Esport organizations were a black box for most of us. Everyone knew they were losing money, but apart from that, there was very little information. But with the Astralis Group, the first Esport organization went public last year. Now the European organization, based in Copenhagen, has published its first annual report, which gives us some more information about the internals of an organization.
The organization was originally founded by RFRSH in 2016 and was separated by a management buyout in August 2019. It is fielding teams in CS:GO (Astralis), League of Legends (Origen) and Fifa (Future FC). Astralis Group is one of the leading European esports organizations.
The equity story
- Dedicated focus
Okay, they focus on building “the most loyal, blah blah blah.” That’s what they should be focusing on anyway and it doesn’t make a difference to other esports organizations. And so far, I doubt they’re running for “the most loyal, emotionally-connected global community in sports.” But things can change and maybe they have a chance, but right now it’s like a football player saying he wants to win the game. That’s obvious and the goal that everyone has. - Proven performance model
In general, this is a decent point. According to many voices in the industry in 2017–2019, Astralis was definitely the leader in professionalizing everything related to players. It was one of the first, if not the first organization in western esports to hire a sports psychologist and to have an office where the players have to train. All in all, a professional structure around team operations is definitely an important factor for success, but nothing special anymore. Many organizations have copied their approach and are now on the same level as them. Therefore, a performance model, even if it is incredibly important, should be the standard for any well-funded organization, and I don’t see why this should be an important part of the equity story as long as innovations are so easy to copy.
Furthermore, we are talking about teams with normally five players (six including the coach). This is very different from traditional sport, as it is much easier for another organization to take over the whole team when the contracts expire. Take their Counter Strike team as an example: If the players decided to join another organization when their contracts expired, Astralis’ Counter Strike department would be in serious trouble, because they cannot simply select five decent players, put them under their “performance model” and have a top 3 team a few months later. - Balanced team portfolio
Finally! This is THE part of the equity story. Unlike most organizations, Astralis builds different brands for each game. This enables them to build a larger fan base. What many outsiders misunderstand about esports is that “a gamer cares about all games”. But as with any other sport, most fans only really follow one sport/game closely and may have an eye on a few others. Therefore, the Astralis Group can cater to different games without disturbing the fans with news and content about other games.
However, as mentioned above, most fans follow their favorite players and not the organization. Therefore the loss of valuable players or the whole team is a great risk for each brand. - Scalable business model
Again, we have a point where I don’t really see the added value to the equity story. As we will see later, the Astralis Group generates most of its revenues (adjusted for prize money) from sponsorships. I don’t see a single indicator that this is different from all other esports organizations or that this is indefinitely scalable. - Highly experienced management
Make whatever you want out of this paragraph. Are they really far above average management? I don’t know, but I’m willing to give them the benefit of the doubt, considering that they had a successful IPO and were always able to attract great sponsors from non-endemic partners.
Overall, their equity story is mediocre at best. They probably have pretty good management and I like their approach of having a different brand for each game. When you look at the other points, I don’t really know why they added them, because they’re not a differentiator at all. One important point they didn’t mention, however, is that they have a strong fan base in Europe and are the undisputed champion in Denmark (maybe they didn’t mention it because their fan base in America and Asia, on the other hand, is not that impressive). Also, Denmark is very progressive in everything related to esports, which should help them in the future.
Revenue
Breaking down (unadjusted) earnings and revenue projections for esports teams is quite a challenge. Since they contain prize money, which is usually distributed 100% to the players, it makes no sense to analyze the business on the basis of the unadjusted revenues. Therefore, the revenues I will talk about in the following will be adjusted for the prize money.
According to its annual report, the Astralis group had revenues (unadjusted) of ~6.5 million EUR. Since “prize money” and “other income from tournament participation” fall under the same item, I could not determine the revenues from prize money 100%. After some research, I excluded about 2 Mio EUR of prize money. With ~1.9 million EUR the biggest part was won by Astralis (CS:GO). This leaves around 4.5 million EUR in adjusted Revenue.
If you look at this table, their revenue streams are much more unbalanced compared to the chart above and do not really prove their point of view of a “scalable and flexible business model” as mentioned in their equity story. While I expect tournament revenues to increase significantly in the coming years, they are still highly dependent on sponsorship money. Pretty flexible, isn’t it?
So, let’s dive deeper into the three streams of revenue:
- Sponsorships
As is the case with most esports organizations, the income from sponsorships accounts for the largest part of the revenues. For the Astralis Group, sponsorship income accounts for 79% of total adjusted revenues. On the one hand, this leads to a high dependency on sponsors, but on the other hand, it gives the Astralis Group security for the future years, as most contracts have a term of 2–3 years according to the IPO prospectus. As proof of this, they added that existing multi-year contracts already secure 50% of the planned sponsorship income from sponsorships for 2020. They also stated in the prospectus that they are aiming for a 70% share of sponsorship income in adjusted revenues. In general, the Astralis Group has been really successful in the past in acquiring new endemic and non-endemic sponsorships. They have succeeded in acquiring deals with names like Audi, Jack&Jones, Omen by HP and Unibet. For 2020, Astralis Group aims to increase its revenue generated by sponsorships by 100%. - Other revenue from tournament participation
Other revenue from tournament participation accounted for only 7% of the adjusted revenue and thus represents the smallest part of the revenue. The income listed here is generated by the tournament organizers sharing the profits among the participating teams. While this has been fairly unimportant to date, I expect it to grow in the coming years through their participation in the ESL Pro League and the expected increase in payments from Riot for their participation in the LEC. As the leagues become more professional and monetized, profit-sharing should continue to increase significantly in the coming years. Overall, they expect an increase in revenue sharing of 40% — 100%. - Merchandise and stickers
This bucket contains physical and in-game items with the branding of one of the Astralis brands. As for the merchandise (physical items), the Astralis Group has done a good job of explaining it in its IPO prospectus, as you can see in the screenshot below.
What is particularly remarkable, and may come as a surprise to someone new to esports, is that the sale of digital items is much greater than the sale of merchandise. In 2019, the Astralis Group’s total revenue from the sale of merchandise and stickers accounted for 14% of the adjusted total revenue. For 2020, however, they are aiming for a share of only 2%(!) of the revenues from the sale of merchandise in the adjusted total revenues.
Further, I looked at the distribution per brand after I deducted the prize money:
As you can see, nearly all the revenue is generated by Astralis. This is further proof, that they are highly reliant on the CS:GO team to stay with them and perform well. And that they aren’t as flexible as they write they are.
Another interesting thing I found was, that Astralis Group considered a subscription-based model for the future in their IPO prospectus. Through the subscription, fans would have “gained exclusive access to players and coaches before and after matches, early previews of or exclusive access to behind-the-scenes video, limited edition merchandise, and exclusive events”. However, a subscription-based model wasn’t mentioned in their annual report which probably means, that they aren’t considering it for the near future. But they mentioned that they are planning on establishing direct-to-fans offerings in the near future. These could be made accessible through a subscription model. I really hope that they try this out, so we can get more insights into how many fans are willing to buy a subscription for additional content around the team.
For 2020, Astralis Group aims to increase the revenue to around 6–7 million EUR. The main driver for the growth should come from the doubled revenue through sponsorships.
Other Financials
Since everyone knows that sports organizations operate at a loss, but is wondering exactly how they make money, I decided to spend more time analyzing income and take a quick look at the other financial figures.
If you look at the EBIT(DA) level, we don’t need to adjust for the prize money because it has no impact on EBIT(DA) as it is deducted under “Staff costs”.
In general, the income statement does not show any surprises. As player salaries skyrocket, staff costs, which include salaries, prize money and social security costs, make up the vast majority of costs. In addition, they have around EUR 2.9 million in external expenditure, which is not further explained in the annual report. However, since this is the only cost block apart from personnel costs, external expenditure probably includes everything that is necessary to keep the company afloat.
