eSports: What All the Buzz Is About
ED LOPEZ: Hi, I’m Ed Lopez, Head of ETF Product at VanEck. We’re excited to be bringing to market the pure-play video gaming and eSports ETF, VanEck Vectors®Video Gaming and eSports ETF, ticker symbol ESPO. I’m here today with J.P. Lee. He’s an Associate Product Manager at VanEck.
J.P., you were instrumental in helping us bring this ETF to market. So I wanted to bring you on to be the subject matter expert in the video game space for us. The market today is undergoing transformative growth and actually creating new opportunities for some of these video game makers and the industry as a whole: better technology, multiplayer online playing. I think the industry is even poised to disrupt the media and entertainment industry. One of the major themes, or driving factors in the themes, is this idea of eSports. Can you tell us a little bit about what eSports is?
J.P. LEE: Sure: eSports are, in a nutshell, competitive video gaming where teams or individuals come together and play online matches against each other. A lot of times these matches are held in an arena, like a typical football game or basketball game. You’ve seen these arenas filling up with 22,000 people and they’re all sitting around watching the Jumbotron.
LOPEZ: People are actually sitting there watching these games?
LEE: Sure. The Barclays Center [Brooklyn, NY] actually sold out two nights in a row recently for the first Overwatch League final championship. That was a huge watershed moment for the New York City area as you saw back-to-back nights sold out at the stadium. Tickets were going for $200. I was looking at StubHub. People are showing up for sure.
LOPEZ: That’s amazing. I remember when growing up, I had an Atari system and that may be the last video game I played—Golden Tea in a bar in Chicago. But how have things changed in the video game space over the years?
LEE: I grew up playing Nintendo back in the day, back in ‘80s. Video games have a long history. They were born out of the technology development and research that occurred in the 1950s after World War II. The first video game that was created for entertainment purposes only and was called Tennis for Two. It was built in Brookhaven Research Laboratory [Research Lab] out on Long Island. Prior to that, video games were used to display new technology, to train personnel. That was the first video game just for fun. The Research Lab had this video game for their open house, so people could come in who were visiting the Research Lab for whatever reason and they could play the video game for fun. From there it just exploded, once the mainstream population got their hands on it.
The Atari home console was instrumental in bringing the video game technology from the Research Lab and from the ether into people’s homes, where you had people playing video games sitting around the TV, the family getting together, your neighbors getting together. Then, in 1985, the Nintendo Entertainment System, NES, came out. That was huge because it represented a shift from prior to that, when the video game companies themselves, Atari for example, was making Atari games: nobody else can make Atari games but Atari. So what the NES system did was let third-party developers have the chance to make these games for the video game console. The number of video game companies really grew at that point and their mainstream popularity in the United States in particular just exploded. That was a watershed moment in 1985. Then you go into the ‘90s and you have the rise of PC gaming and the Internet. You have people having LAN parties, Local Areas Network. You have basically five or six people all lug their huge old desktops to one person’s house and they all connect their computer and they’re all playing online.
LOPEZ: Things have changed since then, now we’re online around the world.
LEE: For sure, now we’ve got people playing on their mobile phones, playing against people on their PC, playing against people on their PlayStation, or their Xbox. The barriers between consoles and, really, the different players are disappearing as more and more people are joining together in these online communities watching each other play. We talk a lot about the eSports tournaments, but another huge component of this online social media gaming industry is the rise of the individual streamers. It’s similar to a YouTube personality, where somebody has this crazy gaming personality and they get dressed up and they have a lot of energy and they get hyped up. Some of these people are pulling in massive amounts of money through corporate sponsorship and through just individual donations onto their streaming websites. One of the guys, Ninja is the most famous guy right now. He’s making around, supposedly, $500,000 a month through his various revenue streams.
LOPEZ: Thanks for taking me through the history of video gaming. Can you talk a little bit about how eSports is helping to transform video gaming today and create this new growth opportunity?
LEE: We look at the growth numbers, which are great, and all the different companies, that aren’t necessarily video game companies, who are getting involved. You’ve got big brand advertisers advertising to gamers and to the people who are watching. For me, it’s like a cultural buzzword. When I talk to people my age and younger, my little brother, people we know, everybody’s watching Twitch, everybody’s watching streamers, everybody plays video games in my age bracket and lower.
LOPEZ: So video gaming has become a new source of entertainment for people?
LEE: It’s entertainment and it’s a community. The gamer community, the gaming community, is a tight-knit group and, of course, there’s drama and infighting going on. But, as a whole, it’s a tight-knit community and people care about each other. And they’re all invested in the future of the idea of being a gamer and being involved in something like this.
LOPEZ: One of the fascinating numbers that I heard about eSports was that some of these video game publishers are creating professional leagues, franchise leagues, and selling team slots for upwards of $20 million.
LEE: Blizzard owns Overwatch and they recently created an “Overwatch League.” The franchise fee for each team was $20 million. When they announced that, people in the media, people in the news, were like: “There’s no way anybody’s going to pay $20 million to own a team in this league!” Sure enough they sold out the 12 slots immediately and that was for the inaugural season. This coming up 2019 season, they’re going to have six more teams and they’re actually upping the fee from $20 million to (it’s undisclosed right now) between $30 and $60 million. People are willing to spend to get involved.
LOPEZ: What’s the most popular game right now?
LEE: The game that’s getting all the buzz, the game that’s in the news the most, is Fortnite. That’s the game where you hear parents complain that their 12-year old won’t go to bed because they’re staying up all night. That’s where the most popular streamers are. What’s interesting is the fact that what is the biggest game today wasn’t necessarily the biggest game six months ago or a year ago. The game before Fortnite to beat was PlayerUnknown’s Battlegrounds, known as PUBG. PUBG was the game of 2017. Everybody was playing, it had a lot of hype. Tons of people were getting involved. Then Fortnite was released and everybody went from PUBG to Fortnite and that’s where all the action is right now.
LOPEZ: For investors looking to get access to this theme, are these franchise fees enough? What other revenue streams do they have to?
LEE: The game publishers are licensing the rights to the games so that other people can maybe start a league or have a team. There are in-game purchases that are being made so, for example, Fortnite, it’s a free game to play, but you can, once you play, buy little add-ons. They’re called “skins” so you can make a character look different or have a different looking weapon. So little things like that illustrate to me that it’s an evolving dynamic situation where new things are happening and these companies are really pushing the envelope in how they’re going to make money off of these games. Millions and millions of people are playing these free games and the video game makers are making money off of them.
LOPEZ: It’s a young demographic here, right?
LEE: Sure. I believe the average eSport participant is 29 years old. When you compare that with traditional sports fans, I think the average NFL watcher is 58-60 years old. So there’s a huge shift in demographics and I think that speaks to the disruptive force of the whole space. You’ve got people who are not watching TV, they’re not turning on Sunday night football, they’re playing eSports all weekend. We see that anecdotally and we also see that in the research and the data.
LOPEZ: The video game industry over the years has had its ups and downs, what are the risks now that face companies in the eSports industry? Is there a risk of oversaturation in different games?
LEE: I think that the case we just talked about with PUBG and Fortnite, it’s such an evolving and dynamic field that no game or company has a huge capture of any specific market. There’s so many different people, so many different people like so many different games. Some people might like playing an RPG [rôle playing game] game by themselves in their house. Some people are playing your first person shooter. Other people might like playing football against each other. There’s so many different kinds of game for any kind of gamer.
LOPEZ: It seems like this move to eSports and this franchise model is almost like a move to the mainstream where, maybe, that would help sustain an ongoing long-term business.
LEE: Definitely. When you look at the articles that were coming out in 2015 and 2016, when these franchise ideas were starting to grow and being announced, there was a lot of skepticism from people in the media and even from some gamers. But I think the fact that stadiums are selling out worldwide… We’ve seen a lot of investment in these eSports arenas from local municipalities and Arlington, Texas has invested in renovating a convention center to be a dedicated eSports arena. There are eSports arenas in Sydney, Australia, Las Vegas, and China. So this is a global worldwide phenomenon getting a lot of investment from a lot of different areas. It’s not just a tech-specific play. Yes, it’s technology, but it speaks to a broad cultural shift.
LOPEZ: Thank you, J.P. Thank you for that insight.
LEE: It’s great to be here.
LOPEZ: So, there’s a lot going on in the video game space. If you’re interested in getting access to this in an investment form, check out VanEck Vectors Video Gaming and eSports ETF, ticker symbol ESPO, and, for more information, visit vaneck.com.
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