September 2018 Chief Investment Office GWM Investment Research Ahead of the game Shifting Asia Content

03 Editorial

04 Asia video gaming by the numbers

06 Executive summary

07 Asia’s gaming leadership to expand

11 The heterogeneous nature of Asia gaming

14 Gaming stakeholders – The four major pillars

15 eSports: A paradigm shift for Asia’s gaming industry

18 The life of a professional gamer (2020–2080)

24 Augmented reality and virtual reality

26 How Asian gaming is at the cusp of major technological changes

30 What does gaming mean for Asian society

32 How investors can participate in Asia’s gaming industry

Shifting Asia Editor Cover photo This report has been prepared Aaron Kreuscher gettyimages by UBS AG. Please see important disclaimer Design Contact and disclosures at the end of CIO Content Design ubs.com/cio the document. Illustrations Editor-in-Chief Rodrigo Jimenez Carl Berrisford Subscribe Project Management For more updates from the Chief Author Sita Chavali Investment Office, please sign-up at Sundeep Gantori www.ubs.com/cio-newsletter Editorial

Dear reader, Specifically, we think the industry will ­benefit from a) a rising share of games A rapidly growing online population and expenditures in overall entertainment ­rising incomes have turned Asia into a spending, ­b) a rise in gamers from new breeding ground for new technologies. We markets like Southeast Asia and South Asia, have explored several areas in past Shifting increased penetration of female and older Asia publications of booming homegrown gamers and new platforms, c) increased innovation in the region, including artificial monetization per user, and d) expanding intelligence, insurance technology, cashless gaming ecosystems thanks to adoption of Min Lan Tan payments and biotechnology. The video new technologies like ­artificial intelligence. Head of game industry (referred to as “the gaming APAC Investment Office industry”), the focus of this edition, is Another exciting development is the grow- another such area where Asia has not only ing popularity of eSports, the professional taken over the reins from the developed competition of video games, and its influ- world but looks set to reshape the indus- ence on entertainment spending habits. try’s future. Asia is currently home to around half of the world’s 395m eSports fans, 60m of whom The video games of today are very ­different tuned in to watch the League of Legends from those we grew up with. Most of us World Championship in 2017. With Asia’s would remember the days of Pong and eSports sector gaining official recognition Atari, when 8-bit graphics had us glued to from events like the Asian Games, it’s likely our television screens. Now, people have left to continue growing quickly in the years to the living room and are gaming on the go come, leading to greater monetization with their mobile phones or through virtual opportunities for the games industry. reality headsets. Yet it’s not just games and platforms that have changed; top develop- The future of Asia’s video game landscape ers and games markets are now increasingly is exciting but not without risks and chal- residing in developing Asia. lenges. China’s recent regulatory delays in new game approvals show how govern- The games market is now a hundred-­billion- ments are seeking to strike the right bal- dollar revenue industry, and its growth tra- ance between the need to regulate and a jectory continues to point sharply upwards – conducive environment for new entertain- especially in Asia, which has been growing ment forms to thrive. Still, we expect Asia’s by double digits­ over the past few years. games revenues to rise three folds between In fact, despite a late start, Asia will become 2017 and 2030 – an estimate which could the biggest market for games revenue prove conservative – and we believe invest- worldwide this year, with its growth out- ment opportunities abound in the years stripping even the explosive pace experi- to come. enced in the West over the recent decades. Looking ahead, we expect Asia’s video We hope you enjoy reading about this fun games revenues to grow from USD 61.1bn and exciting topic, and please reach out in 2017 to USD 200bn in 2030, an average with any questions or feedback. annual growth rate of 9.5%, with a third of the gains driven by user growth and the rest Game on! by increased monetization per user.

Shifting Asia: Ahead of the game – September 2018 3 Asia video gaming by the numbers

Asia Pacific’s ranking by region in the global gaming mar- ket, with the region significantly outgrowing the global market (mid-teen growth rate vs. high single digits). Asia’s gaming industry is set to record a notable achievement this year: revenues are on pace to top the rest of the world for # the first time, according to Newzoo. The strong growth in 1 recent years has been driven by mobile gaming, with sup- port from incremental growth drivers like eSports, VR/AR and the emergence of new technologies. It’s clear that APAC Asia’s ascent has only begun.

The number of active gamers (those who play games at least once a month or billion spends at least one hour on average active gamers per week playing games) in Asia Pacific, >1.2 according to Newzoo and Razer. If the 1. region’s gamers were a country, they 2. would represent the third most populous 3. 4. nation in the world. China accounts for China 5. almost half of the 1.2bn.

The amount Asia’s best eSports player is paid in USD millions annually to compete in professional gaming USD million leagues, according to Bloomberg. The 2.5 figure doesn’t include endorsements or prize money and shows the rising popularity of eSports, which may soon rival many traditional sports.

Asia Pacific’s gaming share in percentage of regional media & entertainment spend. While the region’s entertainment spend as a percentage of GDP is below 13.8 % the global average, its spend on gaming as a share APAC’s gaming share of media & of total entertainment spend is above the global entertainment spend ­average (12.3%) at 13.8% (source: Frost & Sullivan, Razer, Bloomberg Intelligence). This highlights the strong gaming culture in the region.

4 Shifting Asia: Ahead of the game – September 2018 Asia video gaming by the numbers

Asia Pacific’s share in percentage in the global gaming peripherals market, according to Newzoo and Razer. Despite accounting for more than 50% of global active % gamers and global gaming revenues, the region’s spend 25 on gaming peripherals significantly lags behind North APAC’s share in the global gaming peripherals market America and Europe. While the higher share of mobile gaming partly explains the lower peripheral spending, we still see peripherals as an incremental growth oppor- tunity within the region.

The percentage of active mobile players in China who are female. In comparison, 41% of US mobile gamers are female, % and the ratio is lower in the rest of the 45 world. While Asian female gamers domi- Active female mobile gamers in China nate genres like casual and simulation games, their participation is increasingly rising in other genres.

The average time spent in minutes by active gamers in China per day, based on a UBS Evidence Lab min ­survey. With the rising trend of 60 ­eSports, the user engagement Average time spent by with gaming titles should continue active gamers in China to gradually rise in the region.

Our forecast for Asia’s gaming revenues, which we expect to grow more than three times from 2017–2030. We Average annual 9.5% growth rate ­conservatively expect the region’s revenues to grow from USD 61.1bn in 2017 (source: Newzoo) to USD 200bn in 2017 2030 2030, or an average annual growth rate of 9.5%. The esti- USD USD mate is also based on the assumption that gaming should constitute a high-teen percentage of the region’s entertain- 61 200 ment spend, which we think is reasonable given the billion billion increasing shift from traditional media spend to gaming.

Shifting Asia: Ahead of the game – September 2018 5 Executive summary

USD  Video game revenues in Asia Pacific will exceed the rest of the world’s this 200bn year, cementing the region’s position as a global gaming leader. And this USD journey has only just begun – Asia’s gaming ascent is set to continue over the 61.1bn next decade, with gaming revenues growing from USD 61.1bn in 2017 to USD 200bn in 2030 (one-third driven by user growth, two-thirds by increased monetization per user), according to our forecasts. 2017 2030  While the recent regulatory suspension of new game approvals in China is a Asia’s gaming ascent is set to temporary setback, we don’t believe it will affect the region’s strong gaming continue over the next decade, culture and long-term growth opportunities; we continue to forecast average with gaming revenues growing annual revenues growth of 9.5% for Asia’s gaming industry from 2017 to from USD 61.1bn in 2017 to 2030. This is based on multiple factors, including steady growth in Asia’s USD 200bn in 2030. ­gaming population thanks to new audiences, markets and platforms, the rise of gaming as a share of the region’s entertainment spending, new supporting technologies and the rising popularity of competitive eSports.

 Asia Pacific today accounts for 51% of the 395m global eSports audience, according to Newzoo. eSports adoption, which drives gaming discovery Global APAC eSports and distribution in growing ecosystems, is strong in Asia thanks to favorable audience demographics (high proportion of millennials). We expect eSports to be 395m 51% a key future driver of Asia’s gaming industry in the years ahead.

 New technologies, like artificial intelligence, cloud gaming, and facial and We expect eSports to be a key voice recognition, should enhance Asia’s gaming experience and drive future driver of Asia’s gaming increased user engagement and monetization. Augmented and virtual reality industry in the years ahead. are potential long-term drivers, but their development is still in the infancy phase and therefore needs to be refined.

 The addictive nature and violence of some games call for regulation of Asia’s gaming industry. We believe the regulation of gaming will continue to evolve and a few markets like South Korea lead by example. However, the importance of gaming to society both in terms of its entertainment and commercial value cannot be ignored. For example, the gaming industry has created, and will continue to create, a significant number of creative jobs in the region. The rising trend of gamification, the process of using gaming elements to engage and motivate participants in non-game contexts like healthcare or employee-based activities, is another area that can aid society by improving the productivity of workforces.

 With Asia leading the global gaming industry’s revenues, most major global gaming companies worldwide are leveraged to the region’s strong growth prospects. In particular, Chinese internet gaming companies and US-based software and semiconductor companies stand to benefit due to their supe- rior margins, whereas we see limited opportunities in gaming hardware companies due to their lower margins. In addition to publicly listed compa- Sundeep Gantori nies, interesting growth opportunities are available in the venture capital CFA, CAIA and private equity space.

6 Shifting Asia: Ahead of the game – September 2018 Asia’s gaming leadership to expand iStock

The recently held Asian Games, which takes global gaming leader. And we believe the jour- place every four years and is the second-largest ney has only just begun – Asia’s gaming ascent multi-sport event behind the Olympics, in Indo- is set to continue over the next decade, with nesia marked a unique milestone in the history

of competitive sports: eSports’ debut in an inter- Fig. 1 nationally recognized sporting event. The com- petition included popular titles like League of UBS estimates Asia Paci­c’s gaming revenues to Legends and Clash Royale. At the next Asian reach USD 200bn by 2030 Games, to be held in 2022 in Hangzhou, 250 China, eSports will be an official medal sport. 200

It’s no coincidence that Asia is the first to recog- 150 nize eSports as an official sport. The gaming 100 culture and industry in Asia has grown by leaps 50 and bounds over the past few years. For the 0 first time in history, Asia Pacific’s gaming reve- 2017 2030 nues will exceed that of the rest of the world’s Source: Newzoo and Bloomberg Intelligence (2017), UBS Estimates (2030 estimates), this year, cementing the region’s position as a as of August 2018

Shifting Asia: Ahead of the game – September 2018 7 Asia’s gaming leadership to expand

Fig. 2 Global console installed base

Current generation Previous generation

Nintendo Wii U Nintendo Switch 9.5% 11.5% Microso Xbox 360 31%

37% Nintendo Wii U Microso 25.4% Xbox One Sony PlayStation 4

53.6% 2017 2017 32%

Sony PlayStation 3 Source: VGChartz, Bloomberg Intelligence, UBS

gaming r­evenues growing from USD 61.1bn in region. According to Newzoo, Razer and 20171 to USD 200bn in 2030, according to our Bloomberg Intelligence, 71.2% of millennials forecasts, a more than threefold jump. This fore- (aged 12 to 35) and 54.7% of non-millennials cast is based on our expectation for greater user (aged 36 to 65) play video games. The rela- growth (accounts for one-third of the projected tively higher share of mille­nnials in the region, rise in revenues) and increased monetization per who are reshaping consumption in Asia, user (accounts for the the rest). should therefore drive increased spending on gaming in the years and decades to come. In fact, we believe our estimated annual average gaming revenues growth of 9.5% during this We’re also positive on the region’s gaming period is conservative given the following growth growth prospects because of its unique drivers: and strong gaming culture, which has been molded by economic traits and gaming prefer- 1. Rise in the share of entertainment ences. Given most games are not played on spending: While Asians spend relatively less consoles but online through PCs and mobile on entertainment & media (1.8% of their devices, the most popular games in the region income vs. 2% globally2), they spend much have a social element where gamers compete more on video games. Unlike the West, where with their friends and colleagues. offline, console gaming is quite popular, Asia’s In addition, Asians prefer a deep level of cus- gamers are largely online via PCs and increas- tomization, in which players pay for virtual ingly mobile devices; the latter currently skins or avatars to personalize their in-game accounts for around 60% of the region’s gam- characters. Also, due to a lack of quality enter- ing revenues3. Also, compared to the West, tainment options and gaming’s social nature, Asia Pacific’s younger demographics – the key gaming has penetrated well beyond cities in proponent of gaming – should benefit the the region. Hence, we believe gaming penetra-

1 Source: Newzoo 2 Source: UBS CIO estimates 3 Source: Newzoo

8 Shifting Asia: Ahead of the game – September 2018 Asia’s gaming leadership to expand

tion should continue to rise – out of overall Fig. 3 entertainment spending, we expect gaming Global eSports audience by region expenditures to reach 19–20% by 2020 (versus 13.8% today). This forecast is also conservative, Rest of the world as the incomes of gaming-loving Asian millen- 18% nials and teenagers should increase alongside the industry’s growth in the region. Europe 18% 51% APAC 2. Rise in gamers and monetization: According to Newzoo, Razer and Bloomberg Intelligence, Asia Pacific accounts for almost half of the 2017 13% world’s gamers. There are 1.2bn in the region, North America with China accounting for almost half, and this

number is rising by 6–8% every year. While we Source: Newzoo, Bloomberg Intelligence, UBS, as of July 2018 expect the pace of user growth to slow down eventually, we still see opportunities emerging from new audiences, markets and platforms. The biggest opportunity will come from a. New audiences: While young and male increased monetization per user, in our view. gamers dominate Asia’s gaming population, Today, gaming revenues in Asia Pacific are an interesting development has been the close to USD 50 per gamer, versus USD 100 growing trend of new female gamers and per gamer in the US, highlighting significant older ones above the age of 40. For example, monetization upside in the future. While we according to Newzoo, 45% of Chinese do not expect the gap to narrow overnight, mobile gamers are female. With still-solid we believe increased engagement should demand for casual, arcade and sports games, result in higher monetization over time. we think more women and new audiences will enter the market, thus swelling overall 3. eSports to extend discovery and gamer numbers in the region. distribution: The rising trend of eSports in Asia makes us particularly excited about the b. New markets: While China currently domi- industry’s growth prospects. Today, Asia Pacific nates Asia’s gaming population, we see accounts for 51% of the 395m eSports fans incremental growth from new markets in worldwide. With increased game discovery for Southeast (ASEAN) and South Asia, where users and distribution options for publishers, gaming penetration still has room to grow. eSports should drive increased monetization for A case in point is the growing popularity of Asia’s gaming industry. Today, most of the eSports in ASEAN, which is helping to attract monetization in Asia’s eSports industry is new gamers. through ticketing and sponsorship, but looking ahead, we believe media rights, advertising and c. New platforms: While PC gaming growth merchandise should fuel monetization. The ris- is saturated, we see steady growth continu- ing trend of mobile eSports will likely be a key ing for mobile gaming. Also, the emergence driver, as Asia has very strong exposure to both of new platforms like augmented reality and mobile games and mobile viewing given its virtual reality should create new categories strikingly high mobile penetration rate. Today, within gaming. Interestingly, traditional gam- PCs are the primary platform for eSports, with ing consoles, along with hybrid consoles, are PC-based titles the most popular ones in terms also witnessing strong growth in the region. of prize money. But as mobile eSports take off, Asia should emerge as a leader in monetiza- tion.

Shifting Asia: Ahead of the game – September 2018 9 Asia’s gaming leadership to expand

4. New technologies to boost Asia’s gaming What exactly is eSports? ecosystem: The emergence of many new technologies, like ­artificial intelligence, cloud Lee “Faker” Sang Hyeok from South Korea signed with gaming, facial and voice recognition, mobile SK Telecom, a South Korean wireless telecommunications payments and blockchain, should provide operator, to play League of Legends competitively for increased opportunities for user engagement, USD 2.5m a year, the highest eSports contract known, thus strengthening Asia’s ecosystem in the ­according to media reports. Lee joins SK Telecom’s eSports coming years. This in turn should result in new pro team, which has taken home USD 8.5m in total prize and improved monetization opportunities for money from 211 tournaments. So what exactly is eSports, Asia’s gaming industry, helping address its cur- and why are the top players getting paid so much? eSports rently untapped huge potential. is simply professional gaming, in which gamers compete in tournaments for prize money (similar to tennis Grand The strong recent growth of Asia’s gaming Slams). The most common eSports games are Dota 2, Coun- ­industry is a telling sign of its bright future, with ter-Strike and League of Legends. The professional gamers ­revenues set to more than triple over the next form part of a team or play solo, depending on the game 13 years. To put things into perspective, our format. The matches are usually live streamed via platforms USD 200bn revenues estimate in 2030 is equiva- like Twitch or held in arenas in front of their many fans. The lent to the region’s entire smartphone industry winning team of The International 2018 Dota 2 tournament revenues in 2016, highlighting the growing rele- took home USD 25.5m, the largest purse in the history of vance of Asian gaming in the future. Such robust eSports. So, if you consider yourself a top-notch gamer, growth opportunities provide interesting invest- it might be time to consider a career change. ment opportunities for investors in both the listed and unlisted space, in our view.

10 Shifting Asia: Ahead of the game – September 2018 Asia’s gaming leadership to expand The heterogeneous nature of Asia gaming

Asia Pacific’s gaming culture is among the strongest globally, driven by the popularity of online and social games as well as a robust gaming ecosystem. This is reflected by the region’s high gaming ­penetration (gaming revenues/GDP), which is close to 0.25%, versus the global average of 0.16% and many other developed markets like the US ( 0.15%), UK (0.11%) and Switzerland (0.6%). But tastes and penetration rates vary greatly throughout the region. To better understand the nuances of Asia’s gaming landscape, we have divided the region into three zones by penetration rate: strong penetration (>0.25%), moderate penetration (0.10–0.25%) and low penetration (<0.1%).

Asia has a high gaming penetration rate compared to the rest of the world Gaming revenues as a % of GDP

Russia Canada Germany France Switzerland USA Spain Italy China Japan Korea India Taiwan Hong Kong Vietnam Brunei Myanmar Indonesia

Brazil Thailand Singapore Malaysia Australia

Strong > 0.25% Moderate 0.10 – 0.25% Low < 0.10%

Source: Newzoo, World Bank, Bloomberg, IMF, UBS Strong-penetration markets Moderate-penetration markets Low-penetration markets China, Korea and Japan fall under the Most Southeast Asian markets, Taiwan Gaming penetration is less than 0.1% of strong penetration category. While China and Hong Kong fall under the moderate GDP in South Asia, including India and is the biggest market by revenues globally penetration category, in which gaming Australia. The low penetration is mainly – Newzoo forecasts USD 37.9bn of gam- spend as a percentage of GDP is between explained by the lack of a strong gaming ing revenues in 2018 – Japan has the 0.10% and 0.25%. The biggest markets culture, coupled with alternative enter- highest penetration followed by Korea of this group by revenues are Taiwan, tainment options like sports and movies. and then China. While the global domi- Indonesia and Thailand, according to That being said, rising gaming demand nance of Japanese console makers like ­Newzoo. The ­region’s gaming community from millennials may lead a gradual shift Sony and Nintendo highlights the deep is around 250m strong, and is steadily in markets like India and Bangladesh. roots of Japan’s gaming culture, Korea growing thanks to rising broadband pen- has benefitted from solid IT infrastructure, etration and incremental additions of a strong developer community and favor- mobile gamers. While the region is able regulation. China is a unique success unlikely to surpass Korea or China’s pene- story – despite being a newcomer, vibrant trate rate in the near term, strong growth and large online communities and the should continue driven by a lower base success of mobile gaming have catapulted and the increasing popularity of social the country to become a global leader. games and eSports.

Shifting Asia: Ahead of the game – September 2018 11 Interview This interview contains views which originate from units outside CIO Global Wealth Management.

Interview Stella Lui

Stella Lui is currently Director of Investor Relations at Tencent, the largest company by gaming revenues globally. Stella has more than 12 years of expe- rience in investor relations and corporate communications. Prior to joining Tencent, Stella spent over seven years as Investor Relations Officer at Hender- son Land, a major property developer in Hong Kong. She also worked at international public relations agencies as a financial communications consul- tant for a number of financial institutions and listed companies in Hong Kong. Stella Lui Director of Investor Relations Stella holds a Bachelor’s degree in Finance (Honours) from the Hong Kong Tencent University of Science and Technology, as well as a Master’s degree in Econom- ics and International Business from the University of East Anglia, UK.

China’s gaming industry has witnessed sharp revenue game like Honor of Kings, which is only two years old, has growth during the past decade. In your view, what room to increase paying ratios and average revenue per will be the key future growth driver for the industry? user (ARPU) as it’s still attractively priced compared to a PC game like League of Legends. Yes, China gaming has seen significant growth during the past few years, especially driven by the rapid development To sum up, we believe a combination of both paying user of smartphone games, and we believe there are still a lot of growth and higher ARPU should drive growth in the future. growth levers for the next decade. With the migration of Also, we are excited about the emergence of eSports and users from PC to smartphone games, we expect smart- live broadcast gaming services, which currently serve as phone games to continue having more vibrant develop- important marketing means for us to promote our games ment and stronger growth than PC games in the short and and deepen our engagement with gamers. medium term. On the other hand, we are also positive about the long-term development of PC games as the Talking about eSports, how do you see their evolu- technology advances. We see room for gaming users to tion? continue growing in China, as user penetration rates as a percentage of the overall online community in China can eSports are one of the main ways to promote our gaming rise further, which means there are still opportunities for business. We have published many PC and smartphone both PC and smartphone user growth. In particular, given games, and eSports can actually increase user engage- the success of smartphone game titles like Honor of Kings ment. PC games have a longer history than smartphone and mini games on Weixin (WeChat), we believe user games, which is the reason we have been running eSports growth will continue. For example, a lot of Chinese women on PCs for some time. Because of the rapid development have recently joined the gaming bandwagon thanks to of smartphone games and their bigger user base, we have female-targeted games like QQ Dance (50% of users are been very active in promoting smartphone games through female). Leveraging the massive user base on our social eSports. We have licensed some broadcasting companies platforms, users can enjoy playing games while continuing to show eSports matches, as many of our gaming custom- to interact and invite their friends on the social platforms ers are interested to watch our best gamers play in real to join them. time.

Another growth driver is the monetization of smartphone The rising popularity of eSports is also evident by its games. Currently, our monetization per daily active user increased acceptance in society. Over the last few years, (DAU) has room to grow to match the levels already we have seen courses on eSports being offered by univer- enjoyed by our industry peers. For example, our mobile sities. And in the not-­so-distant future, we should see

12 Shifting Asia: Ahead of the game – September 2018 This interview contains views which originate from units outside CIO Global Wealth Management. Interview

eSports recognized as official games in the national gam- First and foremost, we have unique, powerful and popular ers or even Asian Games. eSports are at the early stages of social platforms, WeChat and QQ, which allow us to dis- monetization and are increasingly being used as part of tribute and easily promote our games. For example, on promotional campaigns to bring stakeholders together. these platforms, users can see how many of their friends are playing which games. They can send an invitation to What technologies can be used to enhance the over- their friends and expand the engagement. This unparal- all gaming experience of your customers?­ leled reach gives us the choice of publisher in China. In addition to the above platforms, we also benefit from our We are pretty excited about the use cases of artificial intel- own Android-based app store in China, the largest in ligence (AI) for the firm and for gaming in particular. For China – this also helps us to extend our gaming leadership. example, we have been applying AI in gaming applications to pair players up with one another. We use machine intel- Second, we have strong local know-how as we know our ligence to find the right preferences and match gamers up user preferences; for example, the types of genres they like based on skills. Similarly, we leverage big data technologies or the amount of time they spend on various types of and facial recognition technology across both our PC and games. We regularly monitor the feedback of our gamers smartphone gaming divisions. and fine-tune the games from time to time, which is important. On virtual reality, the opportunities are mostly in PC games – but the ecosystem is not mature enough at the moment. Third, coupled with our local-know and our strong devel- A few users in China complain how the headsets are too opment capabilities, we have multiple teams with different heavy to use while playing. Also, the games need to be strengths and expertise in certain genres, as well as strate- appealing to the players. So we believe it is a work in prog- gic partners in China. And internationally, we are able to ress. Hopefully, lighter headsets with improvements in the identify and develop high-quality new games. overall VR ecosystem will increase the adoption of VR in gaming in the future. Finally, what do you believe are the key success fac- tors that have made Tencent a gaming leader not just in China but globally?

There are three factors, among others, that give us a unique position in China’s gaming industry.

Shifting Asia: Ahead of the game – September 2018 13 Gaming stakeholders – The four major pillars

The gaming ecosystem has many participants, but we have broadly divided them into four major categories.

Developers Customers Developers, who are the most important stakeholders in While all industries have a stakeholder category called the gaming industry, use their creativity and imagination to “customers,” unique to the gaming industry is that there develop games through various steps like animation, story- are two sub groups of customers: players who actively play telling design, programing, etc. Increasingly, major gaming the games and those who watch others play the games platform companies have become vertically integrated to (such as the case with eSports). take advantage of synergies between development and publishing. Popular developers include Epic Games, Blue- hole and Bungie.

Developers Customers

Storytelling design Game development Players Game watcher Publishers Enablers

Peripheral Distribution Marketing Financing studios makers

Publishers Enablers Publishers are akin to movie production houses that This group mainly includes participants who support the engage in various activities, including financing studios, development of the gaming ecosystem. They mainly game development, engaging distributors for publishing, include: a) hardware and gaming system providers like making games digitally available, and managing sales and makers of gaming consoles, peripherals (keyboards, mice, marketing. With the rising popularity of eSports, the role headsets including VR/AR devices), graphics processing of publishers is evolving to take on additional tasks like cre- units (GPUs), displays and computing devices; b) distribu- ating leagues, merchandising and operating tournaments. tion companies including the broadcasters of eSports; c) Most publishers hold the content and intellectual property payment companies given the increasing shift to online and (IP) rights of the games. Popular publishers include Tencent, mobile games; and d) carriers and platforms like telecom NetEase, Activision Blizzard and Electronic Arts. operators, which provide fast data networks and operating systems for both PCs and mobile devices to support the growth of gaming.

14 Shifting Asia: Ahead of the game – September 2018 People visit the stand of Chinese game video streaming platform Douyu, during the 14th China Digital Entertainment Expo and Conference, also known as ChinaJoy 2016, in Shanghai, China. Source: Keystone eSports: A paradigm shift for Asia’s gaming industry

According to the Oxford dictionary, eSports are and operate unencumbered by TV rights or a “multiplayer video game played competitively other challenges. Any player can broadcast their for spectators, typically by professional gamers.” game through in-game live-streaming services, Today, eSports are at the cross-section of some sometimes attracting millions of viewers inter- of the most powerful online trends like gaming, ested to learn new tricks or to simply cheer on live streaming and social networking. While their favorite player. Physical strength is less of eSports as a concept has been around for as a concern in eSports, as reaction time and focus long as the video game industry has, the strong matter more. Given these factors, and due to recent growth in the gaming ecosystem, cou- their strong appeal, eSports have been attracting pled with faster broadband speeds, has reignited significant interest in Asia and globally. its growth prospects. According to Newzoo and Bloomberg Intelli- Unlike traditional sports, which struggle with gence, the global audience for eSports has been logistical challenges, organizing eSports events 395m this year, and Asia Pacific accounts for is relatively easier. eSports are digitally native and 51% of global eSports fans. The region enjoys are more global in nature compared to tradi- a strong fan base, as evidenced by the 60m tional sports, which means they’re easy to set up unique viewers who tuned in to watch the

Shifting Asia: Ahead of the game – September 2018 15 eSports: A paradigm shift for Asia’s gaming industry

League of Legends World Championship in 2017, Fig. 4 up from 43m in 2016. This puts the event on par Major eSports events can attract far more viewers or above many other traditional sporting champi- than traditional sporting events onships (see Fig. 4). Total unique viewers in millions

We expect Asia’s strong leadership in eSports to 120 continue, driven by numerous factors, including: 100 80 1. Favorable demographics: The eSports indus- 60 try benefits significantly from the relatively younger dynamics of Asia, where millennials 40 and teenagers are reshaping the entertainment 20 industry. Live streaming of eSports has been 0 attracting strong interest in the region due in Super BowlWorld Series League of Game 7 Legends World part to the real-time nature of games, which Championship are generally unscripted. The industry has been

able to create a community for game enthusi- Source: Nielsen, company websites, Bloomberg Intelligence, as of July 2018 asts who share common interests. eSports offer interactive and immersive experiences through video, voice and text integrated into the stream- ing platform, and generate further engagement investment. Leading gaming companies are through activities like music shows and outdoor also investing heavily in eSports stadiums and activities. According to Huya, a Chinese stream- developing the ecosystem through investments ing video provider, almost four-fifths of the in professional leagues, production and content company’s users in China registered for its live- distribution. Additionally, the strong improve- streaming gaming unit are 15–35 years old. ment in the device ecosystem,­ with increased availability of smartphones to view eSports and 2. Effective game discovery and distribution: faster speeds (both 4G and broadband), should Our interviews with leading gaming companies drive demand for digital content like eSports. in the region clearly indicate that eSports can The ever-increasing prize pool of eSports is also be used as a strong platform for promotion, attracting more people to the industry. For which helps both the discovery and distribution example, popular eSports events for games like of games. From a viewer’s point of view, live Dota 2 or League of Legends have a total prize streaming of eSports demonstrates how the pool of USD 10–20m, on par with other popu- game can be effectively played by profession- lar sports events like tennis Grand Slams. als; whereas from a publisher’s point of view, it helps generate strong word of mouth publicity 4. Favorable regulations: While gaming regula- and provides a feedback loop with users. As tions are mixed, they are favorable overall for result, eSports help drive the overall growth of eSports in the region. This might be due to the gaming industry through increased engage- the passive nature of eSports, for which users ment. watch rather than play games. For example, in 2016, the National Development and Reform 3. Growth in eSports ecosystem: We have seen Commission in China issued a policy to a noticeable improvement in Asia’s “encourage national and international eSports eSports ecosystem due to a combination tournaments.” China’s Ministry of Education of increased investments and innovation. has also recognized eSports as a major of study According to CB Insights, the global eSports for higher education. Other governments in the industry is on pace to net USD 5bn in private, region also promote the industry through the disclosed funding through over 350 deals from allotment of specialized eSports stadiums and 2013–2018, with Asia receiving the bulk of the recognition of eSports professional athletes.

16 Shifting Asia: Ahead of the game – September 2018 eSports: A paradigm shift for Asia’s gaming industry

eSports viewership can be further divided into two Fig. 5 segments: occasional viewers and enthusiasts. eSports viewership is surging According to Newzoo and Bloomberg Intelligence, In millions enthusiasts’ share should rise from 43% currently 700 (173m people) to 45% (264m) in 2021 (see Fig. Forecast 5). Due to the nascent stage of the eSports indus- 600 try, total global revenues are expected to reach 500 USD 906m in 2018, according to Newzoo and 400 Bloomberg Intelligence. North America currently 300 leads eSports monetization, accounting for almost 200 45% 38% of global revenues, while China and South 100 Korea are the second and third-biggest markets, 43% respectively (see Fig. 6). That being said, we 0 2018 2021 expect Asia to be the top revenue generator of the global eSports industry in the future, proving Enthusiasts Occasional viewers % of enthusiasts among total viewers to be a key growth driver for the overall gaming industry. This positive view is based on our expec- Source: Newzoo, Bloomberg Intelligence, UBS as of July 2018 tation for increased monetization, which is a vital precursor, and Asia’s current leadership in the global gaming sector. In a mobile-first region like Fig. 6 Asia, mobile eSports should be the next driver of viewership and spending as most eSports titles eSports market revenue estimate for 2018 today are still PC-based.

China In summary, with the quantity of eSports content 18% increasing, we believe the industry’s monetization South Korea should improve in Asia. This is due to a large audi- USD 6% Rest of the world 38% ence size, the increase in engagement eSports 906 million offers for advertisers to target a captive demo- graphic, as well as the rise of mobile eSports. 2017 38% North America From an investment point of view, eSports’ grow- ing popularity in Asia should provide interesting growth opportunities. The industry is still in a Source: Newzoo, Bloomberg Intelligence, UBS as of July 2018 nascent stage, with most companies still in the private equity space. But as monetization picks up, we see increased opportunities in publicly listed companies. Additionally, eSports as a trend should lead to increased spending on hardware due to the rise of competitive gaming. According to Activision Blizzard and Bloomberg Intelligence, eSports competitors and viewers spend 30% more on gaming hardware and software than casual gamers. So select gaming hardware companies should also benefit from the eSports trend.

Shifting Asia: Ahead of the game – September 2018 17 The life of a professional gamer (2020–2080)

One can only hypothesize about how the intersection of gaming and society will evolve over the coming decades. We’ve had some fun with this topic and tried to visualize such a future, by following the life of a professional gamer from her childhood to her twilight years.

By 2020 01 Growing up (child – education games)

Most schools around the world have integrated curriculums into educational devices. Classrooms become increasingly technologically interactive and engaging.

By 2025

02 Growing up (teen – gym class)

Sports are no longer chained to a physical location. Schools can com- pete against teams worldwide in a competitive setting.

By 2030

03 Growing up (university student – competitive games)

To earn some pocket money during university, our hero competes in semi- professional eSports leagues.

18 Shifting Asia: Ahead of the game – September 2018 By 2035 04 Professional gamer

The eSports industry becomes a major traditional sport thanks to worldwide popularity. The most elite gamers rank among the highest-paid athletes globally.

By 2040

05 Olympic games (representing country) eSports to be recognized as an Olympic sport. The world watches as nations compete in gaming tournaments.

By 2060

06 Retired gamer/consultant

The gamification of society extends to the corporate world, with former profes- sional gamers acting as consultants to government and corporate employees.

By 2080

07 Grandparent gamer

People of all ages connect in the AR/ VR world. This allows grandparents to game with their grandchildren across continents.

Shifting Asia: Ahead of the game – September 2018 19 Interview This interview contains views which originate from units outside CIO Global Wealth Management.

Interview with Henry Dachuan Sha

Henry Dachuan Sha is the Chief Financial Officer (CFO) of Huya, the largest live-streaming game platform in China. Prior to joining Huya, Sha served as a director of Greenwoods Asset Management from 2015 to 2017. From 2013 Henry Dachuan Sha to 2014, Sha worked as an associate at China Media Capital. Before his pri- vate equity career, Sha worked with Goldman Sachs’ Investment Banking divi- Chief Financial Officer (CFO) sion from 2011 to 2013. He received a dual bachelor’s degree in electronic of Huya engineering and accounting from Fudan University.

How do you see the role of live-streaming sive, with more than 2,600 games covered. We have cre- companies in China in promoting the overall gaming ated an engaging, interactive and immersive community industry? for young game enthusiasts in China. Our rich and high- quality game live-streaming content is a magnet for users In China, live-gaming streaming gaming platforms are who share common interests to connect and share their becoming increasingly popular, as they offer a close com- passion on our platform. We closely cooperate with munity for game enthusiasts to share their common inter- eSports event organizers, game developers and game pub- ests. Live streaming of game content, such as gameplay, lishers to identify trending eSports competitions and secure eSports tournaments and eSports game shows, has live streaming rights of matches and tournaments favored attracted many users to platforms like ours. As a result, by our community. As of 31 December 2017, we had coop- live-streaming companies in China are able to leverage erated with over 90 eSports event organizers and provided strong relationships with game developers and publishers live streaming services for over 360 eSports tournament as well as popular game broadcasters, eSports leagues and matches since our inception. players to offer high-quality and engaging game live streams to users. For example, users can interact in live How different is the eSports trend in China versus online group activities, through video, voice and text, and the West? participate in real-time in a broad range of topics, such as games, music shows and outdoor activities, thus enjoying Based on our experience, the most popular genres in US an interactive and immersive experience. The proliferation are racing games, sporting games and shooter games; but of smartphones has ignited the popularity of live streaming in China, online battlefield games and massive multi-player in recent years, as anyone can easily participate as either a online games are very popular. Also, mobile games are very broadcaster or a viewer. popular in China, and what is also very interesting to note is unlike in the west, where most audiences watch eSports How does Huya fit into the ongoing on their PCs or large monitors, in China, audiences prefer eSports trend in China? to watch eSports on mobile phones. In terms of monetiza- tion too, there are a few differences. In the west, moneti- Huya is the largest and most active game live-streaming zation of the eSports traffic is mostly through advertising platform company in China. As of 1Q18, we had 92.9m and subscription model, very similar to how ESPN or other average monthly active users (MAUs), with an active user traditional sports companies monetize. In China, spending on average 99mins on our app per day. Mobile it is mostly through the “freemium” model where audi- MAUs as of 1Q18 stood at 41.5m, representing around ences access games free of charge but have to pay for vir- 45% of our total MAUs. Our game coverage is quite exten- tual items.

20 Shifting Asia: Ahead of the game – September 2018 This interview contains views which originate from units outside CIO Global Wealth Management. Interview

Talking about monetization, could you please The acceptance in particular in low-tier cities is quite ­elaborate on how you monetize your user base? encouraging given the lack of significant entertainment options. The widespread roll-out of broadband networks We monetize our user base mainly through value-added definitely helps us, which we augment through better user services (VAS) and advertising services. Revenues from VAS experience by providing high definition content where are primarily generated from the sales of virtual items that required. our users purchase on our platform. Users can endorse the broadcasters with the virtual items they purchased, includ- From a regulation point of view, compared to gaming, ing consumable and perpetual items, which can be utilized where players actively engage, live streaming is seen as to enhance the interactions among the users and broad- passive engagement, where audiences may watch during casters in real time. Beyond the real-time nature of live breaks at the work-place, when they are on public trans- streaming where each broadcaster improvises in each live- port or during leisure time, so we don’t think there are any streaming session, our community interactions generate widespread concerns. Nevertheless, on our platform, we another form of content. The variety of real-time interac- have set up effective operating standards and comprehen- tions between viewers and broadcasters or among viewers sive incentive mechanisms to encourage healthy competi- creates viewer-generated content, which in turn becomes tion, good performance and regulatory compliance. part of the overall entertainment and social experience offered on our platform. Hence, in the future, we plan to further diversify our monetization channels by adopting more creative designs for virtual items, and promote more attractive reward systems and membership privileges to further incentivize users to spend on our platform. For online advertising, we plan to actively promote our adver- tising services, tap into unutilized advertising inventory and expand our advertiser base.

How do you see the acceptance of eSports by society in China?

eSports is driving the professionalization of the entire gam- ing ecosystem. It is seen more as entertainment, and in some cases government agencies are providing support.

Shifting Asia: Ahead of the game – September 2018 21 Types of games

Gaming can be divided into many sub-groups but for the sake of simplicity, we have broadly divided them into six different types of genres. The list is not exhaustive but provides a basic understanding for general readers.

Shooter games Role-playing games (RPG) Massively multiplayer online are one of the most popular catego- are another popular genre, in which (MMO) games refer to an online ries, which has sub-genres like first- the player controls a character or a set gaming ecosystem, where thousands person shooter (FPS) and third-person of characters in an imaginary world. of players can participate simultane- shooter (TPS). Shooter games are fast- The characters have many abilities like ously through the internet or shared paced action games played from the fighting skills or magical powers, and networks via a one-time purchase or point of view of the protagonist(s), generally the game revolves around a a monthly subscription. The concept where the player(s) navigates a com- strong storyline. The player’s skills and goes beyond a single genre like RPGs bative environment using lethal weap- power grow as they gain experience in or FPSs. Players in MMOs operate ons and completes the mission or the the game. Some of the most popular real-time in a world created by the quest as scripted in the gameplay. RPGs include the Final Fantasy and the game company. To survive, they are Some of the most influential shooter Diablo series. encouraged to establish or join virtual games include Call of Duty and Halo. communities with people from all over the world and use virtual money to purchase merchandise from other players or in-game vendors. The most popular MMO category is the MMORPG, which combines the role- playing environment of an RPG with an online community. Popular MMO games include World of Warcraft and Blade & Soul.

22 Shifting Asia: Ahead of the game – September 2018 Multiplayer online battle arena Casual games Others (MOBA) are intended for casual gamers and include genres that don’t fit into the also known as ARTS (action real-time have pretty straightforward rules. The other categories, including sports strategy), is a combination of RPGs or games are meant to engage the play- games like FIFA, racing games like shooters and real-time strategy games. ers for a short period of time; for Need for Speed, arcade games like The key objective of the genre is to example, during commutes (a very Pacman, strategy games like Clash of destroy the enemy base as a team common sight these days) or during Clans, and hybrid games that include rather than as a single character, thus lunch breaks. While PC casual games a combination of two or more genres. combining the unique skills of every like Solitaire were very popular in the player, or to be the last surviving char- past, increasingly mobile games like acter in a battle royale. The genre has Candy Crush, Subway Surfers and become very popular in the eSports Angry Birds have become household industry, with popular games like names. League of Legends, Fortnite and Honor of Kings.

Did you know? Japan’s Nintendo introduced Mario, arguably the most recognizable and most beloved fictional gaming character worldwide.

Shifting Asia: Ahead of the game – September 2018 23 Augmented reality and virtual reality

The acquisition of Oculus, a virtual reality (VR) company, by Facebook in 2014 and the success of Pokemon Go, which leverages augmented reality (AR) technology, in 2016 have raised expectations that these two emerging technologies will be the future torchbearers of the gaming industry. However, both technologies are still in their infancy and need to evolve further before they reach an inflection point. Alamy

24 Shifting Asia: Ahead of the game – September 2018 Augmented reality and virtual reality

While AR/VR applications are still in their infancy, The AR device market today is largely centered we believe these two technologies are set to around smartphones, with popular games like transform many industries over the next decade. Pokemon Go leveraging their AR capabilities. More Augmented reality overlays digital imagery onto AR devices should emerge in the future, like the real world, while VR refers to an artificial envi- glasses, watches and other devices. Key obstacles ronment normally generated by a computer that today include poor battery life and other technical can be experienced by the user in a seemingly real limitations around tracking and field of view. or physical way. An example of AR is using a clear headset, like Google Glasses, or a smartphone Despite a promising start, the adoption of AR and camera, like in Pokémon Go, to overlay informa- VR in gaming has been mixed so far. First, expen- tion. Virtual reality uses opaque headsets to sive pricing for both device markets is inhibiting immerse the user in a virtual world. their ability to attract a wider use base. Second, their ecosystems are still relatively immature, Both AR and VR hold promise in three major which is due to technical limitations coupled with areas – entertainment, gaming/simulation and a lack of significant investments, unlike in other retail. As the gaming industry is already an early industries like e-commerce or social networking. adopter of motion-sensing technologies, we con- Third, there are some user interface issues that sider it a low-hanging fruit. Interestingly, need to be solved; for example, addressing research is currently underway on converging both motion sickness from VR or poor resolution or AR and VR into mixed reality, where virtual render- inaccurate vision in AR. We believe most of these ings interact with the real world. We believe sig- problems are initial teething issues and will even- nificant advances in sensor and graphics technolo- tually be solved. As such, while the prospects for gies should accelerate innovation, leading to an AR and VR in gaming are significant, the ecosys- explosion of use cases. The combined size of the tem still needs to evolve. overall AR and VR industry stood at USD 8bn last year, based on industry estimates (Goldman According to company reports and Bloomberg Sachs), and is expected to reach USD 107bn in Intelligence, the global base of gamers using 2025. While most of today’s sales are hardware, installed AR and VR technologies is close to 20m, the mix of both AR and VR software should rise which is a very low penetration. Assuming each significantly, in our view, as devices become gamer buys two AR/VR games per year with an cheaper and the availability of software content average price of USD 30, AR/VR gaming industry rises. Also, while the industry will likely be driven revenues are close to USD 1.2bn globally. Asia’s by VR in the near term, we believe AR structurally share should be significantly lower given the lower holds more promise due to its user-friendly fea- penetration of AR/VR in emerging Asia, while tures and potential for scalability. developed Asian markets like Japan likely fare bet- ter. Nevertheless, as highlighted above, these The VR gaming device market can be broadly technologies could present interesting growth divided into two categories: slide-on and discrete opportunities for the region’s gaming industry in devices. We estimate nearly two-thirds of devices the long run, once the initial hiccups are resolved are slide-on and the rest discrete. Slide-on devices and when pricing becomes more attractive. are computationally less intensive and require less upfront investment, as they leverage the strong processing power of the host smartphone includ- Fig. 7 ing its superior resolution and gyroscopic sensors. Combined market size of AR and VR industry Examples of slide-on devices include Google Card- In USD bn board and Samsung Gear VR. Discrete devices are Estimate expensive due to their better computational 120 power and deliver high-quality VR/AR experiences. 100 Discrete devices still need a host device like a 80 game console or PC to play games. Some popular 60 discrete devices include the HTC Vice and Oculus 40 Rift. In the future, it is likely that a third category of VR gaming devices may emerge in the form of 20 stand-alone devices that do not need any host 0 2017 2025 device, but their high costs will likely be a key deterring factor. Source: Goldman Sachs, UBS as of August 2018

Shifting Asia: Ahead of the game – September 2018 25 How Asian gaming is at the cusp of major technological changes iStock

Our positive view on Asian gaming is largely based On the development front, the Asian gaming on the significant untapped opportunities in terms industry is at a crossroads as both existing and of user growth and increased monetization per new technologies continue to evolve. Today, most user. Still, with a revenue forecast of USD 200bn by of the revenues in Asia are generated by a small 2030, it is going to be a major task to generate an group of hardcore users who spend significant additional USD 140bn per year (from USD 61bn) sums on major gaming titles. Additionally, games during this timeframe. History has demonstrated are being developed in such a way that the that new technologies often enable such a rapid majority of monetization is driven in the earlier increase in addressable markets. For instance, the part of the game’s lifecycle as part of appstore PC industry leapfrogged due to the new “mobile” monetization strategies. However, most gaming technology of laptops and the e-commerce indus- developers and publishers have realized there is try boomed due to advent of shopping apps. The currently a long tail of non-paying gamers in Asia good news is Asia’s gaming industry has such key who are willing to pay if they are presented with enabling technologies in place today, which should the right game. For example, the average con- help to catapult the industry’s growth prospects. sumer in Asia subscribes to music or video We divide these key technologies across four broad streaming services, a business model that barely areas: a) development, b) discovery, c) interaction existed in the previous decade. and d) engagement.

26 Shifting Asia: Ahead of the game – September 2018 How Asian gaming is at the cusp of major technological changes

Against this backdrop, gaming as a service should Fig. 8 gain traction as new technologies evolve. Cloud New technologies for gaming gaming, despite today’s latency, has significant potential in the region. This segment is powered by a centralized base of super-computers, which provide the computing necessary for resource- hungry gaming applications, sparing Asian buyers Development from sourcing or building expensive PCs or con- soles. Indie games, typically developed by small and unaffiliated studios, could also tap the huge potential by partnering with the region’s leading New publishers. For example, Minecraft, a popular technologies indie game that was acquired by Microsoft for Engagement Discovery USD 2.5bn, has garnered 60m users in China. The evolution of launcher-based games, which bypass traditional appstores, should also be monitored given the likely increase in profitability for devel- opers/publishers; though this segment may be Interaction subject to increased cyber-security risks. Finally, artificial intelligence can transform the game Source: UBS, as of August 2018 development industry by handling the heavy lift- ing like repetitive programing or testing, and leav- ing the creative parts like design or storyline devel- opment to developers.

In terms of discovery, i.e. the act of users dis­ difficulty level of a game can be changed real- covering new games, we believe eSports (see time; and in an action game, voice-based instruc- eSports chapter) will be a key catalyst. Also, we tions are effectively used like real-life orders. believe artificial intelligence will be a key discovery tool for doing things like recommending the right Finally, given our view that rising engagement game based on user behavior or finding and rec- should be a key future driver for the Asian gam- ommending the right opponents in an online envi- ing industry, we expect gaming companies to ronment. For more details, please read the inter- exploit new technologies. For instance, unlike view with Tencent on page 12. today’s games, AI can regularly gauge the interest levels of the player and make it more interesting Before the arrival of faster internet speeds, by, for example, skipping mundane tasks in the most of the action in the Asian gaming industry game or automating them. The introduction of was seen in bustling gaming cafes. In fact, the other services into gaming, including high-quality unique social nature of Asian gaming owes its ads, potential payment options like blockchain- origin to these gaming cafes, where gamers based tokens, and other social networking fea- regularly interacted with fellow gamers through tures, should enhance the gaming experience, various competitions. Today, most of the gaming increase user engagement and, in turn, improve happens in a living room or on a mobile phone, monetization. but the interaction is still there. While the internet has allowed text and voice chatting while playing In summary, with artificial intelligence at the online games, thanks to new technologies like ­forefront, we believe the emergence of new tech- facial recognition or voice recognition, the so- nologies could extend Asia’s gaming leadership called man-machine interaction has increased sig- through increased game availability and engage- nificantly. For example, games today are built in ment. such a way that based on facial expressions, the

Shifting Asia: Ahead of the game – September 2018 27 Interview This interview contains views which originate from units outside CIO Global Wealth Management.

Interview Alan Hellawell

Alan Hellawell joined Sea as Group Chief Strategy Officer in October 2017 from Deutsche Bank, where he led the investment bank’s Asia TMT research group for 11 years. Alan has developed in-depth knowledge and insight into a wide range of business models across the Asian internet and e-commerce landscape. Alan has supported many of China’s largest internet companies from their early, private stages through IPO and beyond, and collaborates with the region’s leading VC and PE firms.

Alan Hellawell Alan managed a team of six internet analysts at Deutsche Bank, and a broader Group Chief Strategy Officer team of 25 Asia TMT analysts. He was ranked Deutsche Bank’s #1 Asian of Sea ­analyst (out of 120) for the last seven years of his tenure. Prior to Deutsche Bank, Alan spent five years as Managing Director and co-Head of Research at Lehman Brothers. Prior to Lehman Brothers, Alan spent several years in optical networking with Zaffire Communications and Lucent Technologies. Alan received an undergraduate degree in history and East Asian studies from ­Princeton University, and an MBA and Master’s degree in East Asian studies from Stanford University.

How do you see the gaming industry’s growth However, we still think market penetration is low and the prospects in Southeast Asia (ASEAN) vs. China? industry has huge scope for growth. In more advanced markets like China, South Korea and Japan, on any given Compared to Southeast Asia, China’s online games industry day 8–10% of the population might be playing the most has benefited significantly from the sheer size of its popula- popular game of the day – the leading title “Honor of tion and relative homogeneity. Southeast Asia, in contrast, Kings” for example was probably played by more than 10% has 600-plus million people spanning 10 different countries, of the population of China at its peak. We have yet to culti- some of which have distinct sub-groups and sub-demo- vate that size of following in most Southeast Asian markets. graphics. Southeast Asia’s gaming market has historically been weighed down by issues such as lower internet pene- We have been present in Southeast Asia for nine years tration and generally weaker infrastructure (e.g. slower data now, and we have seen penetration rates pick up dramati- speeds) – all of which are necessary to develop a large and cally. But when you consider the growth rate of the Chinese vibrant online games community. gaming industry, we believe the ASEAN gaming market still has huge scope for growth and can reach or even exceed However, what we are now seeing in Southeast Asia is that the industry growth forecast of 20–30% over the next the industry here is leap frogging into the mobile age, and five years. this is driving a rapid growth rate that would not have been possible a few years ago. In particular, rising mobile device In markets like Vietnam and Indonesia, revenue growth penetration, which many have previously underestimated, is being driven by sharp increases in new users. We think and robust 4G networks have played significant roles. We these markets are heading toward a very healthy rate, with have seen great progress in markets like Indonesia, which new gamers coming online every day. Gaming is one of the has one of the lowest fixed broadband connection rates in first things they do when they purchase a new smartphone, the world, in terms of the infrastructure needed for a thriv- and this is a big driver for the gaming industry in many ing gaming industry. It has made up for lost time in the countries in our region. New gamers generally increase their mobile age. In particular, we have seen some very encourag- discretionary spending on gaming with time. So there will ing activity in genres like massively multiplayer online (MMO) be growth in revenues too, as this new generation of gam- games as better mobile data connections, penetration rates ers continues to grow and mature. There are other trends and connectivity speeds create better gaming experiences. like the universal appeal of eSports, which in turn helps to So, in many ways, Southeast Asia is making up for lost time. broaden and deepen gaming in Southeast Asia.

28 Shifting Asia: Ahead of the game – September 2018 This interview contains views which originate from units outside CIO Global Wealth Management. Interview

What are the subtle differences between the Right now, our aim is to use these events to boost user various ASEAN gaming markets? engagement with these titles –this is the power of eSports. We are also working with leading brands which use these We would describe most of these differences to be more events to tap into the predominantly young and highly nuances than profound differences. For example, an Indo- engaged user base for our games. We think advertising will nesian gamer might prefer first-person shooters while continue to grow strongly, as popular consumer brands can a Vietnamese or Thai gamer might prefer mobile online leverage these titles to access important demographic data, ­battle arena games – but these distinctions are not huge while large numbers of ancillary products can be sold in or mutually exclusive. these kinds of events – although it’s still at an early stage.

We have built up a kind of basic value proposition around The professional leagues organized in the West – in the US the games our customers play, in which we localize them for instance – have evolved over decades. In our region, to the unique contours of the market we represent. For the trends in a lot of eSports leagues, which have devel- example, in FIFA Online, we knew that users in markets like oped over many years and decades in the West, are being Vietnam, Thailand and Malaysia would be more engaged compressed into just months, and we are seeing significant with the game if it had more locally relevant content. So sustained growth in both participation and audience levels we worked with the developer, Electronic Arts, to include for our tournaments. As a result, we believe that eSports the national team for each of these markets as a playable will probably be one of the most prominent secular trends team, as well as local language commentary and even local in the broader internet space for next the 10 or 15 years. language crowd cheers. We work with all of our developer partners to identify and execute these opportunities to How do you see the gaming industry leveraging some build a highly engaging locally relevant game experience. of the new technologies?

How do you see the prospects for eSports in ASEAN? Some of the most exciting advances in technology for the entertainment sector often emerge first in video games, Garena was the first company to start building eSports and we are always looking at ways in which we can utilize leagues in Southeast Asia almost a decade ago. As a new technologies. The fundamental principle we look at is result, we believe we are not only one of the first but also simple – do they enhance the experience for our users? the largest eSports platform in the region. We started to Some of the areas that we’re watching closely include arti- build eSports networks around League of Legends many ficial intelligence and virtual reality, where we have seen years ago, and we have expanded to other titles, some- some encouraging traction as the number of games using times through partnerships and sometimes by ourselves. either technology has increased. In our region, however, The eSports industry in our region is still young and may we believe it’s still very early in the development cycle for not yet generate significant revenues on its own. However, these technologies. we believe it forms a very important component of the longer-term expansion and popularity of titles like League Right now, our primary focus is on giving the widest possi- of Legends and Arena of Valor. ble audience in Greater Southeast Asia access to the high- est quality games, and providing them with a smooth and Garena organizes Southeast Asia’s largest eSports tourna- enjoyable user experience. So we’re also looking at how ment in Bangkok every April or May, called “Garena we can take advantage of the growth in e-wallets, for World,” and we organize some of the most popular suc- example, to make it easier for our users to pay for in-game cessful leagues around the region for titles Like League of items. This can be a real challenge in Southeast Asia where Legends and Arena of Valor – from amateur and campus more than two thirds of people don’t have a credit card. level all the way up to professional.

Shifting Asia: Ahead of the game – September 2018 29 What does gaming mean for Asian society?

Despite the rising popularity of video games, it While the debate is never-ending, governments in remains a controversial topic in Asian society. In the region have acknowledged the importance of particular, the addictive nature and violence of gaming to society both in terms of its entertain- some games are often cited against gaming as an ment and commercial value, and have recognized entertainment option. At the other end of the the need to regulate the industry. For example, in spectrum, gaming proponents cite benefits from South Korea, under the Youth Protection Revision the social nature of games, including the ability to Act, which is popularly known as the Shutdown or learn and compete in an almost real-world setting. Cinderella Law, children under the age of 16 are Alamy

30 Shifting Asia: Ahead of the game – September 2018 What does gaming mean for Asian society?

prohibited from playing video games between region. With artificial intelligence likely to auto- midnight and 6AM. Similarly, the governments mate many jobs in the future, we believe the cre- in China and Japan have responded to gaming ative nature of the gaming industry should provide excesses by promoting rehabilitation programs. new avenues for employment. For example, as On the other hand, the governments in Korea, highlighted in our “Life of a gamer” section, in China and some other Asian countries also sup- the not-so-distant future, there will likely be dedi- port the gaming industry through incentives to cated professionals involved in full-time gaming eSports industries and gaming start-ups. Hence, who represent their countries at major sporting we believe the gaming industry will continue to events. Gaming should also be a subject for study have a love-hate relationship with governments, at universities worldwide. Already, universities in with policymakers tightening regulations in the many nations, such as China’s Lanxiang Technical case of excesses while supporting industries to school, offer eSports degrees. boost economic growth and employment. The rising trend of gamification, which is the pro- Accordingly, our estimates of the Asian gaming cess of using gaming elements to engage and industry growing by an average of 9.5% a year motivate participants in non-game contexts, could from 2017–30 versus the mid-teen growth rate also have beneficial effects for society. In the currently takes into account some moderate regu- healthcare sector, for instance, gamification can lations. Our estimates imply that gaming as a per- be used to encourage users to exercise and stay centage of entertainment spending will reach a healthy. Gamification can be used to drive high-teens share in 2030 versus today’s mid-teens employee productivity at work and to promote rate, which we think is reasonable. healthy competition in school.

Negatives aside, one major positive for society is In summary, while gaming provides benefits like that the growth in Asia’s gaming industry should job creation and gamificaiton, regulators need to boost employment opportunities. According to check the imbalances of excessive gaming and its the Entertainment Software Association, the gam- influence on children. It will therefore be crucial ing industry employs 220,000 people in the US. that policymakers find the right balance between Based on that estimate, we expect gaming jobs in supervising the negative effects while encouraging Asia to be 3–4x that figure given its bigger ecosys- the positive ones. tem and the large number of companies in the

Fig. 9 Top games across all platforms by total digital revenue globally

PC Console Mobile Dungeon Fighter Online Fortnite: Battle Royale Honour of Kings League of Legends FIFA 18 QQ Speed Crossfire Grand Theft Auto V Pokemon GO Fantasy Westward Journey Online II Call of Duty: WWII Knives Out Fortnite: Battle Royale Tom Clancy’s Rainbow Six: Siege Fantasy Westward Journey PlayerUnknown’s Battlegrounds No Man’s Sky Clash Royale World of Warcraft (WoW) The Crew 2 Fate/Grand Order World of Tanks (WoT) Far Cry 5 Monster Strike Counter-Strike: Global Offensive (CS : GO) Tom Clancy’s Ghost Recon: Wildlands Candy Crush Saga DOTA 2 NBA 2K18 Clash of Clans

Source: Superdata, UBS, as of 23 August 2018

Shifting Asia: Ahead of the game – September 2018 31 Gettyimages

How investors can participate in Asia’s gaming industry

With Asia leading the global gaming industry’s Broadly speaking, we see four major ways to revenues, most global gaming companies are lev- invest in the Asian gaming industry. eraged to the region’s strong growth prospects. With a combined market cap of more than 1) Gaming internet Unlike the West, most USD 1trn for gaming and related companies, we games are played online in Asia, which explains see a diversified way to participate in the boom- why some of the leading gaming publishers in ing Asian gaming through regional and global the region are internet companies. Most of companies. While the industry is still exposed them not only operate as gaming internet com- to earnings volatility around product cycles and panies but also as portals across segments like game launches, the increasing recurrent nature gaming, social networking, e-commerce, adver- of gaming revenues should lead to steady tising, etc. Thanks to their unparalleled reach growth in the long term. According to Bloom- and network effects, the leading platform com- berg, trading at a 20x forward price-to-earnings panies in the region have become the partner ratio on average, publicly listed gaming compa- of choice for leading global companies for pub- nies are expected to grow their earnings by 22% lishing and distributing major titles. With gross over the next 12 months, highlighting their supe- margins around 65%, the leading gaming rior growth. internet companies in Asia continue to post above-average growth.

32 Shifting Asia: Ahead of the game – September 2018 How investors can participate in Asia’s gaming industry

2) Gaming software: Most gaming software 4) Gaming hardware: Gaming hardware com- companies are based in developed countries panies consist of gaming system companies, like the US and Europe, and either sell their which include console and gaming PC makers games online or partner with regional gaming and peripheral makers, which supply peripher- internet companies to publish/distribute their als like high-precision mice, customized key- games. The key change in the industry has boards, audio devices, controllers, etc. Accord- been a shift from physical software distribution ing to Activision Blizzard and Bloomberg to online distribution, which helped ­gaming Intelligence, eSports competitors and viewers software companies’ gross margins improve spend 30% more on game hardware and soft- from the 60s to the 70s. Thanks to their strong ware than casual gamers, so gaming hardware intellectual property, gaming software compa- companies benefit from the trend of eSports nies, although seldom based in the region, pro- and gamers seeking better user experiences. vide a unique opportunity to participate in the However, with gross margins only in the 20s, region’s strong growth prospects. gaming hardware companies don’t exhibit strong pricing power in the region. 3) Gaming semiconductors: In the gaming industry, semiconductors play a vital role in With a diversified group of gaming companies driving the user experience, by improving the available in the listed space, we believe investors visual quality of game graphics, increasing the should be able to capture superior growth oppor- frame rate, and improving realism in gaming tunities in the Asian gaming industry. In particular, through the use of 3D software and algo- Chinese internet gaming companies and US-based rithms. With increasing sophistication of gam- software and semiconductor companies stand to ing due to powerful games like battlefield or benefit due to their superior margins, whereas we MMORPG, graphics content should continue to see limited opportunities in gaming hardware improve as gamers prefer a better user experi- companies due to their lower margins. Also, with ence. The shift to gaming as a service should many companies still not yet listed, we believe boost further spending on gaming chips, as opportunities are available through the venture games can be accessed through thin clients like capital and private equity route. desktops or laptops with image processing done remotely at a server level. Gaming semi- conductor companies also enjoy strong pricing power, with gross margins in the 70s.

For further details, please refer to the below CIO investment themes.

Equity markets Longer Term Investments Global e-Leisure Enabling technologies

Chief Investment Office WM | 18 July 2018 3:09 pm BST Chief Investment Office WM | 21 May 2018 7:04 pm BST Alexander Stiehler, CFA, Analyst, [email protected]; Andreas A. Tomaschett, CFA, Analyst, [email protected] Sundeep Gantori, CFA, CAIA, Analyst, [email protected]; Kevin Dennean, CFA, Technology Equity Sector Strategist Americas

• We see a structural shift in consumer behavior toward • Tech devices and advances have disrupted every aspect of our increased spending on experiences. We think this will lives, and spending on the underlying enabling technologies play out through increased spending on leisure, digital that enable their development and production should remain entertainment (e.g. video games), social media and other high over the next decade as both disrupting and incumbent topics in our e-Leisure theme. companies continue to invest to grab or defend market • We recommend investments through traditional areas like share. travel and leisure, but also highlight new opportunities in • We have identified five mainstream enabling technologies areas like video games, which provide investors exposure to – artificial intelligence (AI), augmented reality/virtual reality millennials, one of the hardest consumer groups to reach. (AR/VR), big data, cloud computing and 5G – that are set to • Our investment thesis is supported by record-high consumer transform many industries over the next decade. We expect confidence in many regions, falling unemployment, rising them to grow in aggregate by an average 12.8% annually, Source: gettyimages wages and low interest rates. These result in increased from USD 420bn in 2017 to USD 1.1trn in 2025. Source: UBS disposable incomes and higher consumer spending. • Hence, we believe enabling technologies offer solid long- • As these trends are not limited to specific regions, we Further readings: term growth as technological disruption is an irreversible launch Global e-Leisure as a global theme to benefit from • e-Commerce, published 1 June 2018 trend. Investors can take part in this by investing in a these trends. We recommend a diversified approach across • Silver Spending, published 19 April 2018 diversified way in our theme of enabling technologies, with subsectors. • European leisure flies high, published 3 leading software and semiconductor companies emerging as January 2018 winners. Our view • Emerging market tourism, published 14 Just owning a car is not enough anymore. Consumers want to visit November 2017 Our view new places, try new things, compete online with friends, or shop Disruptive innovation is a term coined by Harvard University whenever and wherever they want. We see a structural shift in Fig. 1: Strong growth in e-sports enthusiasts professor Clayton Christensen. It refers to processes in which a consumer behavior toward increased spending on experiences like and revenues product or service takes initial root in simple applications at the leisure, digital entertainment (e.g. video games) and social media, Estimates for e-sports revenues (in USD billions, bottom end of a market before moving relentlessly up the value which results in various interesting investment opportunities. lhs) and enthusiasts (in millions, rhs), 2015–2020 chain and eventually displacing established competitors. Trends like e-commerce, fintech and automation have demonstrated how Cruises, for example, offer a combination of on-board 2.0 350 technology can dislocate markets in a short time span. Incumbents entertainment and on-land excursions that increasingly appeals 300 286 mn now realize that disruption is an irreversible trend and are adapting to younger people. Consumers are also spending more on video 1.5 250 to the new normal according to the long-standing principle "if you games than ever before. New channels and business models (e.g. 191 mn 200 can't beat them, join them." e-sports, see Fig. 1) enhance revenue opportunities in the coming 1.0 150 years, making gaming one of the most attractive end-markets in 120 mn 1.5 bn As a result, interest from technology disruptors and incumbents 100 the consumer sector. Over the last few years, the e-sports market 0.5 alike in investing in enabling technologies (ETs) that drive innovation 0.7 bn 50 is increasing. The five mainstream ETs we have identified as likely to has more than doubled, and we expect it to double again by 2020. 0.3 bn Half of the e-sports enthusiasts are between the ages 21 and 35 0.0 0 create significant economic value over the next few years include AI, 2015 2017 2020 – a desirable target group for many brands and a good way for AR/VR, big data, cloud and 5G. For example, an AI chatbot can help Total e-sports revenues investors to get exposure to this consumer group. Number of e-sports enthusiasts (rhs) a bank and a tech disruptor both to improve their fintech offering, while AR/VR can aid a retailer and a tech company in bettering their From a macroeconomic perspective, the theme benefits from falling Source: Newzoo (2017 Global eSports Market Report), UBS, estimates, as of July 2018 e-commerce offerings. We expect these five ET industries to grow unemployment and rising wages, resulting in record-high consumer by an average 12.8% annually, from USD 420bn last year to USD confidence. We expect consumer sentiment to remain high and 1.1trn in 2025. global consumer spending to grow around 4% in 2018. We forecast spending on e-Leisure in particular to grow even faster. We see enabling technologies as one of the best ways to invest in technological advances and expect a double-digit rate of earnings In our view, investors should seek exposure to traditional as well as growth. Investors, in our view, will be best rewarded by taking new end-markets within e-Leisure in a diversified way. We expect diversified exposure to companies involved in ETs. Software and strong earnings growth of companies in these areas to lead to this semiconductor companies with superior pricing power and high theme's outperformance of global equities. entry barriers should fare particularly well, in our view.

This report has been prepared by UBS Switzerland AG. Please see important disclaimers and disclosures at the end of the document. This report has been prepared by UBS AG and UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures that begin on page 19.

Global e-Leisure Enabling technologies Published 18 July 2018 Published 21 May 2018

Shifting Asia: Ahead of the game – September 2018 33 Shifting Asia

UBS CIO’s Shifting Asia thought leadership series takes on the major trends shaping Asian markets and how they could impact investors over the next 5–10 years.

Previous editions:

August 2018 April 2018 Chief Investment Office WM Chief Investment Office WM Chief Investment Office GWM Chief Investment Office GWM b September 2017 b April 2017 Independent Investment Research Independent Investment Research a a

China’s biotech The road to How artificial revolution cashless societies Insurtech intelligence will Shifting Asia Shifting Asia Shifting Asia transform Asia Shifting Asia

China’s biotech The road to Insurtech How artificial revolution cashless societies intelligence will transform Asia

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34 Shifting Asia: Ahead of the game – September 2018 Appendix

Nontraditional Assets Interests in alternative investment funds are not deposits or Nontraditional asset classes are alternative investments obligations of, or guaranteed or endorsed by, any bank or that include hedge funds, private equity, real estate, and other insured depository institution, and are not federally managed futures (collectively, alternative investments). insured by the Federal Deposit Insurance Corporation, the Fed- Interests of alternative investment funds are sold only to quali- eral Reserve Board, or any other governmental agency. Pro- fied investors, and only by means of offering documents that spective investors should understand these risks and have the include information about the risks, performance and expenses financial ability and willingness to accept them for an extended of alternative investment funds, and which clients are urged to period of time before making an investment in an alternative read carefully before subscribing and retain. An investment in investment fund, and should consider an alternative invest- an alternative investment fund is speculative and involves sig- ment fund as a supplement to an overall investment program. nificant risks. Specifically, these investments (1) are not mutual funds and are not subject to the same regu- In addition to the risks that apply to alternative investments latory requirements as mutual funds; generally, the following are additional risks related to an invest- (2) may have performance that is volatile, and investors may ment in these strategies: lose all or a substantial amount of their investment; • Private Equity: There are risks specifically associated with (3) may engage in leverage and other speculative investment investing in private equity. Capital calls can be made on short practices that may increase the risk of investment loss; notice, and the failure to meet capital calls can result in signifi- (4) are long-term, illiquid investments; there is generally no cant adverse consequences including, but not limited to, a secondary market for the interests of a fund, and none is total loss of investment. expected to develop; (5) interests of alternative investment funds typically will be illiquid and subject to restrictions on transfer; (6) may not be required to provide periodic pricing or valuation information to investors; (7) generally involve complex tax strategies and there may be delays in distributing tax information to investors; (8) are subject to high fees, including management fees and other fees and expenses, all of which will reduce profits.

Shifting Asia: Ahead of the game – September 2018 35 Disclaimer

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