War for Human Attention

Call of Duty Launch

Call of Duty released their latest game, Modern Warfare, and it generated $600M in its first 3 days of release, which is more than 2x the box office opening of the new Hollywood blockbuster “Joker”. Video Gaming ($152B) is 2x larger than Hollywood ($43B) & Music ($20B) combined. In 2018, YouTube Gaming had 50B hours watched vs Netflix’s 52B hours watched. As I’ve mentioned before, video gaming is a key part of the future of digital entertainment.

The War for Human Attention: Video Gaming is Gaining Ground

We are seeing a tectonic shift in the way people are choosing to spend their leisure and social time. According to Limelight, gamers are now spending an average of 7.7 hours per week playing video games, which is a 19.3% increase from last year. TV has historically had an almost unchallenged monopoly on human attention and with the click of one button you can enter into the world of your favorite tv show or movie.

We believe we are seeing a shift in consumer behavior and their desire to not only be passive consumers, but co-creators in their leisure time with others in the new social square. Gaming allows people to be social without the hassle of planning a social event as well as the ability to immediately enter into their alternate reality (similar to TV). In the likely eve of an overdue economic recession, we think this cultural shift will continue to thrive even if more of the population has an increased amount of leisure time.  

Esports Media Rights: Driven by Ad-Revenue

This week, we published our approach on how esports media rights should be calculated going forward. Media rights are a critical component of the monetization of esports. As this industry matures, each video game title with a professional scene (CS:GO, Dota, CoD, etc) will seek to have media rights as a substantial revenue stream.

In traditional sports, media rights typically account for a significant portion of team revenue. In esports, we expect it to remain significant as the industry matures (10–25% of team revenue).

Summary: We have built an ad-revenue model that can be used to predict the media rights value (break-even) of each esports league. If you use Twitch ad-revenue and viewership as a basis, you can then back into an estimate of what each game’s professional scene is worth. Below is our estimate of the revenue each game generates for Twitch

A game's professional scene only has a fraction of the entire game's viewership, yet you can use the monetization of the entire audience to back into a price for the professional scene's exclusive media rights.

Example: Overwatch League (OWL) accounts for ~30% of Twitch's Overwatch viewership. Twitch makes an estimated $27M in ad-revenue from Overwatch, so there's an argument to be made that the annual media rights value for OWL is actually ~$8.2M per year (not $45M/yr). You can do this for every esport.

IPO Comedy: “Esports Entertainment Group”

This week, a P2P esports gambling company called Esports Entertainment Group filed their S-1 with the SEC. In the last two years, Esports Entertainment Group has a combined net loss of over $8.5M, no revenue, no product, and their CTO resigned in September. They even call themselves in their S-1 a “development stage company.” Esports Entertainment Group is hoping to raise an IPO on buzzwords (Esports, Gambling) that will be under the microscope of sophisticated investors.

They currently have 88,021,451 outstanding shares at a $5.50 offering price per share. That’s a $484M market cap… on absolutely nothing. According to the S-1, “the actual offering price per unit was negotiated between Maxim Group LLC, Joseph Gunnar & Co. LLC and Dinosaur Financial Group, LLC (the “Underwriters”)”. Realistically, this is an extremely under-the-radar public offering so it’s unlikely to see the light of day. It certainly has all of the workings of bankruptcy before it even reaches the exchange. If you have seen this offering, do not touch it with a ten-foot-pole.

Takeaway: as with any accelerating industry, there are always a few bad actors and company facades that try to capitalize on a trend. This has happened repeatedly throughout history in trends such as dot com, big data, VR, blockchain, and many others. This IPO comedy does not mean the underlying trends in esports, gaming, or gambling are inherently flawed. It just further reinforces why dedicated investment focus to this vertical is increasingly important and needed.