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Video games and esports could generate as much as US$300 billion in annual revenue in five years’ time, but most investors lack experience when it comes to buying into the growing market, according to an associate portfolio manager at Purpose Investments.
The world championship finals for the online battle arena video game League of Legends drew more than twice as many viewers as the Super Bowl in 2018. Twitch, the Amazon-owned (AMZN) video streaming service with a massive gamer audience, is second only to Netflix (NFLX) when it comes to minutes watched per user.
For Purpose’s Nick Mersch, it was the giant line for the League of Legends’ semi-finals outside Toronto’s Air Canada Centre (now Scotiabank Arena) that convinced him of the massive opportunity being ignored by many investors.
“The tickets were being resold for more than Leafs tickets,” he told Yahoo Finance Canada.
Purpose predicts combined video game and esports revenue will hit US$149 billion this year, surpassing the US$140 billion that the traditional sports market is expected to rake in.
“To me, it’s one of the most asymmetrically priced risk profiles in a lot of equities right now. Just because there’s not a lot of attention being paid to it,” Mersch said. “There are so many future monetization possibilities that it just has nowhere to go but up.”
He sees untapped pockets within the esports fan base, pointing out that while the average NFL fan spends US$60 per year, the average esports fan currently spends just US$5.
Mersch co-manages the Purpose Global Innovators Fund, which allocates about 20 per cent of its holdings towards the esports theme. He sees three types of inroads for investors looking to gain exposure; publishers, teams and technology.
The biggest publishers are Electronic Arts Inc. (EA), Take-Two Interactive Software Inc. (TTWO), Activision Blizzard Inc. (ATVI), Ubisoft Entertainment SA (UBSFY) and Tencent Holdings Limited (TCTZF).
New games can take six year and US$500,000 to develop. Successful investing is largely about identifying hit titles that cultivate a loyal fanbase and gain a viewership on streaming services like Twitch.
“If you can gauge community interest around the titles and look at the release schedule, you can tie in some of their earnings,” Mersch said of the game producers.
“For me, the most direct way to play this theme is Tencent. That’s one of the larger holdings in our innovator fund. Tencent is just a beast.”
The Chinese technology giant with a US$400 billion market capitalization owns popular franchises including League of Legends and Fortnite, as well as the ubiquitous Chinese messaging, social media and payment app WeChat.
Esports teams are akin to traditional sports franchises, complete with sponsorship deals, advertising and player contracts, and media agreements. Owners of the New England Patriots, Vancouver Canucks and New York Mets have all provided financial backing.
Getting a piece of this action is trickier for the average investor given the amount of private ownership, Mersch said.
He suggests investors consider Enthusiast Gaming Holdings Inc. (EGLX.V), which is set to acquire Toronto-based Luminosity Gaming. The company’s teams compete in popular games including Fortnite, Counter Strike and Call of Duty.
Mersch expects investors will get more options as an influx of teams from the United States follows in the footsteps of U.S. cannabis producers, using reverse takeovers to list on Canada’s junior exchanges with the goal of eventually up-listing to a larger board.
However, he warns that operational costs can eat into a team’s sponsorship and prize revenues, with fees to enter competitive leagues ranging between US$35 million and US$40 million in some cases.
This category isn’t about game development, rather services like Twitch that distribute game-related content, allowing fans to follow their favourite gamers and watch tournaments in real time.
Twitch is by far the most popular service, but it’s impossible to invest in directly since its a tiny sliver of Amazon’s massive business.
Purpose has positions in two of Twitch’s Chinese rivals, DouYu International Holdings Limited (DOYU) and HUYA Inc. (HUYA)
“Instead of worrying about individual (game) titles, and whether they will hit or not, the tech stack is much more agnostic to that sort of success,” Mersch said.
“Gamers go on and stream themselves playing. People subscribe very similar to how they would a Netflix subscription, where they pay $5 a month for premium content. The streamer will keep half, and the company will generally keep the other half.”