What Astralis IPO could teach us: part #1

Astralis Group is making an IPO - securing additional funds to support world-wide known esports organization. Astralis management revealed documents that highlight the current state of business in the group & map future vision. Here & now we have a unique opportunity to dive deeper into esports organizations business & understand: how mature is an industry, what challenges lie in front of it.

Key messaging helps investors to navigate their decision-making process. Astralis Group management put Astralis into the "digital media" category competing with Netflix, Facebook casual gaming, Snapchat & so on. It's not about the only esports anymore - every organization has certain media assets (teams, players, communities, earned media accounts). Performance entertainment is a vague phrase that isn't common to investors, but highlight Astralis belief in constant entertainment quality level (through tournament wins, steady pro-players results).

"Astralis Group’s team brands and media channels have a 100% borderless viewer base with endless opportunities reaching a global, growing audience" - we live in a 100% borderless esports world when the Nordic organization could have fun bases in Asia, LATAM, North America & so on. And it's a new challenge for these companies to scale their business activities within different cultures, languages, insights & identities.

One of the common business strategies in esports is to buyout other teams & secure their fan base - add new fan base media metrics into 1 media reach XLS-sheet. At the same time, it's challenging to maintain the same amount of loyalty from Origen fans as from Astralis CS:GO squad. Especially when you are connecting LOL & CS:GO audiences & trying to sell their media capacities to the same brands as Jack & Jones.

Group of companies structure shows that each team acts as a separate private limited company, but with 1 decision-making center. The decision-making process is centralized with Nikolaj Nyholm acting as a group CEO responsible for strategy & business development & Anders Horsholt for business operations.

What's interesting is performance & communication split into two business streams.

Show me your business model & I will tell you who you are

Astralis Group claims that they build a sustainable & scalable business model. Even in times when the group isn't profitable, it's a success depends on publishers & pro-players performance. Here's how the Astralis value creation engine looks like:

Performance model

"The performance model is the organizational setup through which Astralis Group is building and developing top-performing teams. The performance model is based on methods of scouting, training and treating players as professional athletes".

Let's make an analogy with FC Barcelona. Its general success lies in hands of:

• famous coaches that build unique playing styles from Cruyff to Guardiola.
• a unique fan base that sees FC Barcelona as their life partner
• professional sporting structure from scouts to medics
• right players ready to perform over the years alongside highly-efficient academy

The difference between FC Barcelona & Astralis model is that it's not betting hard on coaches. On a global scale, coaches don't play so significant role in esports as in football. That's why coaches-driven strategy is missing from Astralis IPO documents, but it's one of the key challenges for esports:

• what kind of skills should the coach have?
• where should he/she get trained to become a coach?
• how different coaches should differentiate?

Zonic is a great leader, but I would love to build coaching-performance practice aswell.

At the same time, Astralis Group is building an unprecedented performance model structuring all esports-related performance metrics & approaches. Here & now they are creating a benchmark for other teams to build performance centers, hire nutrition & mental health specialists - look at performance as a 360-degree challenge.

The trick with the high-performance model is simple: what will happen if performance indicators would go down? Should Astralis act as a "Moneyball" movie character using team-members as pure performance indicators or Astralis should believe in their team (remember Team Liquid CS:GO squad run? Astralis maintain the same squad & now are getting back on the winning track).

The brand is everything in esports

Usually, esports organizations can't facilitate branding potential. Why? They are full of former pro-players who strongly believe in results, prizes, memes - you name it. They don't think about building esports brand DNA that will be unique for the market, will have a strong functional & emotional indicator, will be easy to understand for partners, fans, players. It's branding that could help organizations be sustainable, retain audience & sponsors, attract media attention.

"Creating highly engaging brands is in Astralis Group’s DNA. Astralis Group’s branding capabilities are responsible for its highly engaged and loyal fan base – reaching both the committed gaming audience as well as a broader, more mainstream audience".

The biggest challenge for esports organizations is this: what will happen if tier1 players will leave the organization? If s1mple will leave Natus Vincere, or how Team Liquid Dota2 fanbase changed when Kuroky & his teammates left for better? If esports brands 100% depend on several players' media weight - it's a high-risk business model, if they could "free" themselves from this cannibalization - strong brands could be built.

How Astralis Group infuses different teams with brand image:

It's critical for organizations to create an idea - what their brands stand for? Is it just logo+branding+players or there's something more valuable - a certain idea that lives in the head of consumers & partners?

Astralis draws a direct line from branding to fanbase engagement & reach. "Astralis reached approximately 5% and Origen approximately 2% engagement, in comparison to 0.8% for Manchester United and 0.9% for the NY Knicks".

Unfortunately, esports teams are so small that they aren't ready to perform marketing researches asking fans what they think of their brands. Because media metrics is one thing, brand understanding is completely another. I bet that nowadays when you ask 10 Astralis fans "How do you think what Astralis symbolize?" you will have 10 different answers. Here performance & different players' individual characteristics substitute an idea of branding (examples: Apple = innovation, Volvo = safety).

Astralis group highlights that future growth for brand building lies in broadening the brand portfolio and expanding mainstream engagement. New titles are added if there is a match with the portfolio in terms of the game-specific characteristics and the audience. Team brands are either acquired or built. Also developing new media channels where the brands can communicate directly to the fans. This will also include tailored content as video-on-demand, podcasts, live streaming and more.

There's no clear strategy where Astralis want to expand their business: create new Dota2 team, develop media channels in LATAM, hire Chinese speaking streamers?! I think that lots of decisions are happening in esports companies on-the-go, lots of titles like Overwatch aren't stable, sponsors pop-up & go every time, fans are switching teams following their pro-gaming heroes, so eventually, long-term strategy can't be highlighted.

Commercial platform

"Astralis Group effectively creates value by engaging its large audiences through three main revenue streams:

• Team sponsorships: DKK 14.5 million
• Merchandise & stickers: DKK 3.3 million
• and league revenue share derived from media rights as well as league sponsorships: DKK 11.4 million"

Exchange rates: 10 DKK = 1,3 EUR.

"Esports viewers are mostly millennials and male with above-average income. Of the total audience, 80% are male and 56% of the audience are under 35 years old". This is clearly misleading data for investors because income depends on geography. For example, data analytics companies infuse the market with the "above-average" income of esports viewers, but it's the incorrect assumption for such countries like Russia or Brazil.

Revenue stream 1: Commercial partnerships

"Currently the commercial partnership agreements make up the largest revenue share for Astralis Group. Today the group has established partnerships with a range of well-known brands such as Audi, Jack & Jones, Turtle Beach, Omen by HP and Unibet. In projections for 2020, about 70% of total revenue (outside prize money) is generated through commercial sponsor partnerships. Commercial partnership contracts are typical of two to three years length, and Astralis Group has seen the continuous growth of the value of individual category sponsorships for each of the brands".

Future growth:

? Higher value due to increasing audience reach

? Broadening the inventory by developing new digital assets

? Launch local sponsorship offerings in key geographical markets

Takeaways

• current esports teams have capacities to secure more than 5 brands at the same time from the different categories.
• clubs depend on sponsors as they are major revenue stream generator
• Astralis prefers to build relations with sponsors that know why they should invest in esports audience
• esports organizations got to be creative to engage new non-endemic brands, create new co-branded storytelling formats

Revenue stream 2: Merchandise

"A wide range of products branded with team name and logo across clothes, gaming hardware, and other categories are sold online and through high street retailers. Astralis Group has not yet distributed merchandise directly to customers, but only through licensing the team brands’ intellectual property to partners in exchange for royalty fees. Astralis Group will in future years be building up own channels for merchandise distribution to capture a larger portion of merchandise revenues and to better learn the wants and needs of its fan base".

There's a striking difference between North America & EU merchandizing culture. In the USA esports players & organizations leaders (Faze Clan, 100 thieves) have millions of followers immediately operating like influencers. In comparison: Astralis dev1ce has 287 000 followers & Adapt from Faze - 2,7 mil. followers on Twitter. That's why the development of e-commerce differs within the markets & esports organizations business models.

"In financial projections for 2020, revenues from the merchandise is expected to grow to 2% of total revenues (outside prize money). Revenues consist of both license revenues with 100% margin and products sold directly or together with partners with 40% - 50% margins".

Takeaways

• esports organizations starting to sell their merch online
• Astralis could generate customers into physical retail stores
• not every esports organization merch was created equal: Faze Clan is showing tremendous merch activities while EU-based teams lack media reach of North American influencers

Revenue stream 3: Franchise & league memberships

Generally speaking, the performance-based model will help Astralis to generate about 20% of total revenues for 2020 - through league and tournament memberships.

On one hand, "this percentage is anticipated to grow significantly as esports leagues and tournaments start collecting ever-larger media rights for their live entertainment properties", but on another "prize money is potentially highly volatile as it depends on the performance of the individual team brand. Prize money won is generally offset 50-100% in costs as players have claims to prize money or performance bonuses".

Here should be a picture of media praising on n0tail squad 2x the International earnings.

"Astralis Group is projecting no growth in prize money revenue for the coming years. With the introduction of structured league formats, like the LEC for League of Legends, the portion of overall revenue dedicated to prize money has been seen to go down. This is due to players and teams alike favoring stable revenue streams, like those deriving from league membership participation, over the potential volatility of prize money tied to performance. Astralis Group thus takes a conservative view of no prize money revenue growth in the next years".

Takeaways:

• LOL squads are gonna generate about 20% of the Astralis Group revenue stream - a great achievement for 2018th acquisition.
• Prize money is something the media hardly bet in the industry, but organizations - don't.
• Players don't want to bet on prize money, because it's hard to maintain the same level of high-performance team in years

Here & now Astralis Group IPO documents could become a great practice for those who want to know more about esports team operations, revenue streams & financials. As esports teams are in the process of finding working & sustainable business models, the market is risky and immature we gonna see more & more business modeling around esports organizations.

Part 2 will be published soon & analyze Astralis Group financials, industry risks & future vision for the Danish organization.