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If the train stops running for Fortnite, then they’ve got to pick up the phone all of a sudden and call their partners and say, Hey, do you want to do a league? Hey, do you want to do, and they’ve, to some degree, they’ve alienated all of that. And I think that’s just, I just have a different opinion on whether that leads to success.
Jay Clouse 0:17
The startup investment landscape is changing, and world class companies are being built outside of Silicon Valley. We find them, talk with them, and discuss the upside of investing in them. Welcome to Upside.
Jay Clouse 0:44
Hello, hello, hello, and welcome to the upside podcast, the first podcast finding upside outside of Silicon Valley. I’m Jay Clouse, and I’m accompanied by my co-host, Mr. Mouse-and-Keyboard himself, Eric Hornung.
Eric Hornung 0:56
So my brother is a streamer. He’s a gamer, Jay.
Jay Clouse 1:00
Eric Hornung 1:00
Jay Clouse 1:01
Eric Hornung 1:01
Yeah, he does it every single day for somewhere between six and twelve hours.
Jay Clouse 1:05
Eric Hornung 1:05
He is very, very good at Fortnite and Call of Duty.
Jay Clouse 1:09
Are people watching this?
Eric Hornung 1:10
Yeah, people are watching it on Twitch.
Jay Clouse 1:12
Six to twelve hours.
Eric Hornung 1:13
Yeah, it’s a lot. You can go check them out. His handle is @itsnungz.
Jay Clouse 1:19
Is he getting paid?
Eric Hornung 1:20
I think make some money. Yeah.
Jay Clouse 1:22
He has to make some money somewhere.
Eric Hornung 1:24
Jay Clouse 1:24
Six to twelve hours.
Eric Hornung 1:25
It’s a lot. It’s a lot of time. Yeah. But I was home over Christmas. And I’ve always wanted to learn how to play mouse and keyboard. Because I don’t know if you’re familiar since I gave you this nickname because you can’t, you’re so uncreative, you couldn’t come up with something.
Jay Clouse 1:40
You were just impatient. I could have come up with something.
Eric Hornung 1:44
In the world of gaming, there is your console gaming, which is your Xbox, your PS5 now. We’re on PS5. That’s kind of crazy. But there’s also what more intense gamers play, which is mouse and keyboard, which is a lot harder to move. And it’s just like you think. You aim with your mouse. You move with your keyboard. Not super intuitive, not super easy, but I learned.
Jay Clouse 2:07
I grew up in that world. That’s what Medal of Honor was like.
Eric Hornung 2:09
Jay Clouse 2:10
Eric Hornung 2:10
So you do know.
Jay Clouse 2:11
Yeah, I grew up in that world. Wow. We used to have the communication platforms were so nascent back in the day. It was called Teamspeak, followed by Ventrillo. And if I remember, I’ll link to it or tweet it out in the show notes. I can tweet out a photo of Christmas when I was twelve-ish years old when I got my first external microphone for the computer. Not a great look for me. But yeah, it used to be all cobbled together, and it was all mouse and keyboard and dial up.
Eric Hornung 2:39
And now we just have extra microphones for podcasts and no internet here at CES.
Jay Clouse 2:44
That’s right. Strange regression but much better microphone. Holy cow is this a lot better of a microphone. But speaking of gaming, today, we’re speaking to James O’Connor, the cofounder and president of the Pittsburgh Knights. James has been globally recognized as one of the best teams builders and strategists and all of Esports. He is the president of the Pittsburgh knights, a global Esports team of 30 plus players and streamers. In 2018, the Knights announced their partnership with a six time Super Bowl champion Pittsburgh Steelers. And in 2019, the Knights brought on another strategic partner with Pittsburgh roots, Wiz Khalifa. Wiz Khalifa, Eric.
Eric Hornung 3:20
I was such a big Wiz Khalifa fan in college.
Jay Clouse 3:22
Now I thought Wiz Khalifa had a song about green and yellow. No, he did black and yellow.
Eric Hornung 3:27
Black and yellow.
Jay Clouse 3:28
Lil Wayne remixed it to green and yellow
Eric Hornung 3:30
For the Packers.
Jay Clouse 3:31
Eric Hornung 3:32
And my friend Shane Darrow, who you know, from fantasy football, remixed it to a song called White and Forest, which is played all over OU for a few years.
Jay Clouse 3:41
Oh, wow. Was it good?
Eric Hornung 3:43
No. But it was good enough.
Jay Clouse 3:47
Well, we’ve started to dip our toes into Esports and gaming over the last year. If you haven’t listened to our episode with Josh Chapman of Conway Ventures, I highly recommend that we spoken with Matt Benson of EViews who’s building an infastructure startup for Esports in gaming, and today we’re finally dipping into the world of professional eSports on the team side, and we couldn’t have a better guests than James O’Connor, the cofounder and president of the Knights themselves.
Eric Hornung 4:13
So if you guys are into this episode or want to connect with us, you can send us a Tweet @upsideFM. Connect with us on Instagram at the same handle. Or flip us an email if you got something a little longer, firstname.lastname@example.org.
Jay Clouse 4:28
Get into the game.
Eric Hornung 4:32
Jay, come with me on a quest. Come with me on an adventure. Are you in?
Jay Clouse 4:36
Eric Hornung 4:37
All right. I want you to start a high growth startup right now. What’s its name?
Jay Clouse 4:41
Eric Hornung 4:42
The Haberdashery. It’s a very traditional startup name Google. Zynga. The Haberdashery. All right.
Jay Clouse 4:50
Tip of the hat to that name.
Eric Hornung 4:51
That’s a Yeah, that’s a nice one. So let’s say that you go out and you want to hire some great engineering talent to get this thing off the ground. What are you going to do? Where you gonna go?
Jay Clouse 5:01
Well, I would probably first go to my own network and realize quickly that I don’t know enough engineers.
Eric Hornung 5:06
Right. And with a name like The Haberdashery, you’re gonna have a tough time recruiting.
Jay Clouse 5:10
Tough time. Tough time. I might need some outside help, Eric.
Eric Hornung 5:13
Yeah, I think if I were you, I would go to our friends over at Integrity Power Search. I mean, they’re the number one, full stack, high growth startup recruiting firm between the coasts. They partner with venture capitalists, private equity groups, and hypothetical CEOs like you, Jay, to build amazing teams for the world’s most disruptive companies. Since 2012, they’ve successfully executed over 600 searches. So that sounds like you’re starting engineers, Jay, we could get those. All right, we can get those with IPS. And they are on track for over 200 in 2019. Their clients have collectively raised over 2.5 billion with a B in venture funding and, hey, maybe with the haberdashery, will be counting.
Jay Clouse 5:53
If they can help The Haberdashery, they can help you. Learn more about Integrity Power Search at upside.fm/integrity, and they may just be able to help you find your first engineers. James, welcome to the show.
James O’Connor 6:11
Hi, thank you very much for having me.
Eric Hornung 6:12
So on upside we like to start with a background on the guests, but we’re actually gonna change it up a little bit today. Can you tell us about the history of the Pittsburgh Knights?
James O’Connor 6:20
Okay. We founded the company in December 1 of 2017 in a small hole in the wall in downtown Pittsburgh with the whole goal of creating strategic partnerships and a unique ownership group. And I think that we’ve done that as a founding group. And so I wanted to put together music, sports for its partners, and eSports in gaming. And so we did that. A wholly owned subsidiary of the Steelers invested in our company, as a, as an initial investor. They provided a partnership agreement where they incubate us in their offices, and they support us with a significant amount of experience and support. So I haven’t heard a no, which is a blessing, and we meet with all their employees, and they teach us about how they do business. And so what an amazing organization that we could learn from. And so another sports team group invested as well, it’s not public yet. And Wiz Khalifa also partnered as well. And so we brought him and Taylor Gang around us to support us in our growth over the next couple years. Their investors and partners of ours. And so we think we can do a lot of cool things together.
Eric Hornung 7:33
Why was music as important as a potential investor?
James O’Connor 7:36
If you think about gaming, gaming is entertainment, and I wanted to do something innovative. And my business school, my MBA program, I learned about innovation is putting things that don’t normally, that haven’t really gone together significantly in a different space. So you see, entertainers come to Esports events, but you don’t really see them heavily engaged. And so, it was about putting Pittsburgh first when we created the ownership group. It’s all Pittsburgh based groups. And so music was a way to basically…there’s a…that’s a good question. But there’s a lot of there’s so many answers to that. But I’ll try my best to…music is really a part of gaming. And I wanted to take the best of the music industry and the knowledge of that and apply it to our company. So even the way that music monetizes has a direct correlation to how eSports needs to monetize.
Eric Hornung 8:31
LeBron says that all rappers want to be ballers and all ballers want to be rappers. Is there a similar parallel somewhere in gaming and music?
James O’Connor 8:38
I think everybody plays games from casual to competitive. So I think it’s a unifying thing that everybody comes together. So sports, so if you think about it, an NFL player, he might want to be an artist, music artist. If you think about music artists, they might want to be a sports player. It’s very, I agree with that. But the unifying thing in all of that is they probably all played games growing up. So it’s a pretty cool medium to have all the people come together around it.
Jay Clouse 9:05
You said that you started this team with the goal of having strategic partnerships and unique ownership. What is the non-unique model of ownership in eSports right now?
James O’Connor 9:14
So a lot of people…I’ve been in the Esports industry for close to 20 years, three years off when I, I took a break, and then Twitch blew up the industry and I had to come back. I left in 2012, right, and I refused to turn the computer on. But to answer your question, actually, can you repeat it, please?
Jay Clouse 9:31
You said that you wanted to start this team with a unique ownership structure…
James O’Connor 9:35
VC, VC. So there’s, there’s not too many people that have been in the industry as long as I have. And so VC, when they find those groups, they really want access to the market. And so they’re investing in those groups. And so it’s not normal for sports groups to invest in Esports properties. It’s just starting to happen now.
Eric Hornung 9:57
Why start a team versus starting infrastructure play or something else in the esports space?
James O’Connor 10:04
We’re doing both. The nights aren’t just a team. We’re an event management compan,y just starting. And so we have a partnership, a joint venture with the largest starrcade in the world. It’s called Replay Effects. And it has, 20,000 people came to it last year, we’re expecting about 25 to 27,000, this year, July 9 through 12th. And so it’s a nonprofit partnership that we have, where they own a significant amount of equipment. Basically, they go out and buy all old arcade games, everything that you’ve grown up, Dig Dug, PacMan, Pinball, everything from the 1970s till today, they own, and they preserve, and they restore, and they host a large arcade four days out of the year. And so we’re going to be taking that, and I’d like to turn the Steelers stadium into a barcade.
Jay Clouse 10:54
That’d be amazing.
James O’Connor 10:55
Yeah, we have high stage ae. The ownership of the Steelers have asked me to get going with events. We wanted to build the infrastructure of the company first to be able to monetize the events through sponsorships and partnerships. So what’s really special about the event to me is when, parents are trying to understand what their kids are doing playing fortnite or Call of Duty or Counter Strike or Rocket League, Smash, they’re trying to figure out what’s going on and they’re disconnected. And a way that they can become reconnected is by coming to Replay Effects, and playing the game that they grew up with and sharing that experience with their kids. And then playing and experiencing the new game in a casual setting. And we’re also going to be doing Esports competitions. So the goal is to turn it, Replay Effects, into a kind of like a mini dream hack. And so if you think about that, when you asked why music, well, potentially one of the things Wiz is going to do with us iss live appearances and promotional tweets, engaging driving traffic to events and letting people know where he’s going to be. So we will basically at nine, nine o’clock at night, we’re going to turn it into, you know, DJ and do some cool stuff. And we’re going to be adding Esports elements to it. So we have some great partners that are going to be coming in building eSports competition elements at the show.
Eric Hornung 12:08
One thing that’s unique about Esports is that, under the same brand, you can have different teams. Right? So you have different people playing different games under the Pittsburgh Knights…
James O’Connor 12:18
Eric Hornung 12:18
…team. How do you decide which games?
James O’Connor 12:21
That’s a really good question. That’s kind of the secret sauce, but I’ll give you, I’ll give you a tip of it.
Eric Hornung 12:25
Yeah, no one will hear this.
James O’Connor 12:26
Okay, no one. So trying to figure out what I want to share on this, because some of it I’ve just, transparently I just spent the last month of my life, through Christmas, figuring that question out to the science, like to, like probably, like 40 hours just in a room with a whiteboard, doing the analytics, but really what it is, is how are you going to be able to monetize across the game? I mean, it’s a business, so how are you, how you going to drive traffic, how you gonna drive fandom and engagement with the popularity of the game? It’s a marketing play for the game developers until it isn’t. So if you think about the way the game developers think, they think, okay, I want to monetize the game. So first let’s promote the game like a publisher. And then they say, Okay, let’s engage the community by doing online tournaments or in person live tournaments. And then from that, they start to see if there’s a monetization of that through ticket sales, or broadcasting or obviously concessions, and then sponsorships. And so from that, they say, okay, is this as far as I want to go? Or is there a market to commercialize my game where I can sell a franchise out of it? And so they go through the whole cycle of that. And so, we really try to understand the life cycle of where these games are. And you have to appreciate how you think they’re twenty, like their their projections are going to be so you can make your own projections. So to be clear, I look at their live broadcast time, I look at their viewership, I look at their social media engagement of their their social media accounts of what they’re promoting the game. I want to know the investment that the game developers’ putting into it. I want to know what they’re helping , hat their contribution in partnership to us is, as a partner, so that we can understand the revenue. So everything we do is based in, in just numbers. Excel spreadsheets.
Jay Clouse 14:17
Help me explain the value chain here within the professional gaming arena. If you have the game developers you have you have as a team, you have players, how are players compensated? How are you compensated as a team? Like, how did the economics of that all work out?
James O’Connor 14:32
So this really blew up in about 2016. So if you just want to look at League of Legends and how they started doing it, that’s where all a lot of the Esports teams are really based off of, and it’s just from one simple thing, a game becoming extremely popular, which is League of Legends, and them doing publisher stipends. So they’re paying upwards of $250,000 per team, 10 teams to commercialize their game and market the game through Esports. And they cut that back, I believe a year or two ago, and they saw less viewership and engagement in their game, and then they continue to spend in it. So it’s a marketing vehicle. How do you create engagement in micro-transactions and game sales? You, you create a path to pro, you create a way that you can play and be better than somebody, a way to compete. So they really take a funnel of casual gaming into pro-gaming. And so that all is done by their own investment into fostering the game. Some,like Fortnite and other groups, maybe hit really positive game, they don’t need to do that. I personally don’t yet consider Fortnite an Esport. And I think that’s partially due to the fact of the way that they view their competitions and the sustainability of the ecosystem of it. And I think that there’s a lot of things I used to categorize that. But to answer your question, it’s about the holistic environment of the game to make, to make the marketing vehicle successful.
Eric Hornung 15:59
So when you, the way that you guys make money–not the event side, kick that out for a second–is publishers of games pay you a subsidy to…
James O’Connor 16:08
Eric Hornung 16:09
…get a team?
James O’Connor 16:09
Potentially, it depends on the game.
Eric Hornung 16:11
James O’Connor 16:12
It depends on the game, it depends on where they are. So it’s kind of where sponsorships meet games that are more popular. So it depends on if the game developer feels that they have to. So some, they just want to put in prize money. They say, I would rather put, like Fortnite, I’d rather put 100 million dollars in prize money and, and that will be my marketing tool.
Eric Hornung 16:30
So in that instance, you only win when you win.
James O’Connor 16:33
Yes. So you’d have to come up with projections and ways to analyze how it’s not going to be a total gamble to sport a player because you don’t get any of the money, effectively, like through prize money you do. But that’s a gamble. So, so I think that, you know, I would counsel that if Epic Games were to put, heck, even 20 to 100 million they put in price pool and use it to subsidize player salaries, they could have a stronger ecosystem, and they could build it and they could use A different way to commercialize the game. They kind of went through a rush, where they’re like, okay, we’re selling so many in game item sales, we’re making so much money, let’s just keep, let’s just take out of that, you know, 300 million a month or whatever they’re making, let’s just take, let’s take 100 of it and just put it prize pool and it’s a good deal. It’s low cost for them, they don’t have to build the infrastructure, then have to put the staff and time, they don’t have to work with event partners. It’s very lean for them. It’s very smart, but I don’t in the long term, I think it may harm them. Once people lose the engagement of your game. And if you don’t have a sustainable ecosystem to fall back on, you can be in trouble. So from Counter Strike, it started in 1999, truthfully, and that game has a significant foundation of infrastructure, and partners and open ecosystem that really make it sustainable. And so if the train stops running for Fortnite, then they’ve got to pick up the phone all the sudden call their partners and say, Hey, do you want to do it? Hey, do you want to do…and they’ve, to some degree, they’ve alienated all of that. And I think that’s just, I just have a different opinion on whether that leads to success.
Jay Clouse 18:08
What games have the highest concentration of professional teams being formed to compete in them right now?
James O’Connor 18:14
Rocket League is one of them. So we had a team go to the world finals. It’s a nice game, very sponsor friendly, as they evolve it. And so I just talked to a lot of strong words against Epic, they own Rocket League. So, Epic Games, I love you. So I think that, you know, if I were Epic Games, what I would do is I would work hard to commercialize the game, I would move, it has a younger fan base. I mean, some of the kids are anywhere from 16-18 years old, so it’s difficult for them to move that to an all land league because the game level has to mature. So when you think of Smite, some of the players are 24, 26,30, because the game is a little bit older and more mature. So when you get into a brand new game, even with fortnite, some of the concern is that like, you can’t do some of the things so maybe that’s, I’m making an excuse for Epic, but maybe that’s one of the reasons, is because they’re, it’s they have some of the youngest fan base in all of gaming. So maybe that’s just part of a life cycle that Epic will wake up to and partner with teams and and find ways to engage. So I’ll just, I’ll just speak what I mean to that. We’re in the Steelers offices, we have, if you’ve ever been to a Steelers game, they’ve got 60,000 people.
Eric Hornung 19:30
I’m a Browns fan.
James O’Connor 19:31
Oh, yeah, sorry.
Eric Hornung 19:33
I’ve been to a couple of Steelers games.
James O’Connor 19:36
I mean, we…
Eric Hornung 19:36
It doesn’t usually turn out great for me.
James O’Connor 19:37
…can take a moment to talk about this year. I’m sorry that that happened to you.
Eric Hornung 19:42
Just being born?
James O’Connor 19:43
You were excited, things were happening, it was positive. And then…
Eric Hornung 19:47
You’re talking about the last 29 years?
James O’Connor 19:48
Yes. I’m sure you got baited. I’m so sorry. We, as Steelers fans, we feel so sorry for Browns fans.
Eric Hornung 19:58
Thank you. That’s, that’s what I want.
James O’Connor 20:01
My favorite picture is of the Browns Jersey where the guy goes to the game and he has like eighty back of the names.
Eric Hornung 20:09
James O’Connor 20:09
Yeah, and all the quarterbacks. And so hopefully that doesn’t happen with the guy you got now. I think he’s pretty good. So
Eric Hornung 20:15
I’m hoping so too.
Jay Clouse 20:17
So you’re in the Pittsburgh Office, you are the Pittsburgh Knights.
James O’Connor 20:20
Jay Clouse 20:20
Talk to me about building a fan base around a team. You guys seem to have taken at least partially a geographic approach.
James O’Connor 20:28
Jay Clouse 20:28
Is that standard? Or Is that normal?
James O’Connor 20:31
Um, so I thought about Manchester United when I thought about the Knights, and I thought, how do we take the love of our city global? And so we thought, okay, we’ll put it in the name. And I wanted, I want, if you think about they’re the biggest sports team in the world, basically. I mean, they’re one of them. And they do a really good job with the city’s name, you know, with the region name in the name. So I figured if they can do it, I can do it. And we get a lot of support from the city. I think the city when they see the team play year or so back, 60 million people saw our pub g team at the World Finals. So that’s cool because Pittsburgh was all over the place. And the city’s behind us. They recognize us as an official team of the city. They’re so super supportive.
Eric Hornung 21:16
Are there other teams doing that geographic approach?
James O’Connor 21:18
Overwatch is and Call of Duty is as a franchise with Activision Blizzard. A couple groups, I think, have done it, but not too many. I think that right now, as fandom grows, people want to stay almost region agnostic to just get every fan. But the way I think about it is Pittsburgh is a special place. If you look at the group that we have, we’re all from Pittsburgh, I would like fans to become fans of us just because if they don’t have a team in their region, I mean, if I was from, you know, Little Rock, Arkansas, and I had every cool thing in Arkansas happening in my town, I would identify and say I really like what they’re doing. I’m going to be a fan of them. If, if Little Rock ever gets a team, I’ll support them too. But I just think hopefully we’re setting best in class for what you should do in your region.
James O’Connor 21:27
I want to jump back into revenue models real quick, because we’re talking about the Steelers. And traditional sports make a lot of their money off of the broadcast, right, the broadcast right.
James O’Connor 22:18
Eric Hornung 22:19
Media rights, and we didn’t even really touch on those. And what that looks like for Esports. Is that similar?
James O’Connor 22:24
Remember when I told you where they create the game, and then they start commercializing it, or sorry, they start doing broadcasts and live events, online tournaments or in person tournaments. It’s really when they start commercializing it, if you realize it from a business model, they have to make money, they’re doing this to promote themselves, they’re investing in it. And so they’re making a sizable investment into generating ROI for their company. And so what they are looking for is co-investors, and co-investors would subsidize teams and all the operations costs and all the marketing costs as a partner. And so what that needs to build and evolve in–and it’s starting to–is to memorialize that through a partnership agreement. And some, some leagues do, some leaks, don’t. They’d like to, transparently, if they don’t need to, why are they going to force to do it if, if some guy is going to show up with a VC team in you know, Chicago and just pop up and be like, Hello, I’ll, I’ll be in the game, I’ll pay players and salaries, and I’ll do everything for nothing. Maybe I can figure this out to beat the other guy out. So there’s a little bit of that. So what I’m, a mission of mine for this year, is to understand the associations within North America, the partnerships with the teams, the big teams. I’m a middle tier team, bigger because of my partners and want to come in. I mean, I have the history, I’ve been in probably longer than the majority of the bigger team owners, so they know me, they know who I am, and I’d like to create value for them and be a servant leader to a larger Association where we work collectively for, with game developers. So there’s a couple groups. One is called the PEA. And I’m going to be meeting with them to figure out what they’re doing. And I want to, there’s probably a buy-in to understand, you make a significant commitment and you come together. And so there’s a little bit of fragmentation on this around so many different games, and so many teams and franchise and non-franchise. But I think this year for us is about figuring out who are our team partners in a larger league association so that we can help each other.
James O’Connor 22:49
So talk to me about the structure of a team. You have an owner and you have players, but in the middle level, are there like a general manager, an EV of player operationss, ihere coaches, like how does how does the middle of the structure look?
James O’Connor 24:54
So I’ll just go over some of the job descriptions that I’ve got in my head. First you got partnerships team. So partnerships and then from that goes activations. So who is managing the partners once you get them, and who’s giving reports on ROI, event coordinators, you know, who’s, who’s figuring out where your players are going to go and do meet and greets, etc. Also, obviously player managers, team managers, the whole suite of that, coaches, and then if you extend that, you have merchandise. So something I went really deep on, I’m very proud of, the Steelers are one of the five teams in the NFL that do their own merch. Patriots, Packers, Steelers, Cowboys and Raiders. They buy back some of their license rights from fanatics and they do their own merchandise. And so we built, with the help of the CEO Steelers, our entire own merchandise line, like, like our whole merchandising company, similar to the infrastructure of what the Steelers have in that could do the volume that they have if we had that volume. And so we built that infrastructure to be able to commercialize and monetize our Team as we go out there rather than just license our rights away to somebody where we can’t see how many of our eyes on sales and project and really integrate that and do customization and cool things. So I’m really excited about that. I went backwards, I went deep on merch, which is probably the last thing that you do as a team. And the reason why you do is you have to make sure that you’re successful in a lot of other ways. I know that I’m going to be successful. I’ve had a third of my life in Esports. And so actually, sorry, half of my life in Esports. And with that, I really wanted to create value for the partners of the Association of just going so deep in an area that I knew they hadn’t formed yet, truthfully, with the partners, like I get to meet all the Steelers clothing vendors and just learn everything about from all their logistics. So I’m proud about that. And we’re going to figure that out going forward in 2020. So merchandising was one, communications and marketing, graphics and graphic design, content producers, video editors, social media content, social media managers, analytics.
Eric Hornung 27:07
Analytics in what contexts?
James O’Connor 27:08
All social media. Basically partnerships, analytics, and social media. Just basically anything that has numbers attached to it, you need the report, reporting.
Eric Hornung 27:17
What about, like, talent, recruiting and scouting? Is there anything that’s a parallel there?
James O’Connor 27:21
Yeah, we’re going to be ramping up on that. I wanted to…before we grew heavy in Esports, you have to be able to commercialize and support the teams through sponsorships, partnerships, and other revenue sources. So I wanted to get it down pat of understanding the revenue that we would generate per team. So we just spent the last month really breaking down the per team cost of what each team and what revenue it would drive so that we could project the value of sponsors that the value of each team to sponsors so that we could appropriately create a rate card and then have a margin in there for the company.
Jay Clouse 27:57
Can you share any of that? Just even…
James O’Connor 27:59
No, I can’t.
Jay Clouse 28:00
You know, a range? Like we have, we have no idea what that…
James O’Connor 28:02
No, I can’t. But that’s as far as I’d like to share on that. But no, I just went super deep on basically creating…it’s just really, I’m very conscientious and making sure that we create value for our partners, and that we don’t overspend in the market before we’re ready.
Jay Clouse 28:18
All these roles you named off, how many full time employees do you guys have?
James O’Connor 28:21
We’re sitting at 14 right now.
Jay Clouse 28:22
Okay, and what, are players like contract employees? What’s a player contract look like?
James O’Connor 28:27
Yeah. So their employees. You can have, depending on what the roles are, independent contractors, employees, it depends on what roles and you know, if you understand the laws, you have to make sure you’re doing the right thing. So it depends on, on how they’re engaging with the company.
Eric Hornung 28:42
So how many of those 14 are players?
James O’Connor 28:44
Oh no, there’s about, I think we’re sitting about 35 players.
Jay Clouse 28:46
Okay. So it’s separate.
James O’Connor 28:47
That for that’s, that’s a completely separate group. So I was speaking internal back end staff.
Jay Clouse 28:52
In the industry now…
James O’Connor 28:53
And just just be clear, we’re going to be hiring a good bit more, but at each role, we have a lot of resources, and some of the awesome thing about how you watch the Steelers do business, they scale. So during game days, they go up to like 1,200 employees, and they sit a significantly lower during, until game day. So something, when you look at an NFL team, their ability to scale with staffing volume is a critical to their business. And so when you think about how small our team is, we are developing and putting in place similar infrastructure as them to be able to scale up on certain things that we need for certain staffing. I think it’s, that’s really critical to keeping costs low when you’re growing your company.
Eric Hornung 29:35
How centralized is purchasing? Like if someone wants a new headset, or do they just go out and buy it? Or do you guys like bulk purchase? And then not just hardware but vendors for different types of software and internal communications and all the things that run your business, is it done at the top or is it decentralized by team and player?
James O’Connor 29:53
So I’ll go through our merchandising department. We let them do the purchasing. But I can tell you that with the Steelers, it’s awesome to be able to be testing new tech that they might be interested in, new, new services. If it works well for us, the Steelers may consider it. Figure that out. Yeah. Thanks for the good partnership deal. And we’ll tell the Steelers if we like it.
Jay Clouse 30:18
Yeah. So in some sports, like in baseball, there’s no salary cap, and the Yankees just like spend on the best players. And…
James O’Connor 30:25
Yeah, I think that system is broken and the reason why baseball has issues.
Jay Clouse 30:28
So talk to me about the corollary in Esports, can you just go out and buy the best talent and be the best team on the planet?
James O’Connor 30:34
It’s a…yes, that’s why, you know, some of the teams you know, right now, through VC and subset like and they’re going through the VC, Silicon Valley model growth where they’re trying to get a significant amount of views and impressions. And the question is, is that going to drive revenue?
Jay Clouse 30:50
James O’Connor 30:50
And so the, the, if you look at the Internet age back in 2000, when the crash, when the crash happened, when you focus on, if I was their investor, and you told me I had X amount of YouTube views, or X amount of followers, I would say, Great, thanks for the impressions, How is this driving sales, sponsorships? And how are you doing that? And so if it’s leading, leading to revenue, and if they’re actually attributing to that, great. But when you’re sinking significant amount of money into infrastructure, as far as like building a home office, some people are doing it right, and they’re getting really nice partnerships. I’ve heard some of them, and they’re using that to subsidize some of the growth, but it’s really, you got to be careful with that, or you can just spend people’s money.
Jay Clouse 31:37
Yeah. So what do you think about, there, there’s like a giant Esports stadium being built in Texas somewhere, right?
James O’Connor 31:43
So there’s a couple things. Arlington has an Esports arena, but I think they might be doing something with Envy, Hastro I might be building something for Call of Duty. I have to look into it. I know Philadelphia and Tyler from Comcast, Comcast Spectre and T1 and the Overwatch team, they’re building something.
Jay Clouse 32:02
Are you bullish on stadium experiences and plays like that for this industry?
James O’Connor 32:07
I am as long as they’re universal, meaning that it’s, it’s not just Esports, it’s multi-use venues. I think all venues have to be successful. I went into, a college invited me, and they said, Hi, we’re just doing this significant renovation of our basketball arena. And we would like, when the basketball season isn’t being used for volleyball, we’d like to, you know, you do Esports events in it. And I said, Okay, great. Can I see the plans, and they showed it to me. And all they did is knock out a wall and make it prettier, let more light in, but it’s still a basketball arena. And there was no thought to other alternative uses for wheeling in like projectors or any of the other technology that you would want to transform this thing into a multi-purpose venue to do all kinds of different content and media and shows and events. So the problem with that is that I think you really need to focus on the programming first and focus on the projected revenue that you would drive from the venue, and then work backwards on what it looks like. And I know that’s how it’s done. But you would see, when you see what they make, you would assume they created the design first, and said, Oh, we’ll figure out the programming later. I just don’t get that.
Jay Clouse 33:21
James O’Connor 33:22
So I am bullish if the programming is there. And so we’ll see.
Eric Hornung 33:27
What do most people who are conscious of Esports not understand correctly about Esports?
James O’Connor 33:34
How big it is. Actually understanding the size and the revenue of the gaming industry versus…so Esports is a subsection and the subculture of gaming. And I know you guys know that, but it’s important understand. It’s the shiny outer ring of the giant circle of revenue that is gaming revenue. It’s what you see. And, and Esports has really been around for a long time time but, it’s now finding a way to monetize. So it should continue to grow on that giant circle of revenue. When you look at the other ones, they’re significantly smaller. If you look at music or TV, it’s smaller than gaming revenue. And so I think it’s breathtaking to appreciate how big and how powerful game like, or a company like Epic Games or, or Valve or Blizzard, Activision Blizzard is. They do a great job of driving revenue. And so the thing and the thing that people don’t understand is, they are the new power players. They created the new football and anyone that doesn’t create is beholden to them. So you better get in line. They’re not saying things on podcast mean about Epic Games. Sorry, Epic Games.
Jay Clouse 34:47
We’re getting close to time. So I’ll try to wrap this up. But you’ve been beating this drama of revenue driving revenue metrics, like building a sustainable business. So what does…
James O’Connor 34:57
That’s to my investors apparently.
Jay Clouse 35:01
Who, Who does this really well in the industry and like, what levers are they pulling to build a sustainable company in the gaming industry?
James O’Connor 35:09
Who do I think is doing it well? That’s a great question. You know, I think Energy with their partnership with Hector, and how they’re thinking about their business and some of the, the ways that they’ve been structuring, some of what they’ve been doing with YouTube and their partnerships. I really like, I think they’ve got a good leadership group over there. And I think that they are heavier focused on that than…I think they’re doing a good job. I think you’re going to do really good for 2020. It’s surprising because you don’t hear, you know them, but you know, they don’t really talk about the business side of it, but I like some of the moves they’re making. I think that my old company that I used to work for, Liquid, is very smart. Steve Arhanset, Victor Goossens, they are very good at what they do, and they’ve got really strong backing with the Golden State Warriors Investment Group and Washington Wizards and XGeomatics capital, which Michael Jordan and all these smart people invested in. Tey went to the Disney incubator, I’m super jealous. I think that they’re really smart on some of the strategic partnerships that they do. They’ve got a really good team over there. So I think they’re the Yankees of, of Esports. And I think, I model some of what we do off of what they do.
Eric Hornung 36:22
I guess my last question is what’s going to change the most in the next five years of Esports?
James O’Connor 36:26
I think that there’ll be a sustainable ecosystem. I’m gonna make a prediction.
Eric Hornung 36:31
Oh, we love some good predictions.
James O’Connor 36:32
Okay. I think that the teams will gain significant strength over the next couple years, and the event companies that currently are just partnered with a game developers may become contracted. So it goes game developers, right now event companies, and then teams. And I think potentially teams may flip with event organizers, where they subcontract to event organzers, because, if you think about it PRG are these companies out there that are white label you never hear about, but they just do a ton of events, you don’t hear about PRG you hear about the Steelers or the NFL or, you know, all these other event companies. And so I think that, right now, event companies are acting as a liaison for marketing. And I think that if the revenue doesn’t get distributed appropriately, I think that the teams will gain continually more investments. And then they will, they will create an infrastructure where they will either build their own event infrastructure, and they will, because they’ll partner with sports entities who have that backing and assets, because if you look at Call of Duty, they partner with the Vikings, they partner with sports properties who have that infrastructure. And so I think companies that only do events need, need teams as much as the teams need the event partners.
Jay Clouse 37:58
Awesome. Well, if people sant to follow your work or tune into a Pittsburgh Knights competition, where should they go?
James O’Connor 38:05
You can go to my twitter @JamesOConnor. O-C-O-N-N-O-R. Or Knghts.GG, so @KnightsGG is the Twitter handle. Find out more about us, follow us. I’ll start trying to get out there more with content and media once I get out of the batcave of doing all this finance stuff.
Jay Clouse 38:23
Awesome. Thanks for coming on the show.
James O’Connor 38:24
Jay Clouse 38:28
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Eric Hornung 39:07
Alright, Jay, we just spoke with James from the Pittsburgh Knights and he dragged me.
Jay Clouse 39:14
Yeah, he did. He had no, no holds barred. Gloves came off. And I love when someone makes you, you know, reflect on this constant self punishment of following the browns.
Eric Hornung 39:29
Yeah, it’s it’s a decision that, you know, I didn’t really have a choice. Really, I was born into it. But it’s one of those things that I just had to continue to double down on. And it’s one of those things that every time you double down on it, it just somehow gets worse.
Jay Clouse 39:44
Feels a lot like blackjack last night at the Mirage.
Eric Hornung 39:48
Yeah, I didn’t even get a chance to double down. I was just hitting 16s.
Jay Clouse 39:53
Anyway, hot takes Eric, what did you think?
Eric Hornung 39:55
Holy investor list huh?
Jay Clouse 39:57
Eric Hornung 39:58
So one of them is undisclosed, but Wiz Khalifa, I think he mentioned a few off air that we’re not going to mention here that are bigger names. And the Pittsburgh Steelers, we mentioned multiple times. That’s quite the investor list, Jay,
Jay Clouse 40:14
I can’t imagine a better strategic partner than one of the most successful NFL franchises of all time. I mean, I get that Esports does not map directly to traditional, like, NFL football. But they figured so many things out, even the example he gave of merchandising, that’s got to be such a valuable learning and, you know, having the cachet of the CEOs behind you to get some friendly terms and deals for whatever software or hardware they may be buying that could be useful to their partners. It seems like James has really figured out a lot of the strategy behind partnerships on the Esports side, but it, it sounds necessary because the economics don’t just, just don’t seem as straightforward as you might expect.
Eric Hornung 41:03
Yeah, I wish we would have gotten a little bit more on the economics. We understand a little bit more of how they make money, but not the scale or the size or where it really all comes from.
Jay Clouse 41:16
And now it’s making me question, you know, whether the assumptions of how I think professional sports models generally are as simple as I initially thought. You know, I have no idea what the breakdown is for the Pittsburgh Steelers, for example, of what percentage of their revenue is really coming from what channels and if that’s more complex than I think. But the confusing and hard part it sounds like is, without a consistent model of who the payers are in this industry, you know, some of the game developers are supporting teams themselves. Some of them are just doing these prize packages, which incentivizes teams to come up and build. But to your question of how do you choose what games to get into, it sounds like some complicated algebra and risk, frankly, of where you go.
Eric Hornung 42:03
Yeah, as a team owner in Esports, it’s way different from being a team owner in football, baseball, basketball, lacrosse, whatever it is, because the underlying game isn’t going to go away and you can optimize for that game. But being a owner in Esports, you’re actually more of like a, like an investor, right? You’re, you’re making bets on a game, not a, not a venture capital investor, but more of maybe a private equity public markets type investor where you’re taking all the, all the data you have, and making an allocation of capital decision based on game trends and where games are going. And at some point, there’s going to be game exits as well. And not the good kind. There’s gonna be, okay, this game is dying off, so we need to get out of this game…
Jay Clouse 42:49
Eric Hornung 42:50
…And move our resources over to another emerging game.
Jay Clouse 42:54
Which frankly sounds difficult as a player, too, if you’re trying to be professional in any type of game. If you really wanted a bet and say like, Well, I think that League of Legends is going to continue to be awesome, well, good luck, you’re, you’re way behind the curve on that. And there’s a lot more people competing for that if you try to get into a younger game, you don’t know that’s going to be around. And that’s opportunity cost for getting better at some of these other games. So yeah, it really is interesting that you’re building teams around very different games with very different rules and different incentive structures. There’s no salary cap. So the liquids of the world can pay all kinds of money for just the best players, and you’ve got to play Billy Beane Moneyball with your gamers. Sounds a lot more complex than I realized. And he spoke a few times about big money, big venture getting into this space and funding teams. I didn’t get a chance to ask this, but I’m really curious what the expectations on the venture side are if you’re putting a ton of money into a team, like where they think the return is going to come from, and on what timeframe and what the implications of like, let’s say eight more teams that became just heavily venture backed sprung up What does that mean for the Pittsburgh Knights of the world? Are the Knights going to be good? Because they have strong fundamentals? Or is that going to kill off some of these more grassroots teams for an artificial bubble of subsidized venture backed teams? And if they all fall away, then what? You know?
Eric Hornung 44:16
Yeah, I don’t have the answer there. One thing I wanted to talk about on this kind of outro is this idea of geography. When we when we left our conversation with Josh of convoyed ventures, one of the things that was fascinating, I think to both of us, was this idea that teams didn’t have to be geographically centralized. They could be okay, maybe you’re not all from Pittsburgh, but instead, everyone who follows this team is some other consistent variable. I forget the exact example we gave. But there’s a very conscious effort here to mimic what the Steelers and Penguins and Pirates are doing because, you guys couldn’t see it in the audio, but the Knights gear is black and yellow. So it harkens back to the city of Pittsburgh being black and yellow, and I think makes it easier for generations that aren’t used to this Esports experience to get on board and root for their city. But I don’t know at what cost.
Jay Clouse 45:18
Yeah, I don’t know what at what cost either, you know, if I’m really into Rocket League, and I want to follow a professional team, but I live in Denver, am I going to follow the Pittsburgh Knights if Denver doesn’t have a team? Or am I going to find somewhere that doesn’t have a geographical allegiance? On the other side of the coin, there seems to be a lot of value at a high level partnership perspective for being aligned with a city because the city support themselves. They’re recognized as an official professional team in the city of Pittsburgh. That probably was very fundamental to partnering with the Steelers, frankly, I would guess. So I think there’s a lot of value there. But yeah, the question of to what costs is really interesting. And if the cost is viewership and fandom, what does that mean? Are you lowering revenue on merchandise or on ticket sales? Or is the majority of your revenue coming elsewhere so it doesn’t matter? Can you exist with a smaller fan base and Esports and still have a more profitable team if you understand the economics of where your biggest revenue generators are? I don’t know. Maybe a part two coming up?
Eric Hornung 46:21
Yeah. Sounds like we have a lot of things we should have asked, huh?
Jay Clouse 46:24
Yeah. Well, you spent 10 minutes talking about the Browns.
Eric Hornung 46:28
That’s on me. You know, I, you get me started on the Brownies, and I’ll just fold.
Jay Clouse 46:33
Alright guys. Well, we’d love to hear your perspective on this, any other questions we should have asked and didn’t. Tweet at us @upsideFM or email us email@example.com. If there’s another team or another aspect of professional gaming you’d like to hear about, tweet at us @upside FM. Otherwise, we’ll talk to you next week.
Debrief starts: 39:07
James O’Connor is the cofounder and president of the Pittsburgh Knights, a global esports team of 30+ players and streamers, headquartered in one of the most well-branded sports cities in the country. With his knowledge of management, program development, economic development, veteran affairs, data-analysis, and strategic planning, his 10+ years of professional gaming experience, and his desire to bolster his hometown, he is driving the Pittsburgh Knights to become one of the most esteemed esports teams in the world.
In 2018, the Knights announced their partnership with six-time Super Bowl Champions, the Pittsburgh Steelers. In 2019, the Knights brought on another strategic partner with Pittsburgh roots – multi-platinum recording artist Wiz Khalifa.
- AD: Finding experienced employees for your new business with Integrity Power Search (4:32)
- History of Pittsburgh Knights (6:12)
- Opening Esports events (9:57)
- Deciding games for a team (12:08)
- How teams make money (15:59)
- Building a fan base and media (20:17)
- Team structures (24:36)
- Esports stadiums (31:37)
- Misconceptions about Esports (33:27)
- How to build a sustainable gaming company (35:01)
- Changes in Esports in next 5 years (36:22)
Learn more about the Pittsburgh Knights: https://knights.gg/
Follow James on Twitter: https://twitter.com/jamesoconnor
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This episode is sponsored by Integrity Power Search, the #1 full stack high growth startup recruiting firm between the coasts. They partner with venture capitalists, private equity groups and CEOs to build amazing teams for the world’s most disrupting companies.
Learn more about or get in touch with Integrity Power Search: https://upside.fm/integrity