Inside Activision's Plan to Make Its Gaming League the Next ESPN

Players on headsets exchange strategy as two teams fire away at each other through the rubble of a virtual city. Thousands of video-game fans in an arena cheer as the clock ticks down to the five-minute finish.

"The nerves have got to be kicking in now," an announcer says in a nearby booth.

The Call of Duty World Championship played out last weekend in Los Angeles and delivered an $800,000 prize to the first place team EnVyUs. The event's promoter, Activision Blizzard Inc., is the largest independent maker of video games in the US. Now, it's trying to dominate the emerging business of professional video-game play by developing leagues, hosting tournaments and airing them live on its own online channel.

On Wednesday, Activision took another step in that direction, naming 21st Century Fox executive Pete Vlastelica as chief executive officer of its Major League Gaming online network. Vlastelica, who previously oversaw online content for Fox Sports, joins a team that includes Steve Bornstein, the former CEO of Walt Disney's ESPN sports network who serves as chairman.

"More traditional leagues and sports broadcasters look with some amount of envy on the engagement and functionality around live streaming that has been part of E-sports from day one." Vlastelica said in in interview.

Facing a decline in physical sales of video games and a surge in free mobile play, companies such as Santa Monica, California-based Activision are trying to generate new sources of revenue -- from in-game downloads to advertising and tournaments, which have the added benefit of keeping their products front and center in the minds of customers.

(Also see: Activision Posts Strong Results on Demand for Call of Duty: Black Ops III)

Activision acquired the MLG.tv site in December for $46 million. This year, the network is producing a series of competitions leading up to BlizzCon, the annual fan event for the company's World of Warcraft and other games. Teams from the US, Latin America and Australia and New Zealand will be compete in regionals in Columbus, Ohio, on October 8 and October 9, vying for a spot in the finals.

Not everyone thinks E-sports will be a slam dunk. Michael Pachter, an analyst with Wedbush Securities, estimates Activision will pump relatively little money into tournaments or the Major League Gaming channel. They're unlikely to be big profit contributors soon, he said.

"We think that the company's desire to be 'the ESPN of E-sports' is misguided," Pachter wrote in a June note. "In our view, if anyone will be the ESPN of E-sports, it's likely to be ESPN itself."

The analyst instead likes the approach of Electronic Arts Inc., which seems more interested in sponsoring tournaments to promote game sales than in owning every piece of the business.

The idea of fans watching professional video-game players has been around for decades. In South Korea, three cable channels cover the sport and enthusiasts number in the millions. In January, the research site Newzoo projected worldwide spending on E-sports would climb 43 percent this year to $463 million (roughly 3,076 crores). Revenue comes from media rights, merchandise, event tickets and advertising.

At the annual Milken Institute conference in May, Activision CEO Bobby Kotick showed a slide comparing the billions of TV revenue earned by leagues such as the National Football League and the National Basketball Association to the paltry tens of millions generated by E-sports.

Kotick, who built Activision from a $20 million, bankrupt maker of Atari video games to a $6 billion-a-year behemoth whose titles include Skylanders and Candy Crush, sees an opportunity to promote the players on a global basis. The company plans to sell franchises in 50 large cities worldwide. Kotick even made an onstage pitch at the Milken event to Robert Kraft, owner of football's New England Patriots.

"You paid $172 million, you're going to get our team for a lot less than that, and we'll finance it," Kotick said.

Vlastelica said he sees a lot of opportunity for Activision in owning the games, developing leagues and having the network the tournaments air on.

"The good news is we are in a category where there are a number of a successful business models," said Vlastelica.

© 2016 Bloomberg L.P.