exec, Tim Kilpin, was recently hired to run the company’s consumer products division. (One more Mouse House connection: Sandberg, Kotick’s girlfriend, serves on Disney’s board of directors.) And Stacey Sher, the long-time producing partner of Quentin Tarantino, is now copresident of Activision Blizzard’s fledgling TV and film business.

Kotick feels confident he’s placed bets on the right people; time will tell if he’s picked the right game.


Somewhere on the Internet, a young woman named Riley Youngs is eating a chicken sandwich, and scores of people—myself included—are watching the mundane act in real time. Youngs is a budding “streamer,” someone who plays videogames online for a living. Her forum of choice is Twitch, a wildly popular, Amazon-owned website that showcases gamers who broadcast themselves.

About 150,000 fans have watched Youngs do her thing online—her thing being playing Activision Blizzard’s Overwatch, along with the occasional live-streamed lunch break. Today’s video stream is titled “LOOK AT MA NEW FOKIN HAIRCUT,” which refers to her ­below-the-shoulder-length locks, dark brown on top and almost blond underneath.

Viewers follow along. In the main box on the busy web page is a dynamic screenshot of the game on her computer. To the left, a smaller square shows Youngs via webcam as she sits at her monitor. And to the right runs a constant feed of comments and questions from her thousands of viewers—inquiring minds who want to know what virtual weapon she’s going to pick up next and how much she paid for her new hairdo.

This stream will last more than six hours. (Youngs, a 24-year-old from Michigan, later tells me she streams for four to eight hours a day). I have a much shorter attention span, but I watch long enough to see why Overwatch, a multiplayer, first-person-shooter title, has become Blizzard’s fastest-growing game to date, generating more than $1 billion in revenue and amassing 30 million players since its introduction just a year ago—and why it’s the game to which Kotick is harnessing his e‑sports ambitions.

Youngs’ character runs through some kind of high-elevation temple, encircled by snowcapped mountains, shooting at creatures that are moving so fast it’s hard to make them out. All you see of her in-game self is the tip of the futuristic, golden firearm with which she kills off opponents. On the smaller screen, I see the face of “in real life” Youngs, mostly scrunched in a concentrated squint.

For the uninitiated, the experience is like staring into a digital version of an M.C. Escher print. But for millions, the site—and others like it—presents hours of engaged entertainment. Activision Blizzard has about 450 million monthly users globally, who spent a collective 43 billion hours playing its games last year. Notably, a record 3 billion hours were spent viewing its games in that same time span.

“When people ask me what I do, I say I play videogames,” says Brandon “Seagull” Larned, one of the best-known Overwatch streamers. “They think it’s pretty cool.” Larned explains that there are two career paths for gamers. The first is streaming, which allows players with considerable followings to share in profit from advertising. The second involves endorsements and prizes for competing in pro tournaments.

A character from the game "Overwatch" on display near the Hollywood Walk of Fame .
Courtesy of Activision Blizzard

A few high-end streamers and e‑sports competitors make seven-figure salaries; most do not. While Larned doesn’t disclose his income, he does say he quit a computer science program at Washington State because “there was too much money to be made” as a professional gamer. Larned, known for his “dazzling Genji play” (don’t ask), may soon have an even bigger career opportunity—the 24-year-old is a contender for the Overwatch League.

At the moment, viewership for gaming is not unlike golf—if you play golf, you’ll watch golf. But Kotick hopes to make e‑sports more mainstream, more sticky. One way he’s doing that: instituting teams that are city-based—a first in professional e‑sports. Just like Green Bay’s Packers, Overwatch teams will be tied to cities. (Activision Blizzard hasn’t yet said how many teams will exist and in which locations.) Of course, unlike the NFL—or the NBA, the MLB, or the NHL—Overwatch has been around for only a year. “If I’m [a potential sponsor], I have a pretty good confidence that the L.A. Kings [hockey team] will be around in five years,” says Morgan Stanley’s Nowak. “But how do I know that Overwatch will?” Still, Activision Blizzard thinks Overwatch has advantages, despite its “noob” status (gamer-speak for new). Going with a recently launched title lets the league start from scratch—more established titles like Call of Duty or World of Warcraft are already played by several existing e‑sports teams and leagues.

Meanwhile, Activision Blizzard doesn’t have to deal with the legacy TV networks that have tied up traditional sports rights for years. “E‑sports is the first digital native sport,” says Vlastelica, the Fox Sports veteran who heads MLG. “We’re not encumbered by the paid-TV ecosystem that keeps the content out of the hands of young people who, frankly, don’t watch TV.” At the same time, the hope is that transforming itself into the “ESPN of videogames” will help Activision Blizzard make e‑sports more recognizable to the masses. “What we’re seeing is the evolution of the games themselves to becoming more broadly appealing as a spectator sport,” says Kotick.

That evolution is not lost on the real, Disney-owned ESPN, which launched a dedicated e‑sports vertical on its website last year. The audience is “not enormous,” says Marie Donoghue, EVP of global business and content strategy at ESPN, but “the fans are passionate and engaged, the athletes and teams are compelling.” She adds, “It’s also incredibly popular among a demographic we know well—young men.”


As lucrative as that demographic is, Kotick’s plans—including the Overwatch League—could enable Activision Blizzard to reach beyond it. The vast majority of e‑sports pros, like the majority of gamers, are men. But players like Youngs are reminders that capability in videogames doesn’t rely on muscle mass or size. And the marketing and expansion of other sports leagues has generally led to more gender parity in their audiences—the NFL, for example, says that women now account for almost half its fan base.

It’s clear that Kotick has this ideal in mind as the Overwatch League gears up. “I think it’s the first game on a broad scale where about half the characters [are] women,” he says. “This is a level playing field.” Indeed, Overwatch features equal numbers of men and women heroes plus three “omnic” (that means robotic) characters and a male scientist who happens to be a gorilla.

Activision Blizzard’s real-life leaders don’t yet reflect such parity. Only one out of nine board members is female, and there’s not one woman on its eight-person “senior corporate management” team. It’s notable that one of the company’s few leading women—the newish hire, Stacey Sher—is tasked with bringing Activision Blizzard’s IP to movies and TV shows, media that more easily cross gender lines. “You have to have control of your script and your movies,” says Sher, whose production credits include Garden State and The Hateful Eight.

Last year Sher put together a “writers room” in a house in Los Angeles, where six handpicked creatives sat every day for a month to brainstorm adaptation ideas; they now have three projects in various stages of screenwriting. Of course, they’re all variations on the Call of Duty series—a war-driven franchise where male characters dominate. Turns out there’s a daunting amount of testosterone in Activision Blizzard’s DNA.

Still, Kotick’s strategy suggests that he’s willing to alter that code to make Activision Blizzard a bigger, faster-growing entertainment company. In February, in its latest annual report, Activision Blizzard said it will have a light slate of game releases this year when compared with 2016. (There won’t be a new “full console” Skylanders game, for instance.) The implicit message: It’s time for the company to invest in new areas, from its position of strength. If it doesn’t, it risks going the way of its predecessors, companies that became one-hit wonders, metaphorically speaking, no matter how many games they created.

A version of this article appears in the June 15, 2017 issue of Fortune with the headline “A Giant Enters a New Arena.”

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