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The sport of investing

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Harry Smith, Senior Investment Analyst

The sport of investing

One of my favourite past times while at Otago University was heading down to the House of Taine (or Pain depending on your vintage) to watch the rugby. Jerseys were loose, rugby was played under the winter sun and both seats and terraces were packed to the rafters with supporters. Watching the Auckland Blues the other day, I was struck by how empty the stadium was. It reminded me of my recent trip to the US and research of video game publishers.

Declining viewership of sports isn't just an issue with rugby, most traditional sports have a diminishing supporter base and declining TV ratings. In contrast to this trend, multiplayer competitive video gaming, commonly known as e-sports is running hot. You only need to pick up the newspaper to witness the explosion around new game, Fortnite.

In 2017 385 million viewers tuned in to watch an e-sport event. Audiences have grown 24% yearly since 2014 and it is expected that viewers will grow to 850 million by 2025. The packed stadium pictured is the League of Legends video game World Championship!

The sport of investing

The core driver behind this growth is the inclusive nature of video games — you don't have to be a professional athlete to get involved. There are over 2.2 billion gamers globally, playing video games that are competitive in nature. Another driver is being able to identify with your hero as they are in a similar age bracket (18-35) and are playing your game just like you, which is engaging. This compares to the ever widening gap between pro and amateur athletes in traditional sports. Top players like Tyler 'Ninja' Blevins, who is 27, can command up to 250,000 viewers per game and earn $500,000 a month from playing the hit game Fortnite.

Even though e-sports currently only generates around $2 of revenue per fan compared to $54 for other traditional sports in the US, there is a race from video game publishers, media companies and telecommunication firms to capture a slice of this rapidly growing market.

Also battling it out for eyeballs are the major tech giants. In 2014 Amazon brought video game streaming platform, Twitch and its 55 million monthly users (now 100 million) for $824 million. The website had only been founded 3-years earlier in 2011! It was reported that Google was also bidding for the streaming site. Through Twitch, YouTube (owned by Google) and Facebook gaming, viewers can subscribe to a gamers channel for between $5 and $25 a month or tip a player for skilled game play.

As active investors, finding growth themes is one thing, but finding companies with the ability to maintain competitive advantage over competitors, capitalising on the theme, is a lot harder. Through our investments in Facebook, Google (streaming platforms) and PayPal (online payments) we currently have indirect exposure to the rise of e-sports and online gaming. On recent trips to the US we have meet with all major US video game publishers, including Activision-Blizzard, Electronic Arts and Take Two, and also attended the E3 video gaming industry convention alongside 20,000 video game enthusiasts in Los Angeles. Our search for potential investments in this space continues. Investing is not about growth at all costs, it is also about capital preservation and ensuring the businesses you invest in have a franchise that ensures they will continue to profit for many years to come.

Image source: https://euw.leagueoflegends.com/sites/default/files/styles/wide_small/public/upload/photo-1_0.jpg?itok=2o14n4bd

 

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