The games people watch

Esport is the new investment opportunity.

It used to be that the coolest kid at school was the captain of the netball or rugby team. However, the day may not be far off when the coolest kid in school is the one with the highest player rating in the first-person shooter online game Overwatch.

In the last few years, competitive online gaming has become a serious business. Don’t imagine nerdy teenagers missing supper because they are playing ‘video’ games. Think of organised tournaments, mass audiences, huge sponsorships and substantial winnings.

The top gamers have turned professional. Sponsorships and broadcast deals are reaching tens of millions of dollars. Millions of people are watching.

This is not just recreational gaming any more. It is esport, the competitive edge of an already substantial industry.

Last year the global esports market generated revenues of $655 million. A recent report from Goldman Sachs estimated that by 2022 this will reach $2.96 billion.

That is growth of 300% in just five years, and Goldman Sachs expects that what will drive it is an explosion in media rights deals. Earlier this year Amazon’s esports streaming service Twitch paid $90 million for a two year deal to broadcast the newly-launched Overwatch League. This is the first major deal in this space, and Goldman Sachs expects more to follow.

In 2017, media rights accounted for around 14% of esports revenue. Goldman Sachs predicts that this will grow to 40% in the coming years.

One should consider that the League of Legends World Championship last year attracted more than 100 million online viewers. In January of 2018 Twitch also attracted more viewers than CNN or MSNBC. It now averages more than 1 million viewers per month.

Mainstream channels like ESPN and NBC have also recently signed esport deals. In South Africa, there is already an esport channel on DSTV – GiNX on channel 240.

This is turning into big business, and that also means it’s a growing investment opportunity.

“eSports has lots of structural growth ahead with growing societal acceptance of computer games as a sport combined with deflation in the cost of the hardware and software needed to participate and become a spectator,” says Ruan Stander, a portfolio manager at Allan Gray. “There will most likely be a couple of big successes skewed towards mega hit games that are successful in building esport businesses around them and in doing so perpetuating a virtuous cycle of fans becoming participants and participants becoming fans.”

Gerrit Smit, the head of equity management at Stonehage Fleming, says that the centre of this industry is currently in Asia.

“I think China especially and South Korea to a lesser extent are way ahead of the west in terms of their participation in esport,” Smit says. “It has developed to a stage where there are particular esports people who have become recognised as heroes in gaming communities. It has already become something like people watching the main stars playing in live sporting events.”

The Goldman Sachs report estimated that the number of people playing online has reached 2.2 billion. That is just under a third of the world’s population.

However, only around 5% of these watch esport, which suggests that the potential for growth just amongst currently active gamers is significant. This obviously presents an opportunity for media companies, particularly streaming services like Amazon’s Twitch or Google’s YouTube.

The even greater investment opportunity, however, is in the companies that actually develop the games that become popular.

“Direct investments are hard to find and risky due to the difficulty in predicting success and longevity,” says Dirk Noeth, an analyst at Centaur Asset Management. “Probably the best strategy to invest in this space would be to focus on the big names like Tencent, ATVI, Amazon and Google.  Only ATVI (Activision) is a pure-play on gaming, with the other players having substantially different core earnings drivers.”

These larger players tend to buy out any companies that come up with hit games anyway, since they have the balance sheets to protect their market share. The only large unlisted gaming-focused company is Valve.

“It owns the steam platform as well as rights to Dota2, and Counter-Strike: Global Offensive, which typically attract large crowds,” Noeth says. “There has been talk of it coming to market, but it does not seem to need any capital at present.”

The good news for South African investors is that the current leader in this space is Tencent, which can be accessed through Naspers.

“They are a leading developer and marketer of games,” Smit says. “They have also clearly adopted a strategy of diversifying into the west by buying leading game developers such as Supercell Oy in Finland.”

Stander agrees.

“Online games contributed 40% to Tencent’s Revenue in 2017, growing 38% from 2016,” he points out. “Tencent games like League of Legends (PC) and Honour of Kings (mobile) are actively developing esports businesses to strengthen the franchise and improve the longevity of the underlying games.”

Tencent is also spending a lot of effort identifying smaller companies with promising ideas. It then takes large minority stakes in order to support their development putting it in a perfect position to make a full acquisition if the game catches on.

The company’s open platform also allows tech entrepreneurs to work on their ideas without having to own the infrastructure. Tencent won’t necessarily take a stake in what they are doing, but the company is nevertheless attracting talent into its universe and placing itself as the obvious first mover if something noteworthy develops.

“Overall, they have announced a five year plan for spending $15 billion on further esport development,” says Smit. “Those are serious numbers.”

The potential for playing and watching esport on mobile devices is also a significant growth driver.

“It allows gaming to spread even further, where anyone on the go can play or watch,” says Smit. “Of the growth in esport in China last year, more than a third was on mobile devices.”

Ultimately, Smit is bullish on the outlook, particularly since growth in esport has thus far been predominantly in Asia, and there is therefore substantial potential in the rest of the world.

“The kinds of sponsorship and media deals we see in traditional sports like tennis or golf are going to happen in esport as well,” he says. “Slowly, but surely, that eastern culture of esport is going to become a global one.”

Please consider contributing as little as R20 in appreciation of our quality independent financial journalism.



You must be signed in to comment.




The Budget Speech explained
Moneyweb’s 2020 national budget offering, including infographics and audio ratings, as well as past budget coverage....

The Investor Issue 48
Separating out the noise from useful information in the markets is not easy. The trick to staying the course is to keep an eye on ...

The Investor Issue 47
Some people intuitively understand that investing for future gain is a long-term process that cannot be rushed. The management of ...

The Investor Issue 46
While US innovation soars and its tech listings continue at a ferocious pace, SA has no real plan for how to embrace the 4th Indus...

The Investor Issue 45
As the investment world falls more and more in love with the simplicity that ETF investing offers, index providers are realising t...

The Investor Issue 44
Company financial statements are the last line of defence for investors wanting to protect their investments. But these cannot alw...

The Investor Issue 43
What makes one CEO great and another mediocre? The Moneyweb Investor ponders this and other leadership questions in the latest iss...

The Investor Issue 42
Stagnant economic growth and questionable economic policy is hampering the development of mid-sized - and investible - businesses ...

The Investor Issue 41
If you are one of those people who invests more energy into your credit card or medical aid rewards programme than you do your ret...

The Investor Issue 40
Volatility in global markets is higher than it has been in years, giving investors the jitters. Some 'experts' are suggesting a re...

The Investor Issue 39
From lessons from Buffet to building your own crypto-portfolio (a risky endeavour by anyone's standards), this issue of The Moneyw...

The Investor Issue 38
They say the art of investing is to ignore the short-term noise and focus on attaining long-term goals. That's true, but that does...

The Investor Issue 37
Getting the economy on the correct footing requires that everyone pulls their weight. Our writers this month have gone above and b...

The Investor Issue 36
The past year is littered with train wrecks like Steinhoff, SAA and Eskom. But there is real sense of ‘back to business’ in So...

The Investor Issue 35
Stock markets are soaring, but productivity is not. Innovation continues, but leads to fewer new jobs. And the great and the good ...

The Investor Issue 34
South Africans are fed up with corruption, or anything that has even a whiff thereof, as JSE rockstar Naspers is currently experie...

The Investor Issue 33
As the year races towards its close, investors will be forgiven for feeling a little breathless. The British WWII propaganda phras...

The Investor Issue 32
Anyone would think that getting an economy moving is rocket science. It's actually not. It requires single-minded commitment. Whil...

The Investor Issue 31
We examine the opportunities of forex trading, the best unit trusts, e-commerce at Richemont and more. ...

The Investor Issue 30
Despite what the astrologers say, there are no shortcuts when it comes to successful stock picking. Fundamental analysis counts. T...


Follow us:

Search Articles:
Click a Company: