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03 June 2020Getting in the Game with Esports Investing (10:44)
Shelter-in-place orders have helped boost video gaming and esports stocks so far this year, but in our view, this is an acceleration of the long-term trends in this space rather than just a short-term spike. Product Manager JP Lee highlights how companies are capitalizing on these trends and developing new business models to enhance revenues.

Jenna Dagenhart: Hello and welcome to Asset TV. More and more people are playing video games as they stay home to stop the spread of the coronavirus pandemic. VanEck Product Manager JP Lee joins us now to explain how this gaming trend is playing out in the markets. JP, thanks for being with us.

JP Lee: Great to be here. Thanks for having me.

Jenna Dagenhart: JP, why don't we start off by measuring the performance of gaming stocks over the year. What metrics are you using to measure the gaming industry?

JP Lee: Sure. Well, one of the measures that everybody looks at is how the stocks are doing—the video game publishers and other companies that are related to the space. As a group, the video game companies and related companies have done very well this year. The MVIS [Global] Video Gaming and eSports Index is up about 10% versus S&P [500] down 10%. [MSCI] ACWI's down 12% or so. It's done very well from a stock performance basis. But additionally, when you look at the different metrics that are used to gauge video game engagement, everything is breaking records right now. There are different platforms like Steam is a platform that people log on to play PC games. Steam has posted multiple concurrent record-breaking statistics showing 22 million people were playing at the same time.

Another metric that's been tossed around a lot is esports live TV broadcasts. In March, NASCAR has switched to esports. The NASCAR drivers are at home. They're in these simulation cockpits, and they're racing each other. And it's being broadcast on Fox. Over a million people tuned into a broadcast in March, and it was the largest esports TV broadcast on record. We're seeing a spike right now because everybody is stuck at home. But one thing I want to really emphasize is that this is a trend. This is a long-term trend and the spike is more of an acceleration of a trend versus a short-term spike that came out of nowhere.

Jenna Dagenhart: This isn't just related to the coronavirus pandemic. This had been going on before.

JP Lee: Yes. There are some long-term trends that are in place. We've identified consumer demand for online interactive entertainment. You think about social media, people hanging out together online. You think about cord cutting—Netflix, Disney, Hulu—and then people are bucketing their video game spend into that same category. I'm going to spend 10 bucks on Netflix, 12 bucks on Hulu and 10 bucks on my League of Legends tasks. Additionally, the publishers themselves are really doing a great job. They're embracing new business models and new revenue streams. Esports is a new revenue stream for them as well.

Jenna Dagenhart: Yeah, they want to capitalize on this as much as they can. Building off of that, you mentioned that these gaming companies are developing innovative new business models to enhance the revenues. Can you walk us through these?

JP Lee: Sure. I'll just highlight two. The first is “game as a service”. The old video game model is game as a product. You want to play Mario Kart. You drive down to Toys R Us. You buy Mario Kart for $50, and it's a one-time transaction. Nintendo or whoever publisher is going to make one transaction from one consumer. The new model is game as a service, and it kind of mimics the subscription as a service model. Essentially, you're getting to play these games for free. Fortnite is a free game. It's a really popular game. You get in the game for free. You get engaged, and then how the company makes money is there's smaller in game transactions. And it really serves two purposes. Number one, it increases the amount of money that a publisher can make off a single consumer, because instead of one $50 transaction, you could potentially spend $500 to $1,000 on a game over a couple years.

And that's the second point is that it extends the lifecycle of the game. Everybody always says, “well, Fortnite is going to go away, Fortnite's going to go away.” That's not necessarily true. A lot of these big games have been around for 20 years. Counter-Strike GO is a very popular esports game with a lot of people playing it. It's a 20-year-old game. Call of Duty is a game that's been around for about 15 years. It's different versions and iterations of the game, but it's the same IP. The companies are doing everything they can to maximize the revenue of a single game and then to extend the lifecycle of the game. That's the game as a service.

The second thing is the esports themselves. The publishers are launching and running their own leagues. The Call of Duty League is run by Activision. Overwatch League is run by Activision. The Fortnite World Cup is run by Epic, the creator Fortnite. Because the publishers own the leagues now, they're trying to basically take all the revenues from the esports pie. They own the rights to the game, and now they're owning any kind of media rights that they could profit from when they sell the media rights to, for example, Twitch TV or ABC, to be broadcast on TV. Esports is a new revenue source for them and they're really trying to get every bit of revenue they can from that.

Jenna Dagenhart: And what about the video gaming industry globally? This isn't just happening in the U.S. What are we seeing around the world?

JP Lee: That's what's really cool about this space is that it's global, but it's also localized. A game that could be really popular and exciting in, say, China or Vietnam or Malaysia is not going to be popular in the United States, and vice versa. What's interesting, there's a group of companies in the emerging markets space—Tencent, Sea Limited, Bili Bili—and they're really tapping into domestic consumer demand to drive revenues and profits. And that's kind of a shift away from the old traditional emerging markets companies, which were essentially extracting natural resources and exporting it to the developed world, whether that's manufacturing or catfish or steel or any of those other commodity-based companies. These companies are actually digging into their own domestic consumers to profit.

Jenna Dagenhart: And how do esports factor into the gaming industry? And what's the overall outlook on esports going forward? I know you mentioned that interesting example with NASCAR.

JP Lee: Esports, in our opinion, is very early innings right now. The companies are still trying to figure out how to maximize the revenues. They're still trying to figure out what games are going to be very popular. I think NASCAR is a cool example of that because to be able to watch a NASCAR race, it's very easy. There are cars going around in a circle and you know who's going to win because it's very clear. Some of the other games are a little bit more difficult to get a handle on. League of Legends is a very, very popular game. Unless you know what's going on in the game, if you were to watch just a video of a League of Legends match, you would have a hard time understanding what's going on. I think we're still trying to figure out the best way to reach the most people and figure out the best business model.

But ultimately, it goes back to our thesis. At the end of the day, because Activision owns, or any of the publishers, owns the rights to their game, they're going to benefit the most. And one great example is, over the summer, a 16-year-old from Pennsylvania, he won the Fortnite World Cup here in New York City. It was a big tournament. He won $3 million. Think about what that means. It's front page news. It's on the front page of the [Wall Street] Journal, the front page of the New York Times, and there's all these people around the world. They see this, and they're saying, "Wait a minute. This kid won $3 million, I want to get involved. I want to be a part of that." It creates kind of a halo effect where the esports league is generating good news.

Then because of this new business model. “Hey, I want to try Fortnite. I want to see how to play it.” It's free to play. And then you get into it. You get engaged, and then you're hanging out online. And that's what's really cool about this. And in my opinion, it's kind of like a new form of social networking. People are logging onto these games, hanging out and just goofing around online. It's not necessarily just game, game, game. I got to win the match. It's more like, “Hey, we're hanging out. How was your day? We're goofing around on the game.”

Jenna Dagenhart: More of a social network, which is interesting, because you can't really have the social network at, say, a football game or a basketball game right now with all the major league sports being canceled.

JP Lee: And it's more than just social networking. This is kind of a forward-looking, a sci-fi kind of take. But there's been a couple of concerts that Fortnite has held in their universe. The first one was the Marshmallow concert. Millions of people were logged in to watch DJ Marshmallow spin a set. And then in the last couple weeks, the rapper, Travis Scott, he had his own Fortnite event. There was a giant avatar of the rapper, and he was roaming around the universe. You're not playing a game. You're just kind of goofing off and hanging out in this music video. It was a release party for this event.

There's been some crazy things. One of the things that's kind of been kicked around as an idea is, there might be a day when you go into Fortnite and you watch the world premiere for the next Mission Impossible movie. You're going to log in to a character, and you're going to go find a spot on a hill, and you're going to watch the new Mission Impossible in the game. And that's just an example. But that's the kind of thing we're moving towards is these in-game events that are a cultural moment, where people want to be participating. They want to be involved, and they want to be a part of it. I think it is social media, but it's even bigger than that.

Jenna Dagenhart: Gives people this space to gather. And I think it's interesting, too, that these stocks are outperforming, and other parts of the market—the broader market—has not been doing very well this year, of course. I wonder, any final takeaways for advisors, JP?

JP Lee: I'd say that this is a forward-looking, innovative industry, and it's driving consumer behavior, and it's also leveraging existing trends to boost revenues and diversify their business line.

Jenna Dagenhart: Well, JP, really interesting. Great to have you.

JP Lee: I really appreciate your time. Thanks a lot. Have a great day.

Jenna Dagenhart: And thank you for watching. That was JP Lee, Product Manager at VanEck, and I'm Jenna Dagenhart with Asset TV. For more insights from VanEck experts, please visit