Nobody decides what is going to become a great tradition, they happen. The best things that last longest require little convincing. Momentum gains strength where there is the least friction and the most fun. Almost every parent I know is going to disagree with me here (I was one of them). That is fine, because the investor in me wants to be where the crowd will erupt in agreement…..later.
Confessions of a Digital Dinosaur: Esports is the Next Great Traditional Sport
Debates about whether esports is a real sport, or whether video-gamers are athletes, are distracting my generation of middle-aged investors with a lot of real tokens to play, from the better bigger fact I now believe is unquestionable. Esports is becoming the next great traditional sport because more young people are regularly playing and watching them than any other sport. This data comes from a survey conducted by Limelight Networks between the ages of 18-25 across different countries and education levels. For young people esports has a tremendous first-mover advantage of being the first digitally native sport.
This is not a story about the growth of esports from an industry source or tech writer. I am an old-fashioned money manager who occasionally dusts off the journalism degree in the back of my closet somewhere, when I know I need to investigate and learn. In this case, I have some inside information on the next generation of consumers with five kids at home. My ‘aha moment’ here was more like an arghh moment we will get to later. And, that’s when I started to learn just how underestimated this idea was among my peers. The majority of my generation is biased against esports. They are not just losing that battle royale, they are getting blown out. So, I set out to find out why we might have it all wrong.
Esports is INCLUSIVE
I like massive growth opportunities. Of all the clues I found, the one that offers the most upside is just how accessible esports must feel to so many young people compared to other sports. There are 2,836 people that get to play in the NFL, NBA, and MLB combined. In the top 3 esports leagues by prize pool, I counted 16,287 players who have won money since esportsearnings.com began tracking the data. Many more competed in those tournaments and countless more are practicing to play in one. There are no boundaries slowing that growth of participants. My back of the envelope math is not even counting the #4 through #100 additional leagues with another 28,120 esports players winning prize pools. How much? In those 100 largest prize pools over $400 million has been paid.
Millions more people of all shapes and sizes from very different places have no reason to think that could not be them. Think about that difference for a second. The same kids are given reasons every day to believe playing in the NFL, NBA and MLB will not be them.
I don’t know about you, but my neighbors’ kids look a lot more like these Golden Guardians than they do Kevin Durant. His NBA Golden State Warriors own this League of Legends team. A game owned by Tencent with more than 100 million monthly active players.
Esports is going to get even more inclusive. I noticed Activistion’s wildly popular Overwatch League chose to make about half its game’s characters women.
Esports is GLOBAL
Players from 28 different countries participated in the League of Legends Championships. An audience watched online from 90 different countries.
The U.S. Government already says they are professional athletes. Professional esports players are able to travel to the U.S. from around the world using the same visas granted by the United States as other professional athletes.
South Korea is the mecca of esports for one primary reason. The fastest internet speeds from the most sophisticated broadband networks gave birth to its national sport. That tradition can travel at lightning speed anywhere else on the planet.
Add some imagination and a simple cold call across one of those lines and you could host Intel’s Extreme Masters Finals. Seven years ago that is what Katowice, Poland pitched in an attempt to turn around their little mining town. It worked. An audience from more than 180 countries attended or watched the event this past year hosted by that town of about 300,000 people. Almost three times as many people around the world watched this event live, than viewed the myopically named World Series of baseball last year.
What surprised me even more was just what a global event it was on the ground in Katowice, Poland. Almost three times as many attended in person as fans attended the last three football Super Bowls in San Francisco, Houston and Minneapolis – combined.
70 different broadcasters in 19 different languages shared the event. Facebook offered live steams and customized viewing. Intel offered a 360-degree virtual reality broadcast. In all, more than 55 million fans watched on their own screens somewhere, up from 30 million the year before.
Matt Kim, an esports reporter offers an interesting perspective. He grew up in Seoul, South Korea where the national sport is esports. “By the time I left South Korea, StarCraft was a dominant pop culture fixture in ways I don’t think a lot of people really understand. It wasn’t just because South Korea was paying professional gamers years before anyone else, or that competitions were broadcast on major television networks. In South Korea, StarCraft was literally everywhere, from branding on clothes to labels on food. It was in everyday conversations with classmates. Posters were plastered across city windows of seemingly infinite PC bangs – cafes where players pay by the hour. Now I’m seeing esports (in the U.S.) in mid-construction where it’s my job to report on its progress. Yet it feels like I’ve already seen the ending, and now I get to witness its engineering in reverse.”
The esports audience is almost four times larger in Asia than in the United States. A sacred principle in my trading diary is an ancient Chinese proverb: “To know the road ahead ask those coming back.”
StarCraft is owned by Activision whose mission printed in its annual report is to “Delight nearly 500 million monthly active users around the world in 196 countries.”
Katowice is not alone. Cities with big bazookas full of cash are ready to fire at events, and there is no fixed calendar or too many governing bodies to get in the way like other traditional sports. Shanghai has said it wants to become the “esports capital” and has announced investment into construction of esports arenas, esports industrial parks, and for hosting international tournaments.
The Olympic Council of Asia has partnered with Alibaba and announced that esports are included in the 2018 Asian Games and will be a medal sport in 2022. Could the Olympics in 2024 be far behind?
This is not the top 10. I cut 52 faster than the U.S. off to fit on the page clearly. The US ranked 62nd. So, if you think esports can grow fast here, its tailwind is a fraction of many other countries around the world.
Esports has SCALE
1.2 billion hours were watched of the League of Legends Championships. More than 80 million unique viewers watched one match alone. By comparison, 76 million watched the final episode of Seinfeld, the Super Bowl of traditional television. If this is hard to get your head around, imagine how advertisers are trying to chew on this exponential opportunity while some of their traditional platforms are being spit out with declining viewership.
This might be a good time to pause to make sure I have not alienated my last cord-keeping friends. I have as many of them tangled as ever, worry not. This dinosaur has not learned new tricks but knows when to back them. When even a ‘terrible idea’ can be turned into a billion dollar company, I pay attention. That’s exactly how Justin Kan described his original “lifecasting” streaming idea he started while a student at Yale. That idea became a video streaming service called Twitch and Amazon bought it for $970 million in 2014. It has proven to be an absolute steal for Amazon. Twitch already has more viewers than CNN and MSNBC.
The video game online streaming audience is more than five times greater than Netflix subscribers, and Twitch dominates this market. According to Cerulli, the average age of a wealth manager is 51. I wonder how many have even heard of Twitch. Twitch is home to more than 2 million broadcasts a month shown to more than 15 million unique daily viewers. Their audience watched 355 billion minutes of Twitch last year. More than 150,000 streamers – the people providing the content – are getting paid from the Twitch platform alone. The total number of creators earning money more than tripled year over year. All with enough left over for Twitch to raise more than $30 million for charities.
The revenue side has explosive scale while the cost per broadcast has to be even more enticing to future creators. I met a broadcaster on Twitch who needed a cheap webcam and comfortable chair. Compare that to an itemized cost to produce an average football game on television I found. It was two dozen broad categories long (for a declining audience).
Diving into the data another clue emerged for just why its popularity is soaring with this generation of sports fans. Esports happen fast. Most of the games I studied take close to half an hour.
When you multiple fast consumption by more games on more days than any other sport you get incomparable scale over any other sport for sponsors and streaming. And, the virtual playing field is getting faster. According to Recode media, global internet speed overall got 30% faster in 2017.
It is cheap to try. Parents who have a high school athlete who trains much of the year can easily be spending five figures on that. Or, for a couple hundred bucks he could be recruited for esports full college scholarships. Yup. University of Utah was the first on a fast growing list. I toured the campus a few weeks ago. If only I had a chance to go to a fabulous school in the Wasatch Mountains on a Pick Axe Pete scholly!
The Odyssey was my first video game console as a kid. Atari’s were owned by the cool kids. My parents must have been conditioning the stoic in 9-year old me for a lifetime love of uncrowded trades.
My Peter Lynch Moment
The legendary money manager Peter Lynch humbly described just tagging along on his three daughters’ trips to the shopping mall to see what stocks to look into. His classic stock-picking book suggested to “buy what you know.” I knew I could not follow his playbook because I hate shopping and wanted my kids to share that quality. My three daughters would have my portfolio overweight unicorns and glitter. But, when I watched my son’s basketball teammates playing esports between every game it really hit me. Later the same week I drove carpool from a birthday party of different kids, which had switched themes in the middle to just playing Fortnite, a game owned by Tencent.
I started tracking this next generation of consumers at their malls – on the couch. What I found astounded me. In my entire life I have never seen one product consumed by young people from middle school to college like Fortnite. I recall young cultures being built around very different stepping stones of distinct activities. Those lines have been erased by this shared interest. Every type of kid. From academic and non-athletic introverts, to super social sports stars, I polled them. The last two oldest kids I came to know well as interns at my company ranged from a valedictorian to SEC football player. They both play Fortnite, with all their friends. Almost every single one of their parents wish they were doing something else. As a result, I bet most will completely miss one of the biggest investment opportunities (in both public and private markets) I have ever studied in my career.
The confusion for parents makes sense. When I was my son’s age less than 10% of U.S. households had a personal computer. The world wide web was a few years away. Videos were watched on tapes, still more than a decade away from the first DVD. The top movie in 1985 was Back to the Future. The very first CD’s were being introduced. Cassettes just edged vinyl records in sales with 52% of the music. Less than 1% had a cell phone.
So, how are we able to compare ourselves as parents when we claim we would never have wasted so much time on videogames? Or, maybe it was just that they kinda sucked back then, so of course we found other things to do. There was just only so many things that ole Pick Axe Pete here could do.
Between games, my sister and I might have caught another episode of Three’s Company or Different Strokes. So, in hindsight are we the greatest judges of quality content?
As parents, our memories of video games have conditioned us to completely underestimate esports potential now hiding in plain sight, right in front of us. And behind us, and on the side of us.
Smart Money Betting on Esports
Forget the big prize money, I mean the really big money. Smart players like to deploy capital where consumer behavior and technology collide into the biggest investment opportunities.
Even the cutting edge seems too crowded to one of my favorite thinkers - Daryl Morey, the General Manager of the Houston Rockets - who likes to be even earlier. He has completely revolutionized my favorite game of basketball. But, he’s not done. He now compares the growth opportunity of esports to 1950s basketball. Morey explains, “I say it all the time because it’s true: The three dominant sports in the future are going to be soccer, basketball and esports.”
Morey led the Houston Rockets to be the first NBA franchise to hire an esports employee internally. His name is Sebastian Park and he studied cognitive science at Yale. I interviewed him and was fascinated. There is nothing more impressive to me than knowing somebody is several steps ahead of any industry, but who is disarmingly humble enough to look for swords to fall on. Park said, “There is no way we know anything right now, absolutely no way, compared to where we will be three years from now.” I believe working at a craft requires much more curiosity than in a job, and why it’s so much more exciting. Park agreed and told me, “When I was working in a ‘stable’ job in San Francisco that seemed like an illusion.”
Together Morey and Park built Clutch Gaming inside the Rockets organization. Taking a quantitative approach to a different game has yielded remarkable results for Morey once again. Clutch Gaming shocked the esports world with a run to the final four with their very first entry into the North American League of Legends Championship Series.
Morey attended the watch party for Clutch Gaming hosted by Mainline, an esports company in Houston. I toured their nerve center with the CEO, Chris Buckner. It was buzzing with brainpower and graphics cards so hot they need their own liquid cooling units (pictured here).
Mainline is building Houston’s first esports arena. The startup is one of the crown jewels inside a venture capital firm which is building a sprawling campus around the esports arena.
Its chief Mark Toon explained to me that esports attracts the brightest young minds for a startup community of many different businesses. He has plans for a $70 million 120,000 square foot co-working space incubating startups, and the esports arena is right in the middle of all the action.
It was hard to imagine as I stood taking this photo that with only two days’ notice and no marketing whatsoever, they were going to fill it with esports fans for another event.
Then, the crowd showed up more than seven times larger than expected.
Fans watched the Houston Outlaws play in the Overwatch league, a game owned by Activision. Overwatch team owners offer a clue to esports’ crossover appeal according to some smart money. Robert Kraft from the Patriots, Jeff Wilpon from the Mets, Stan Kroenke from the Rams and Nuggets, and Dave Scott from the Flyers were among the original team owners who had to pay Activision $20 million each for a team. Speculation is that teams added next year could cost $60 million.
Could it be that a few owners smell peak pricing in their older leagues? Michael Lewis is the author of Moneyball and The Big Short and has a pair of my favorite eyes on sports and Wall Street. Lewis has said he believes this next big short is the NFL.
The NFL is still the #1 show on television so gross numbers remain large but the direction of numbers is always more interesting to investors.
The NFL has its own unique problems. But the surprising needle that just might pop some asset bubbles in football, baseball and basketball was just delivered from an unlikely source that I believe is being overlooked. Season tickets have been unraveling for a few years now. One thing left holding that artificially priced model together was the fact that businesses deducted that “expense.” The new tax law eliminates the only reason most people I know could even fathom justifying those prices.
I will never stop watching the NFL. But can my fellow dinosaurs at least agree on one thing? Football fans are not allowed to call esports weird.
An entire generation of young adults increasingly do not aspire to one day afford season tickets like some of their parents did. “If you’re in your mid-20’s and move into your new job in a new city, you arrive without the ability to pay for a ticket to go to a game anymore, no cable package to watch, and no subscription to the local newspaper to follow the team.” This is not my opinion, I heard this from the owner of a professional sports team about his own son. All eyes are on cord-cutters while a generation of cord-never-had-em emerges.
The direction of the next great traditional sport is clearly benefiting.
This data is hard to come by and no doubt flawed. I tried to account for that by rounding it all way down. For starters, I excluded all of the occasional viewers which is an enormous and growing, and many will no doubt be converted to recurring viewers - which is all I counted here. Unlike network television with Nielsen ratings, the moving number and locations of fans watching esports on different devices across different platforms makes this chart hard, but incalculably appealing to sponsors.
“I believe esports will rival the biggest traditional sports leagues in terms of future opportunities, and between advertising, ticket sales, licensing, sponsorships and merchandising, there are tremendous growth areas for this nascent industry.” That comes from Steve Borenstein, Chairman of Activision’s esports division, who is the former CEO of ESPN and the NFL Network.
Esports is FUN
I interviewed a guy named Artreyo Boyd who appears to be having more fun than anybody I know. He told me, “Growing up I always loved and played basketball. Wherever I could play, I was playing it. Whether it was virtual or reality, I was down.” My old dusty Pistol Pete Maravich tapes just coughed in confusion. But the best showmen in any game eventually pass the torch, or console. What the Pistol was to me, Dimez is to fans of NBA2K. That’s Boyd’s handle. Virtual basketball AND real basketball players know him well.
Take-Two Interactive makes the game NBA2K and launches the NBA2K League with its first professional player draft April 4. Real NBA teams make up the league and the NBA’s own vintage draft ping pong balls were rolled out to determine the draft order. Sponsorships have already been sold on virtual jerseys. Fans will be cross-pollenated by the NBA, and Boyd told me that is the biggest difference in this segment of esports. “Any person who has never seen an NBA2K event can go and understand exactly what is going on because they have watched the NBA before and understand basketball. When I watch League of Legends I do not know what is going on. Other people are screaming and I do not know why.”
Boyd had to compete in months long qualifying events with more than with more than 72,000 other players in order to participate in the draft combine. From there 250 got the golden ticket to be interviewed, like a lot of other jobs. Ironically, all this online activity cleans up a social media feed, another parent bias. NBA executives scour all social media and look for the cleanest most professional representatives that they will promote. Finally, only 102 were selected for the draft. I predict my man Boyd is the first player chosen. After getting to know him, he mixes an uncommon passion for his craft with high intelligence and deep humility – the kind of candidate a lot of businesses would love to draft.
When guys like Kevin Durant, Paul George and Kyrie Irving come to Boyd’s office (that’s him on the left) and can only dream of being as good at NBA2K as him, you have found some explosive crossover appeal.
I have one bias that did not get disrupted in researching this and blessed to live it every day – fun is an underrated ingredient in a business plan. The most inclusive, global, scalable, smart money idea is fun.
I think my generation has a tougher pill to swallow on this one. We were raised to believe you have fun after your get your work done. What if you are able to recode that to make an even more efficient model? Let me give you a ridiculous question. What if we used a different word than gamers…like Enorutss Engineers? My generation would raise an eyebrow in suspicious respect about a field we were not familiar with, and ask more about it. All I did was smash together two letters, in descending order, from the words Entertainment, Sports, Computers, and Business. Just like they are doing.
Curiosity is the most disruptive technology I know how to use. I knew I was missing something when I set aside time for three months to find out why esports is so big. I was wrong again, it is going to be gigantic.
As always, nothing I have written is a recommendation for any investment of any kind. I enjoy sharing what I have learned if only to make sure I write it down to question it myself. We may have positions in some companies mentioned that can change at any time. Also, we may just be completely wrong. We are convinced of nothing and curious about plenty. Thanks for taking an interest in that journey with us. www.kc-roi.com