Think Cineplex is all about movies? Think again. It's rapidly becoming a diversified entertainment company, and competitive gaming is the next stop
John Bruno can't remember the last time he took in a movie at a local theatre. It's been at least four years. Instead, like many others of his generation, the 18-year-old high school student from Cambridge, Ontario, spends most of his time playing video games.
You might think a big theatre chain like Cineplex Inc. would be worried by the trend. But Bruno is actually a Cineplex regular—he just doesn't come to watch movies. You see, Bruno—or Xotic16, as he's known when he checks in as one of the country's top competitive gamers—is a stone-cold killer in the Call of Duty video game. And Cineplex—known to most of us as the country's largest theatre chain—is quickly becoming a leader in a whole new field: the rapidly expanding world of live competitive video gaming.
With a rangy build, scraggly beard and surreal hand-eye co-ordination, Bruno calls to mind the legions of Canadian teens dreaming of NHL stardom. But his athletic future lies in a different arena. "I've been playing on teams for five years," he says, "but I really got serious in the last year, when we started winning online tournaments."
And he is serious—so serious that he decided to reduce his course load and stay in high school for an extra year, just so he could devote up to eight hours a day to honing his Call of Duty skills. If he's worried he's mortgaging his academic future, he doesn't show it. Instead, he exudes the "aw-shucks" confidence found in any top-tier junior hockey player who can see a path to the pros. "I do want to go to university," he says. "But I want to play professionally and see where this can take me."
Prowess with a virtual ARX-160 assault rifle has already taken Bruno to fully paid tournaments in Dallas, Atlanta and Paris, and earned him several sponsorships, including those from handset maker Scuf Gaming and JerkyXP, an Ohio-based beef and bacon jerky maker "dedicated to fuelling gamers for their long hours of play."
In March, Bruno anchored the four-man team that won the Cineplex WorldGaming Canadian Championship Series, a tournament that began with 6,000 online players and live events in more than 20 theatres. The two-month battle climaxed with a full day of Call of Duty matches played before a packed Toronto multiplex theatre—competitive gaming, or eSports, is a big spectator sport—with an online audience of 147,000. A total of $65,000 in prizes was handed out. "ESports are just starting to take off, and they are going to explode," Bruno says, coming off his first major tournament win. "Cineplex was a great host—and they need to put more into these events."
As it happens, Cineplex chief executive officer Ellis Jacob plans to do just that. Three decades into an impressive career as a theatre operator, Jacob knows he needs to roll out a strong second act.
Cineplex is a giant in Canada, with 164 theatres and a 78% market share. That hold on moviegoers translates into a solid business: The company boasts a market value of $3.2 billion. But screening films is a mature business. Theatres face increasing competition from online rivals such as Netflix. And Cineplex has no control over the quality of its product—if the latest instalment of Fast & Furious or Fantastic Four bombs, the bottom line suffers.
That's why, five years ago, Jacob and the Cineplex leadership team decided the company needed to be about more than the movies. They started by launching what is now one of Canada's largest digital advertising networks. Now, Jacob is betting he can further wean Cineplex off the box office by building two new cornerstone businesses.
The first is an audacious move into eSports via WorldGaming—a company Cineplex bought in 2015 that hosts tournaments like the one Bruno won in Toronto. The second venture is a newly launched chain of upscale gaming, dining and live entertainment complexes known as The Rec Room.
The vision is ambitious. But striking gold beyond the silver screen won't be easy. Competition in the leisure space is fierce, and eSports is a nascent and rapidly shifting sector. There's the risk Cineplex could spread itself too thin. There's also a significant branding challenge; attracting Bruno's friends and fans means changing the way a generation thinks about the multiplex.
Can Jacob pull off the transformation? The CEO is confident. "We are more than a theatre chain," he says. "We are an entertainment destination."
Standing on a patch of sidewalk destined to be part of a 300-seat outdoor patio serving 25 brands of draft beer, the 63-year-old Jacob points to where his audience will come from. The Rogers Centre, home to baseball's Blue Jays, is across the street. The Air Canada Centre and Bay Street's office towers are a few blocks away, and condos soar in every direction.
Welcome to Toronto's Rec Room. Still under construction, the former site of a Leon's furniture outlet will be the new chain's second location when Cineplex opens its doors this summer. "I've got an accounting firm and one of the law firms pushing to be the first to hold a function at Rec Room," says Jacob, who worked as an accountant before joining a predecessor to Cineplex. "And we're surrounded by young people with small apartments whose social life is all about gaming with friends."
Cineplex opened its first Rec Room in Edmonton last September, hiring an executive who built the Planet Hollywood chain to run the project. The concept combines high-end food and live entertainment with the latest cutting-edge games, and a dash of retro arcade entertainment. Along with what's billed as Canada's largest wood-fired grill, and Italian-made pizza ovens that cook a thin-crust pie in 90 seconds, Rec Room offers private rooms and a stage for music or comedy acts.
When it comes to games, there is everything from state-of-the-art Formula One race-car simulators to axe-throwing, as well as vintage attractions such as pool tables, Ping-Pong, air hockey and pinball. The one thing that's missing is a movie screen: Cineplex won't show films at Rec Room.
Just the thought of flipping flippers and ringing ringers brings a smile to the face of Cineplex's CEO as he leads a tour though the almost-complete facility. "I used to blow off steam playing a lot of pinball," he says, recalling his days as an MBA student at York University.
Thanks to a steady stream of like-minded pinball enthusiasts and other fun-seekers, Edmonton's Rec Room is already exceeding internal expectations, notching $2.2 million in sales during its first three-and-a-half months in business. On Alberta's coldest winter nights, patrons line up to get in. Cine-plex plans to spend up to $150 million launching 15 locations over the next five years, with a second facility planned for Edmonton and sites already chosen in Toronto, Calgary and London, Ontario.
Based on results at rivals such as the Dave & Buster's restaurant chain, where sales are growing at a 16% annual clip, analysts project a return of 25% a year; three years out, Rec Room is expected to generate $110 million in revenues, which translates into $27 million in bottom-line profit.
While that would make a significant contribution to Cineplex's financial results, the bigger prize could be eSports, where Jacob and his team are among the first major entertainment companies to invest in a sector that looks like it's about to ignite.
When guys like John Bruno say they want to be professional gamers, it's easy to scoff. But as of last year, more than two dozen top eSports players had pulled in $1 million or more each in career prize money. The top dog, 27-year-old Madison, Wisconsin, native Saahil Arora, won $2.7 million (U.S.) playing in some 60 tournaments around the world.
Those tournaments are almost always live events, held in multiplexes, convention centres or large arenas more commonly associated with concerts and major sports. And thousands of people pay good money to watch. The events routinely draw sold-out crowds and many competitions are broadcast live online through streaming websites.
Players compete individually or as part of a team, usually in first-person shooter games such as Call of Duty, where the object is to shoot and kill opponents to earn points. Real-time strategy games are also popular on pro circuits. In these games, competitors attempt to secure territory on maps, build structures and command units in a bid to destroy opponents' assets and win the game.
Globally, playing video games for sport has morphed from something kids do in the basement into an industry that generated $890 million (U.S.)in sales in 2016. According to CIBC World Markets analyst Robert Bek, most of that cash came from sponsorships and advertising, and revenues are expected to grow at a double-digit pace, hitting $1.2 billion (U.S.) by 2019. The worldwide audience for eSports is estimated at 214 million viewers, with 70% of that crowd falling in the millennial cohort, between the ages of 18 and 34. And it's a boy thing—viewership is estimated to be 85% male.
Cineplex was early to this brave new world, hosting Xbox tournaments on its theatre screens way back in 2005. But Jacob didn't make his first significant foray into eSports until 2015, when he acquired a tournament hosting platform called WorldGaming for a total investment of $15 million (U.S.).
That takeover brought aboard veteran executive Wim Stocks, whose mop of grey hair disguises a fiercely competitive FIFA soccer gamer who speaks the language of 20-somethings. Stocks started his gaming career with the pioneers at Atari, which brought Pac-Man to video consoles around the world, then worked for marketing machine Richard Branson on a venture called Virgin Gaming, which became WorldGaming after an amicable parting with Branson in 2014.
"The attraction of online gaming is that it scales up beautifully," says Stocks during a lull in the action at Cineplex's Call of Duty tournament. "We are in the early days of what we can do with our eSports platform."
As Stocks chats, the tournament's final game plays out against a backdrop common to any pro sports event. The arena is packed, with well-dressed patrons in the best seats munching $6.49 nachos and sipping $3.49 bottled waters while teenagers from every ethnic background make an ear-splitting racket by pounding thunder sticks when their favourite sniper executes a particularly brutal kill. Two play-by-play announcers—Clint (Maven) Evans and Jack (CouRage) Dunlop—call the action for an online audience. They're the Don Cherry and Ron MacLean of eSports. Based in New York, they roam the world to call tournaments, and have attracted massive social media followings. Dunlop jokes that it's his first visit to Toronto and he hopes to meet hometown rapper Drake. On reflection, this might not have been a joke: Some eSports announcers now move in Drake's social circles.
Cineplex will build its eSports business by tapping multiple sources of revenue, Stocks says. There's traditional advertising for online games, along with ticket and concession sales for live events such as tournaments. Sponsors are lining up to back players and events: Sony's PlayStation logo is everywhere at the Call of Duty championship.
The greatest promise, however, lies in broadcast and media rights, as eSports now attracts online audiences that match viewership for North America's mainstream pro sports, such as hockey, basketball—even NFL football. It's worth noting that 40% of eSports viewers don't actually play the video games; they treat the matches as a spectator sport, just as baseball or wrestling fans might. Sponsorship and advertising currently bring in approximately 74% of revenues in eSports, with event tickets, merchandise sales and wagering on matches accounting for the rest.
According to CIBC World Markets' Bek, the pull of eSports is obvious. "The genre appeals to a narrow, desirable and increasingly hard-to-pin-down demographic," he wrote in a recent report. "If Cineplex is successful, the company should be able to attract sponsorship dollars, with management indicating its longer-term goal is to license the model in partnership with some of its exhibition peers across the globe."
As an example of just how fast eSports is moving, Stocks points out that WorldGaming owns a North American eSports network called Collegiate Starleague, which was created eight years ago by linking students at 25 universities and colleges. Today, that network has grown to 900 schools, with students facing off online in a host of games, including contracts to host matches for the widely followed League of Legends, Street Fighter and Madden NFL games. This past school year, contestants vied for $200,000 (U.S.) in prize money.
Cineplex is moving into eSports at a time when many of the largest entertainment companies are waking up to the sector's potential. One entry point involves buying up online broadcasters, who stream the events over the Web. The largest is called Twitch: Cineplex put its entire Call of Duty tournament on the network. In a landmark deal, Amazon acquired Twitch in 2014 for $970 million (U.S.), paying up for a prize that Google was also chasing. That price is now considered a bargain: Twitch is growing explosively and has developed new revenue streams, such as selling games directly to viewers. Analysts estimate the online broadcaster is now worth $5 billion (U.S.) or more.
Some entertainment companies are also moving into eSports with a focus on hosting and streaming live eSports events. Late last year, Walt Disney Co., owner of sports network ESPN, teamed up with a subsidiary of Major League Baseball and committed to pay an estimated $300 million (U.S.) for the rights to stream tournaments for League of Legends, a game that has a following equal to any major league sport. Investors are also buying directly into top eSports teams. The NBA's Philadelphia 76ers invested in a team, as did retired athletes Shaquille O'Neal and Alex Rodriguez.
In Canada, the largest collection of eSports teams operates under the name "SetToDestroyX," a group founded by Charles Watson, a former insurance executive, based in Kitchener, Ontario. Bruno, the Call of Duty champ, plays on one of Watson's SetToDestroyX teams, and a team from his stable won last year's Uncharted 4 national championship, also hosted by Cineplex.
Watson got into eSports in 2010, eventually recruiting players and signing up sponsors. He saw enough potential in the business to quit his day job two years ago and become a full-time eSports owner. Over the past year, Watson fielded numerous offers to buy part or all of his business, and turned them all down in expectation of better valuations in the future. He now employs more than 100 contract gamers and staff. Many are still in school, earning $15,000 to $35,000 annually from playing video games. Watson fields teams that play 12 different titles, including heavyweights Call of Duty and Halo. One team is entirely female.
"Cineplex was a key catalyst in building eSports in Canada, and for that, they have my full respect, because the first to go through the wall tends to get bloody," says Watson. The theatre chain's support has helped Canada grow from the minor leagues to become one of the top four or five regions in the world—still well behind the U.S. market, but creeping up on the revenue and interest seen in Asian and European nations. As a team owner, Watson says he shares Cineplex's view that the industry is poised for rapid growth, with revenues coming from multiple sources, including advertising, sponsorship, events and online broadcasting.
Right now, however, eSports is not exactly lighting up the screens on Cineplex's financial results. CIBC World Markets' Bek ran the numbers for the company's current schedule of four major tournaments a year, and found the business just breaks even: Ticket sales and sponsorships total approximately $2.5 million, balancing out the cash needed for prizes and staging the event. Bek says sponsorship revenues and the opportunity to export its homegrown expertise to international theatre chains are "the biggest drivers and biggest question marks" in Cineplex's plans. "We do not yet have any clarity around sponsorship dollars and the potential to roll this model out to exhibitors globally," Bek wrote recently in a report.
Others question the long-term profitability of the business. Analyst Jim Marrone of Accountability Research isn't sure the video game tournaments and Cineplex's other new ventures will match the 17% to 20% profit margin that Cineplex has historically earned showing movies. "The diversification strategy is negatively affecting earnings and margins and the trend is expected to continue," Marrone wrote in a recent report. He noted that Cineplex shares sport a "premium" valuation due to the company's dominant position in the theatre business, and that valuation is likely to slip as the cost of expanding into new ventures increases.
If Cineplex's CEO is worried, it doesn't show. He's the first to admit there's much he doesn't know about the brave new world of electronic entertainment—he calls himself a pinball guy in a Call of Duty world. But he stresses that as it charges into new forms of entertainment, Cineplex is focusing on growth in areas where it has hard-won operating expertise, such as food sales, event management and amusement games. Besides, he says, none of Cineplex's new ventures involve significant upfront capital commitments.
Last year, Cineplex looked to Hollywood hits for 85% of sales. Analysts say if Cineplex meets its targets, in two years' time there will be an even split between revenues from theatres and the rest of its entertainment businesses. The company's earlier foray into digital signage is already paying dividends, with the homegrown media business posting revenues of $171 million last year.
While sales in the mature theatre business are expected to grow at a modest 3%, double-digit growth from the new initiatives is projected to translate into 9% overall growth, according to Tim Casey of BMO Nesbitt Burns. He predicts profit will soar from $1.25 per share in 2016—a mediocre year for movies—to $2.03 in 2018. "Cineplex is a premium stock in the media sector," he says. "Digital signage, advertising, Rec Room, gaming and, in time, eSports will become important drivers."
Movies, of course, remain the core business. And after talking up the prospects for eSports, Jacob is quick to mention there's great buzz around the new Guardians of the Galaxy film.
But Jacob also sees Cineplex's new ventures kicking off a phase of stable, strong expansion at a company that is nearing the limits for growth in its traditional business. He is willing to invest in Call of Duty tournaments and trendy gaming facilities because that's where millennials want to gather.
Looking across the Rec Room construction site in Toronto that is expected to host crowds of 1,500 this summer, Jacob sums up what the new venture is all about: "When we get this right, we will win over a new, different consumer," he remarks, "and welcome a whole new audience."
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