ESPORTS DISCUSSION

An update on the market July 2021 INTRODUCTION

Esports Update

• This report will give an update on the esports Finally, the report will extend the analysis to The esports market is market from our previous report in 2019. 2020 recent developments with esports organisations expected to reach $1.5bn was an unprecedented year, in which most and what makes them attractive to investors. Like by 2023 (Newzoo) industries were affected in some way as a result of most industries, the dominant players are seeing COVID-19. new entrants that threaten their position. • The Asia Pacific region Focusing on the success in professional esports is The esports industry saw several developments not enough to guarantee financial success. represents more than during 2020. As lockdowns were implemented Successful teams will need to find the right balance 50% of the esports and around the world, most forms of in-person between being both an esports company and gaming audience (Juniper entertainment were cancelled overnight. The entertainment company. To find the right balance research) esports industry had a unique advantage over and to manage multiple revenue streams and traditional sports, and there was an evident cross- monetise their audiences, esports organisations over between the two sectors. will become better organised and adopt a more • Latin America may also professional approach to managing their become a key region for The report will also give an overview of the businesses. growth. It is projected to different investors that are involved in the esports produce over 130 million ecosystem and the reasoning for investing. The esports industry has historically attracted esports and game attention from high net worth investors. We are streaming viewers by now seeing an uptick in in the number of 2025 (Juniper Research) institutional funds who wish to gain exposure to the esports industry. With the increase in capital • allocated to esports, it is a matter of time before Emerging regions and an esports team reaches unicorn status. markets are projected to maintain double-digit growth beginning 2021. This will be driven by the popularity of mobile gaming in Latin America, Asia, the Middle East, and Africa (Newzoo)

2 MARKET UPDATE

Global Gamers (billion) 2021 esport Audience 4

3 Total viewers Occasional esports 2 Viewers Enthusiasts 49 51 240m 474 234m 1 million Global Gamers (bn)

0

2015 2016 2017 2018 2019 2020 2021 2022 2023

Figure 1 - Source newzoo Figure 2 - Source newzoo

esports industry demonstrates its resilience

• Since our last esports report, the market has Although in 2020 the global esports audience was esports enthusiasts are continued to go from strength to strength. 2020 close to 500 million according to research by classified as watching was a year that no one could have predicted, and Newzoo and is expected to grow to 1 billion by professional esports it had far-reaching impact on most industries. 2025, the gaming market is considerably larger content more than once a Overnight, in-person entertainment stood still due with the number of global gamers in 2020 month to lockdowns implemented across the world. The estimated to be 2.78 billion (growing to 3.19 esports gaming market however saw a positive billion in 2023), a huge market for traditional impact due to the online nature of the industry. sports, fashion, music and other entertainment • Occasional viewers are However, initially professional tournaments were genres to tap into. classified as watching suspended as contestants could no longer travel professional esports to tournaments and compete with the same Traditional sports and sports personalities getting connectivity. The industry did however show its involved in some way with gaming is not a new content less than once a resilience and by adapting to the changing phenomenon. Our last report touched on FaZe month landscape. Blizzard Entertainment, one of the Clan signing up Juju Smith-Schuster, a wide world's biggest game publishers, worked on plans receiver from The Pittsburgh Steelers. What has • In 2019, over 15% of to allow some of their leagues to go ahead online changed due to COVID is the increase in sports millennials watched and to make sure there was no delay for stars getting involved which is a natural participants as well as observers and progression as many sports stars have grown up esports on a monthly commentators. As the nature of esports is digital, with gaming as a part of their lives. They now see basis (Newzoo) most of the infrastructure was already cloud- it as a way of communicating with their fans by based. creating their own streaming profiles where fans can watch or even play alongside them. This • Another development during COVID was that theme will likely continue and grow long after In 2020, 33% of millennials traditional sports leagues such as the NBA and COVID lockdowns. watched esports on a Formula 1 used gaming to connect with their monthly basis (Newzoo) audiences. Traditional sports teams have More recently, to show how far the esports historically shown interest in esports with several industry has come, FaZe Clan was featured on the • By 2025, the number of NBA teams having invested in cover of Sports Illustrated. There is no denying teams. However, during COVID, traditional sports that companies like FaZe Clan are defying the old esports viewers will reach leagues turned to virtual competitions to keep pop culture stereotypes of gamers. 1 billion (Juniper fans, media and sponsors engaged in order to Research) supplement lost revenue.

3 ESPORTS INVESTORS

Fundraising in esports $1,200 70 $1,000 60 50 $800 40 $600 30 $400 20 $200

10 Transactions of Number

Value of Transactions (m) Transactions Value of $0 0 2019 Q1 2019 Q2 2019 Q3 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 Value of Transactions (m) Number of Transaction

Figure 3 - Source: Quantum Proprietary Research

Broadening investor interest

The esports market is fragmented. Many There has also been increased interest from the • The estimated value of investments in esports over the years have owners of traditional sports teams. Jeff Vinik, the global esports been made from the fear of missing out rather owner of the Tampa Bay Lightning, , industry in 2020 was than than by informed investment decisions. co-owner of the , and Ted $947.1 million (Newzoo) This theme has been changing in recent years, Leonsis, owner of NHL’s Washington Capitals, with leading consultancy firms engaging with formed Axiomatic. Axiomatic is an esports- investment companies to understand the focused investment company. Axiomatic holds a • In 2021, global esports esports ecosystem. In 2020 esports companies controlling stake in , which was revenues are expected to raised $2.3 billion over 200 transactions, up recently valued as the third most valuable esports reach $1,084 million, 116% in value from $957 million in 123 deals in organisation in 2020 at $310 million by Forbes. representing a year-on 2019. Jeff Vinik told Sporttechie, “We think bringing our experience from traditional sports and year growth of 14.5% It is helpful to map out who the principal entertainment worlds to the esports industry is (Newzoo) backers are of esports and their reasoning for very applicable.” Esports organisations leverage getting involved in this market. their “on the field” esports performance with • The global esports market gaming and lifestyle content to communicate with The first broad category is traditional sports their fans through social media in order to be combined with streaming teams. For example, Sporting Lisbon, FC successful, with the majority of revenues coming is expected to be worth Schalke, Wolfsburg, and Manchester City have from publishing through social media channels, $2.1 billion in 2021 and all got involved in esports to a varying degree. brand deals, content and product licencing and more than $3.5 billion by The main reason is for these clubs to engage in merchandising. Traditional sports teams rely 2025. This represents a esports is to try and reach a wider audience of primarily on TV rights, ticket sales and football fans. Traditional sports teams are merchandising to be successful. Although there is 70% growth in the next getting involved in completely unrelated some overlap, combining teams from each four years (Juniper esports titles. The Golden State Warriors, the industry should provide synergies; esports Research) Houston Rockets and the Sacramento Kings attracting online fans and revenues and traditional have invested in League of Legends teams sports bringing investment, management expertise seeing this as a way to reach out to esports and legitimacy. fans and diversify their audience.

4 ESPORTS INVESTORS

Broadening investor interest (cont.)

One of the more interesting partnerships was Other notable celebrity backers include Drake and According to Foley & the US Air Force’s sponsorship of ’s Will Smith, who have invested in and Lardner: Counter-Strike team. According to Major Ross Gen.G, respectively. Both of these teams have McKnight, head of the national events branch at been ranked in the Top 10 most valuable esports • 73% of stakeholders the Air Force recruiting service, the Cloud9’s companies by Forbes. Counter-Strike team had the ”same level of believe the pandemic will discipline, rigor, and achievement” that they The last broad category of investors includes generate more value in members of the Air Force. More venture capital and private equity firms. Given the investment and deal recently, FTX Exchange, a cryptocurrency firm, traction the esports ecosystem has seen in the activity in esports announced signing a naming rights deal with US previous few years, venture capital and private professional esports organisation TSM for $210 equity companies have for the most part stayed million. The deal will see TSM expand its on the sidelines. A desire to take advantage of the • Meanwhile, 49% expect operations and enter new markets in South growth in esports is changing this and has led to a traditional professional America and Asia under the name TSM FTX. significant rise in the interest in esports. An sports teams, athletes The key takeaway is that the esports market is example is Artist Capital Management which and celebrities to increase attracting a diverse set of corporate backers. It raised $100 million to establish a fund to provide seems beneficial for esports organisations to its institutional investors with exposure to their investment in have corporate backers who have experience in different themes, one of which is esports, by esports in 2021 scaling up businesses and moving into new investing in 100 Thieves. Hiro Capital launched a markets. $100 million fund to invest in innovators in the EU • Additionally, 40% expect and UK’s video games, esports and digital sports ecosystem in the UK. The team behind Hiro increased investment Another group of investors that have shown interest in the esports industry are celebrities. Capital have co-founded and invested over $9 from venture capital and These celebrities are likely to have less input in billion in games, sports and technology companies. private equity firms the day-to-day management of esports organisations, but they bring in publicity and Private equity and venture capital becoming sponsorship opportunities to teams and brands. involved in esports will create a host of They will also help esports organisations opportunities for the sector. become more mainstream as more and more “A-List” celebrities get involved in the industry. In 2020, David Beckham, arguably one of the most recognisable sports personalities in the world, was announced as the co-owner of Guild Esports.

5 TEAMS OVERVIEW

esports Teams by Prize Money ($m) & Social Media Followers 30 40 25 35 30 20 25 15 20 10 15 10 5 5 0 0 Prize Money ($m)

OG LOUD Virtus.pro FaZe Clan Social Media Followers (m) Team Liquid YouTube Instagram Facebook Prize Money ($m)

Figure 3 – As of June 2021

New team entrants challenging the more established teams

• As of January 2021, the top The graph above shows the top 10 most It could be said that LOUD’s success has been live streaming platforms in successful esports organisations regarding prize similar to how FaZe Clan became successful. FaZe terms of the number of money won and their social media following. FaZe Clan enjoyed success in , a hours watched are Twitch Clan and LOUD have also been included to show mainstream game that is easy to follow. Most (1.6 billion hours), YouTube the evident disparity between social media casual esports viewers and the broader global following and prize money won. FaZe Clan is gamer would have played Call of Duty at some (517 million hours), and currently ranked 14th and LOUD ranked outside stage. This made it relatively easy for FaZe to Facebook Gaming (280 the top 200 in prize money. In our last report, create a following as many gamers could relate to million hours). (Stream FaZe Clan was by far the most dominant esports them. Hatchet) organisation in terms of social media following. This is not the case anymore, as LOUD has seen a In 2020, LOUD was the first esports organisation • As of the latest data, 26.5 meteoric rise in their online presence since being to reach 1 billion YouTube views. Even more million visitors come to founded in 2019. impressive is that they achieved this within 16 Twitch daily (TwitchTracker) months of starting their YouTube channel. FaZe LOUD has positioned itself as a lifestyle brand. Clan, considered to have the most prominent Despite little success so far in tournament prize social media presence, only reached 1 billion • Current streaming statistics money, it has created a vast social media following. YouTube views in 2021, having existed for nearly show that Twitch controls LOUD has taken advantage of its founders’ 10 years. around 72.2% share of the experience working as game developers, live gaming streaming market publishers, agencies and as content creators. LOUD represents a success story within the (StreamElements) According to Datareportal, in January 2021, the esports space that existing and new entrants number of social media users in Brazil was should take note of. LOUD also focused on their 2020 Global Smartphone equivalent to 70.3% of the total population, one of local Brazilian market first and formed Users (m) the highest percentages worldwide. Brazilians partnerships with celebrities with a social media consume high levels of digital content, primarily presence. 297 through their mobile phones demonstrated by the 325 success of Free Fire, a mainstream mobile game that, according to ActivePlayer, consistently has an 540 average monthly player count of over 300 million. 2,013 In contrast, 2, which has the highest all-time prize money, has an average of 500,000 average 443 monthly players.

North America Latin America 6 Europe Middle East Asia-Pacific GAME PARTICIPATION

Total Prize Number of Team Evil Vici Natus Team Invictus FaZe Game OG Fnatic Virtus.pro Newbee LOUD Nordavind Money ($m) Tournaments Liquid Genius Gaming Vincere Secret Gaming Clan 231.86 1,496 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

CS:GO 112.06 5,535 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Fortnite 102.38 687 Yes Yes Yes Yes Yes Yes Yes Yes Yes

League of 83.19 2,528 Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Legends StarCraft II 34.70 6,066 Yes Yes Yes Yes Yes Yes Yes Yes

PUBG 32.86 327 Yes Yes Yes Yes Yes Yes Yes Yes

Overwatch 26.75 747 Yes Yes Yes Yes Yes Yes

Hearthstone 24.56 914 Yes Yes Yes Yes Yes Yes Yes Yes

Arena of 24.09 62 Yes Valor Heroes of 18.19 475 Yes Yes Yes Yes Yes the Storm Table 1

Investment considerations and the consolidation game

Despite COVID-19, Dota 2 There are a number of esports organisations sense for two successful teams like Team Liquid looking for investment. Those teams that and Fnatic to merge as they participate in the surpassed the $40 million consistently win tournaments, due to having a same games. Most likely they will also have prize pool mark for the first strong player roster, field teams in the most overlap in their social media following which will time in 2020 popular games and enjoy commercial success by result in less synergies than if they competed in leveraging the online gaming community will be different games. It would make more sense for a the most sort after by investors. The top games successful team in terms of prize money to merge Up and coming esports by prize money are the best games to compete in with a team that does not participate in the more team: and are highly competitive with high barriers to established games. Loud would be a great target • Nordavind is a Nowegian entry for the younger less well capitalized for a team like Team Liquid, Fnatic or Faze Clan. organisation established in organisations; buying into a Call of Duty and However smaller teams could also be good 2011 as BX3 esports club Overwatch franchise can cost between $25-$40m. partners for the major esports teams. We have Some teams have earned their way into these included Nordavind in the table above to th which rebranded on 9 popular leagues through promotion, but it can be demonstrate this. Nordavind is an up-and-coming February 2018 in a lengthly process. esports business from Norway which could give collaboration with the an established US or UK team exposure to a new Norwegian football club The franchise model in sport is successful in the set of fans and a more progressive way of building US demonstrated by leagues such as the the NFL its social media following, thereby increasing its Vålerenga Fotball and MLS. The advantage of this model is that it reach with little chance of overlap. removes any potential for relegation allowing a • Nordavind aims to team to develop a fan base in their segmented Whichever way teams decide to build their harmonize traditional market. We would expect US investors to prefer businesses, they need to remember that being Scandanavian design investing in esports companies that own franchise successful in different games is only part of the spots, as they better understand their puzzle. They need to have an online presence in all virtues with iconic monetisation model, and will perceive it as a forms of social media to reach and monetise their imagery and technological lower-risk investment. fanbase. Once esports companies get to Series B shrewdness, while investment and onwards, financial results become bridging the gap between Another way of participating in the more increasingly important in order to attract established games would be through a merger investment. The focus of Investors is not traditional and electronic with another team participating in these games. necessarily on profitability but on a team's ability sports When analysing which teams could merge, it's to monetise their audience by diversifying its important to note that most games do not allow revenue streams as well as being cash-efficient. • They compete in 8 games, organisations to field two teams in the same 4 of which are in the top league. Thus, on the face of it, it would not make 10 all time prize money 7 THE FUTURE LANDSCAPE

Conclusion

• It could be said that 2020 was a defining year for Successful esports organisations in prize money Whilst esports is the esports ecosystem. Overall, esports and the won have been identified, but these don’t continuing to grow bigger wider gaming community were a shining light for necessarily lead to a higher social media following. each year, physical sports many people during lockdowns implemented Teams need to have a healthy combination of the are still quite far ahead in worldwide. It was a way for people to stay two to be considered a dominant esports revenue. The European connected with one another. Another theme was organisation. As the esports market is becoming the crossover between traditional sports and more mainstream, investors are becoming more football market is esports. With in-person events cancelled, sports knowledgeable about the industry. This means estimated to be worth such as basketball, football and Formula 1 had no that as we advance, teams looking for investment £25.1 billion in 2020 alternative but to turn to esports to cushion their will need to justify to investors their valuation. (Deloitte) losses. There was also an uptick in sports players Ultimately, teams will need to have multiple themselves creating their own twitch accounts to revenue streams and the ability to monetise their connect with their fans. All these developments audience as they develop. • Just like the streaming will likely lead to higher growth in esports in the wars, media companies future as the line between traditional sports and like Disney, Comcast and esports is becoming more blurred. Netflix will compete for esports in the future. The CEO of Netflix even said that he’s more afraid of Fortnite than he is of Disney (Sportscasting)

8 Aalto Capital Esports Discussion July 2021

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