How Fnatic’s esports victories led it into hardware

VentureBeat
By Dean Takahashi
December 1, 2018

Sam Mathews and Anne Mathews founded Fnatic as one of the pioneering esports organizations in 2004. Over 14 years, Fnatic’s esports teams have competed in over 25 titles, and its League of Legends team recently placed second in the world championships, making it the most successful Western esports team in that game. That final match was viewed by more than 200 million people, including 50,000 who watched in a big stadium.

Besides League of Legends, the organization has 10 other teams competing in games such as Counter-Strike, Dota 2, and Heroes of the Storm. And the company has taken its expertise in esports and used it to design its own Fnatic Gear brand of gaming hardware accessories, from headphones to keyboards and mice.

That makes it pretty unique in esports, which is booming now and is expected to reach $1.7 billion in revenues and 250 million enthusiast viewers by 2021, according to market researcher Newzoo. Fnatic raised $7 million in 2017 from investors that included Boston Celtics ownership organization Raptor Group, MIT Media Lab director Joi Ito, Fractal Design chief executive Hannes Wallin, and Hersh Interactive Group.

Fnatic teams have claimed $8 million in prizes and multiple international championships including the inaugural League of Legends World Championship, seven EU LCS Championships and three separate CS:GO Majors. Based in London, Fnatic has 80 employees and 45 players.

Fnatic also published a book with Penguin Random House named How To Be a Professional Gamer, and it created BUNKR, the world’s first esports concept store, in the heart of London’s popular Shoreditch neighborhood.

Here’s an edited transcript of our interview.

GamesBeat: How much have you grown over the years?

Sam Mathews: We have 11 teams and won $8 million in prizes over the years. We have 80 people on staff and around 125 with our team members. We’re a global team with branches in Southeast Asia, London, Berlin, Los Angeles, and Australia. In 2015, we did an acquisition and moved into esports equipment. We are in hundreds of Best Buy Stores with our Gear brand.

We also do our own research and development for esports hardware, we have a large content and marketing team, and 10 million followers on different channels of social media. We produce a lot of content every day. We employ a lot of people, including a chef for one of the teams. It’s very much like a big traditional sports team. Forbes said our value was $120 million.

GamesBeat: Are esports teams making money yet?

Mathews: As a whole, definitely not. They are investing. In the last two years, a bunch of investors have come in. But everybody has bought into the fact this is one of the major forms of entertainment. Video games aren’t going away. Everyone is growing revenue quickly, at 50 percent rates or sometimes higher.

We were profitable for seven or eight years. We moved into a startup mode three years ago, moved into hardware, and are working to build and scale the business. We’ve raised around $9 million to date. We may do another round next year.

A lot of what we’re doing is developing the whole platform, that marketing capability, and PR to some extent. Mostly it’s content writers, video editors, a lot of the content team, and the events team as well. We do about 30 or 40 events a year.

All of that marketing capability is supporting Gear, but it’s also going into our partnerships team. If you think about what’s happened in the last two years, every brand is suddenly waking up to esports. Today alone we announced a partnership with EE, the English network. We’re going to be doing a Clash Royale tournament with them.

We’re upping our capabilities, and at the same time, player salaries are rising. The facilities we’re building and the innovation–we’re also buying into franchise slots. It’s not a secret that the European LCS is franchising. That’s an 8 million euro buy-in. There’s also money going into buying these long-term–like the NFL or NBA or whatever, you have to buy a franchise spot. Obviously it’s a lot less than those, but it’s still a permanent ride.

GamesBeat: Are you doing the Overwatch League as well?

Mathews: We haven’t gone into the Overwatch League yet. We’ve explored it on numerous occasions. It’s very interesting. We keep a keen eye on it. The number one reason we didn’t go in originally was just because it’s not with the Fnatic brand. As I said, we’re very focused on trying to represent this audience. To do that we have to be Fnatic, not some other new name. We weren’t set up to do that then. But we’re considering it in the future as another part of our operations.

GamesBeat: I know the buy-in is starting to get a lot higher.

Mathews: Exactly. The buy-in gets higher and therefore we need to see more transparency on the revenues. I do know they’ve done pretty well from a revenue perspective. I don’t know if that’s enough to justify the buy-in, but it’s significant progress. Everybody is happy with the progress so far.

GamesBeat: The money listed here is just the winnings, I guess?

Mathews: Right. There’s already been articles. I don’t have any official numbers. I don’t have access to their financials. There are lots of rumors, but there’s also the fact that–there’s the Twitch deal, which was something like a $90 million deal over two years, and then they’ve announced partnerships with Toyota and HP and some other big brands. Rumors are in the $100-150 million range as far as revenue, based on the deals they’ve managed to pull in.

GamesBeat: If you had, say, $12 million in winnings, what part of the revenue is that for the team? I imagine there’s a lot of other revenue, whether it’s merchandise or advertising.

Mathews: Just to give an idea, prize money’s contribution to our revenues is less than 10 percent. We keep a portion of that and give it to the players. It’s a miniscule part of our business. The main revenues are coming from league participation. You get money for playing in different games, whether that’s from broadcasting rights or anything else. You get revenue shares in some games. Sponsorships are the second major way we get revenues, and then third is products.

Products are things like apparel. We do quite a lot of things like clothing and other merchandise. And then our hardware, which is the fastest-growing segment right now. We launched in 2015, and we’re now in Best Buy and Korea and different places. We think that esports equipment is going to be here for a long time, and we think it’s not being done the way players want, and that ultimately the community wants. There’s too much fluff. We want to focus on the core of what people want, and that’s why Best Buy came to us.

GamesBeat: In the hardware business, do you share that with your partners in some way, like the R&D for it?

Mathews: As far as R&D, we do all of that in-house. I hired Felix Guerra, who was the head of engineering and R&D at Corsair for five years. He’s helped develop some state-of-the-art products that we’re producing in tier one factories. We’re in the same factory as Bang and Olufsen for our new headset. Our keyboards and so on are made in the best factories.

Best Buy does quality control checks, checking the product and checking the factory audits. But the relationship with them–we don’t sell to Best Buy. They license our products from us. We work with them more closely on their general esports strategy as well. It’s a two-way street.

GamesBeat: How soon do you think that business will pay off? Do you see something in the road map making it clear that the hardware business was a good bet?

Mathews: We’re seeing about 70 percent to 100 percent year-on-year growth in that business. In May we launched all of our new product line, completely designed from the ground up. We don’t yet have an audio product that’s designed and built by us. We collaborated with AIAIAI, a Danish DJ headphone manufacturer, back in 2016. But we’ve been working for two years on a new audio product that will be coming out next year. That’s a big thing for us. It’s unique. And there’s not just one.

GamesBeat: Was there a general practice in the industry where players kept the prize money and teams kept the sponsorship money?

Mathews: It’s like any business in sports. We manage, pay the players, do everything other sports businesses do. We don’t make a profit on individual games. We get a small fraction of the prize money. The prize money is actually their bonus. The rest, sponsorship or whatever, goes into running a multinational corporation where we’re delivering against–to get a deal with AMD you’re dealing with the CMO all the way down to country managers, managing deliverables. It’s not something a player could ever do.

GamesBeat: In which game are you most successful now?

Mathews: Definitely League of Legends. That’s established us as the number one team, because it’s the most competitive game in the world, and we just reached the final. We’re the best western team and top two in the world. We also won the European LCS twice. Apart from that, our Counter-Strike team is top 10. We won a couple of major tournaments earlier in the year. Our Dota 2 team is number one in southeast Asia. We have some of the biggest Fortnite players in Europe, out of Italy and Germany. Rainbow Six is one of the newer games we’ve entered, and we’re number one in the APAC region for their league.

Each year it changes, though. We have different teams performing well. That’s the business of esports. You might be in 10 different games at one time. There are tier one and tier two games. We’re actively looking at things like PUBG, Call of Duty, other games we’re interested in but where we haven’t made a bet yet. We still have many games on our radar.

GamesBeat: Adding a new game is a big investment, then?

Mathews: We look at it as exactly that, an investment. What’s the potential upside in terms of viewership, in terms of reach, in terms of player base? How established is the sport? Is it going to grow? Is there any sort of publisher relationship in which we might be part of an official league?

We weigh every game out before we go into them. Some of them are no-brainers where you have to be in them. Others like PUBG or Call of Duty — Call of Duty is new, and PUBG is uncertain — we take our time and figure it out. It might be a big investment, and there’s been plenty of times where you spend a lot of money on players and it doesn’t really add anything overall, because the game never amounts to an esports title.

GamesBeat: Is the attraction of Call of Duty right now more the Blackout mode than team competition?

Mathews: Yeah. It depends how interesting it is. The CWL is interesting to us. We just want to see the viewership numbers growing and getting big. Fortnite is an amazing game, for example, but it’s not nailed the esports side. We’ve picked up players in it, but those players are acting more like ambassadors right now than people who are going to become the number one team in the world, because the tournament side is not very clear.

GamesBeat: As far as things like local esports, whether that’s going to take off, do you have a view on that? Is that interesting to invest in at the moment?

Mathews: We’re going to starting to see regional leagues. We’re going to see that in Europe this year with Riot. There’s going to be six regional leagues, which we’ll also support. Another way it’s going to grow is through academies. We’re quite keen, going back to growing the brand and representing esports–we want to go into countries that don’t have an established esports landscape and help encourage that.

We’re looking at places like southeast Asia or India where we can launch an academy program. We might put a bunch of money into nurturing talent and investing in local infrastructure. Ultimately we might end up with some amazing players coming out of there, or it might just end up being a way to help nurture esports and grow the brand in a region which could be huge in the future. Local is interesting, more and more.

GamesBeat: Does that mean you may need local venues to play in, as far as real estate goes?

Mathews: Definitely. In London right now we have about 6,000 square feet. We’re taking another 5,000 and building training facilities here so we can bring some players closer to us. We also have two other properties in London where we have people living. In Berlin we have three properties — a training facility, an office, and a gaming house where they live, plus player apartments and staff. In L.A. we have players. Some American teams are just L.A.-bound, and eventually they’ll invest in huge spaces in L.A., building academies and all the training facilities around that.

My dream is actually that we’re going to create a little auditorium where you can go watch tournaments. Even for games which aren’t live in the actual auditorium, we’ll have viewing parties and stuff like that. We already do that in places around Europe when we have big games.

GamesBeat: I visited the Team Liquid facility in Santa Monica. That was pretty big.

Mathews:We’re about twice the size of that, once we’re finished with the space upstairs.

GamesBeat: What I’m also interested in, though, is whether you need actual stadiums.

Mathews: It’s interesting. I would love to have stadiums. I think the issue right now is just the uncertainty around the game IP. At any one point Valve could turn around and change the way Counter-Strike or DotA is run. Overwatch is moving toward that, where you could have a stadium, but whether the fan base is big enough specifically for Overwatch–how much content would you have for that stadium? You’re talking about a 2,000 or 3,000 person arena.

In general, immersive esports stadiums, if they’re done right, could be amazing. You have access to real time data from the game. You could do pyrotechnics and AR and random crazy effects inside the stadium, things a basketball arena or whatever might not be set up to do. It has to be purpose-built. But that’s maybe five years out.

GamesBeat: Las Vegas has that new arena at the Luxor now.

Mathews: Right. They’ve got the big screen and a bunch of computers and a bar. That’s kind of the concept.

GamesBeat: But it’s up for rent. Anybody can use it, so they can rotate events through there.

Mathews: Yeah, which I think is probably the way it will go. An esports arena, purpose-built, in the future will be a bit more than that. Full lighting setups, things around the stadium. You might have vibration in the seats when things happen in the games. It’ll be tied in to the game directly.

GamesBeat: For that purpose, do you look to investors that are already in that facilities space? People who own stadiums?

Mathews: Honestly, that’s not been a priority or focus right now. It’s something we’re thinking about, but at this stage we’re not actively pursuing setting up stadiums.

GamesBeat: But have you ever sought people like that as investors, people who own those kinds of properties?

Mathews: We have. We have Jim Palotta, who owns AS Roma. He’s also a partner in the Boston Celtics. That type of investor we’re looking for. He has tech experience, sports experience, and venue experience. But we’re not necessarily expecting that they’re going to back a future venue. That would be nice, obviously.

GamesBeat: It must be tricky now to figure out just how much to invest in the short term, because of all the potential in the long term.

Mathews: That’s why we’re not making big infrastructure bets. The infrastructure needs to have long-term assured content. It’s not 100 percent that every game is going to continue. That’s why we’ve been hesitant. But we’re starting to build more and more infrastructure. Once we get to the point where revenues are probably double, profitability is getting there, it starts to be more stable, and we can command a good following in a certain location, then we’ll pull the trigger.

GamesBeat: At some point, is it going to matter where you’re based? Do you want to be based in Korea, or in the U.S., or London?

Mathews: Definitely. But I do think that titles make a difference. What you’ll find is that most people don’t have strong affiliations to–they’re not going to watch League of Legends and Call of Duty. They’re really into Call of Duty so they’ll watch Call of Duty, and then maybe they’ll watch League of Legends. There’s some crossover. What I mean is, we can strategically place it based on teams. That can be interesting.

When it comes to building a venue where you want to have content every day, with different games on different days, it becomes harder to have different locations. But that’s not really the point we’re at. I don’t know if it’s going to be like that. It could end up being that the games develop the arenas and we go play in their arenas. That could be one way it happens.

GamesBeat: How does player recruitment happen these days? Do you just need a large team of people to go after key players?

Mathews: Generally speaking we have–in the main games, when the off-season begins we’ll have a scout who’ll manage the spreadsheet and CRM system of who’s available, how good they are, what the price is, and so on. On top of that we’ll be looking at academy players and top-ranked players in the games. We’ll do trials sometimes to test out a bunch of people. We’ll have a big open trial season. Sometimes you need to do those trials anyway to see if different players jell. It’s similar to traditional sports, with the absence of having to travel around to a bunch of football pitches. You can just see it all online.

GamesBeat: It sounds like a lot of knobs to keep control on.

Mathews: We’ve been doing the team side of the business for 14 years now. It’s a very well-structured, very stable team. We have a strong brand. A lot of the best players want to come play for us, which helps. You don’t have to do as much convincing. Obviously it still comes down to how much you’re paying, but the brand helps a lot in pushing things across the line.

GamesBeat: My hope is that one day everybody will make money playing games. I don’t know if we’re going to get there.

Mathews: I think that’s inevitable. We’re going to get to a point where–my view on this is that automation is going to jobs away from people. They’ll have to earn money, and there’s going to be some sort of universal basic income where people are given money, because people need to survive when their job’s been taken away. At that point you’ll have all these people with money and they’re playing a lot of video games. They’ll be streaming and all of that.

I think esports and streaming and video game culture is going to be one of the biggest beneficiaries of automation, in terms of people having something to do every day. Generally speaking, nowadays we’re seeing a lot of unemployed youth, and we’re seeing esports grow. I don’t want to make that a direct correlation because I think it’s just a general trend. People are finding esports more engaging than traditional TV and sports sometimes. But that’s an aspect to it.

GamesBeat: Esports is like a celebrity pyramid right now, but over time it will be interesting to see the incomes of these YouTubers and Twitch streamers grow. You have a longer tail that’s possible from all of this.

Mathews: Exactly. Probably the biggest–the people that don’t benefit from Twitch streamers are the big agencies and corporates. You might have CBS making a lot of money and paying talent less, but now the talent are the ones making the money directly, right? Through things like YouTube and Instagram. It’s a kind of role reversal now that we’re seeing.

GamesBeat: It was interesting to see MasterCard come in to League of Legends as a sponsor.

Mathews: Yeah, that was super. We’re starting to see more of these brands coming. In Europe there are going to be announcements soon with a car manufacturer as well. We’ll have some good news coming.

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