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    In Perspective: Esports and Video Gaming

    John Patrick Lee, CFA ,Associate Product Manager
    July 19, 2019
     

    Over the last two years, media coverage of esports, a form of competitive video gaming, has reached a fever pitch. News of sold-out stadiums, multi-million dollar franchise fees for professional teams and big-brand sponsorship deals have driven the esports mania narrative. However, comparing esports revenues to the broader video game industry can help keep things in perspective.

    According to Newzoo, out of the $134 billion in revenue that the global video gaming industry generated in 2018, roughly $865 million was generated by esports. In other words, the global video gaming industry generated around 154 times the revenue of the global esports industry in 2018.

    But what about all the front-page articles about the esports boom? It’s easy to conflate the two industries, or at least to fail to draw a clear distinction between the two. At VanEck, we view the esports industry as a sub-industry within the broader video game segment. Video game companies, in turn, are a convergence of technology and communication services. The video gaming and esports industries encompass a wide range of companies, from video game publishers (Activision) to semiconductor companies (Nvidia) to media companies (HUYA).

    ESPO Pyramid

    Video game publishers and related hardware companies have been in business for decades, while the esports business model is relatively young and in development. Although the top publisher companies generate significant video gaming revenues beyond esports, they are among the biggest beneficiaries of esports revenues.

    Insert Coin to Play: Publishers Become League Operators

    Over the past few years, video game publishers have invested millions of dollars in developing, launching and running professional esports leagues. Previously, esports leagues were run by independent third parties separate from the publishers who make the games. We believe the end result of this development is that video game publishers are now primed to gain the most from the esports phenomenon.ESPO Leagues Chart
    Publishers own the rights to the games played in competition, as well as the broadcasting rights, which are sold to media and communication services companies (like Twitch and Facebook). According to Goldman Sachs, media rights are expected to grow from representing around 20% of all esports revenues to 40% by 2022. This means that, after factoring in other revenue sources like sponsorship and game publisher fees, video game publishers are in a position to potentially own the majority of revenues coming from esports.

    Currently, revenues from esports are still a relatively small part of publishers’ revenue streams and not typically broken out into a separate line item in financial statements. Activision Blizzard, which runs the highly successful Overwatch League and also owns Major League Gaming (MLG), reported $7.5 billion in consolidated net revenues in their 2018 annual report. Of that, only $607 million (8%) included revenues from its “Studios and Distribution business, as well as revenues from MLG and the Overwatch League.”

    Power Up: Cultivating a Video Game Fan Base

    A large esports audience for a specific game typically equates to a large video game fan base. If publishers can build and maintain a popular international esports leagues surrounding a hit title, then that should (in theory) sustain the popularity of the game itself among consumers, creating a positive feedback loop. This may lead to an expanded revenue cycle beyond a single transaction to purchase the game, to one with a much longer timeframe that includes additional in-game purchases and subscriptions. The effect is heightened even further under the new “game as service” model, where games are free to play while offering the option to buy add-ons and subscriptions to boost the user experience.

    In a highly competitive entertainment landscape, publishers are actively looking for any edge to gain marketshare (and mindshare) among video game consumers and enthusiasts. Esports represent a unique and new way for companies to attract and retain loyal fans over a longer time period.

    ESPO Network Effects

    Source: Citi Research1


    Investing in Video Gaming and Esports

    Determining which games will become hits is difficult, and investors may wish to invest in a diversified basket of stocks. Such an approach may allow investors to express a view on the sector without having to know which specific stock will outperform over the future. The index methodology which guides VanEck Vectors® Video Gaming and eSports ETF (ESPO) provides exposure to companies in the video gaming and esports industries.

    Currently, the MVIS® Global Video Gaming and eSports Index is heavily tilted towards video game publishers (including the publicly traded companies that operate the largest esports leagues) and semiconductor companies. As the esports industry matures, smaller esports names, such as streamers like HUYA and Modern Times Group, could grow to become a meaningful part of the Index. In the interim, the index captures the esports phenomenon as part of the broader evolution of video gaming, creating awareness of the industry’s potential to reshape how people spend their time and entertainment dollars.

    To learn more about ESPO and the high growth potential of the global video gaming and esports industry, visit vaneck.com/esports/.


    1“Video Games: Cloud Invaders,” Citi Research

    IMPORTANT DISCLOSURE  

    This material is for informational purposes only. The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and are subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.

    This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the companies mentioned herein. Fund holdings will vary. For a complete list of holdings in the ETF, please click here https://www.vaneck.com/etf/equity/espo/holdings/.

    Indices are unmanaged and are not securities in which an investment can be made. Index returns do not reflect a deduction for fees & expenses. Certain indices may take into account withholding taxes.

    MVIS Global Video Gaming and eSports Index is the exclusive property of MVIS® (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Video Gaming and eSports ETF is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.

    An investment in the VanEck Vectors® Video Gaming and eSports ETF (ESPO) may be subject to risks which include, among others, investing in the video gaming and esports industry, information technology, equity securities, foreign securities, foreign currency, special risk considerations of investing in Asian, Japanese and emerging markets issuers, depositary receipts, small- and medium-capitalization companies, cash transactions, market, operational, index tracking, authorized participant concentration, absence of prior active market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and concentration risks, all of which may adversely affect the Fund. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Fund's returns. Small and medium-capitalization companies may be subject to elevated risks. The Fund's assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

    Fund shares are not individually redeemable and will be issued and redeemed at their Net Asset Value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called "creation units" and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading fund shares in the secondary market. Past performance is no guarantee of future results. Returns for actual fund investments may differ from what is shown because of differences in timing, the amount invested, and fees and expenses.

    Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.