GLOBAL eSports Insights Making Sense of the Economics There has been much discussion regarding eSports team valuation recently, particularly given that Blizzard is currently seeking franchise investors for its Overwatch League (LINK). In general, eSports franchise valuations have varied significantly, with estimated valuation ranges from $2m-$5m in non-major market to upwards of $30m in major markets. We expect valuations to continue to vary widely based on various factors, with roughly three distinct levels. (Keep in mind that much of the valuation is driven by Macquarie’s eSports Thesis the future expected revenue from sponsorship and/or tournament winnings). 1. eSports is becoming an important part of 1. Semi-pro level teams are valued from $1m-$5m USD. These teams have publishers’ product and marketing strategy. one or two years of track record and less mature organizational structure. 2. eSports to gain mainstream traction as Team Echo Fox (purchased by Rick Fox for $1-2m) and Cloud9 Challenger advertisers capitalize on the growing and engaged viewers. (purchased by Milwaukee Bucks co-owner Wesley Edens for $2.5m) are examples of this category. 3. Professionalization of eSports will lead to industry consolidation and greater media rights. 2. Pro level teams are valued from $5m-$15m USD. Recall that the 76ers 4. Pro sports teams to invest in eSports to hedge invested in Team Dignitas last September reportedly at these levels. Our against the decline in traditional sports viewing. conversations with industry professionals and eSports team owners suggested 5. eSports could gain Olympics status as the IOC that pro team valuations are approximately $10m USD. looks to add events that have global appeal. 3. Ultra-pro level teams could be valued at >$40m. These teams are run like 6. Mobile eSports will drive industry growth by any other professional sports organization. A good example of this would be catering to a broad audience with mass appeal. Fnatic ($42.5m valuation), widely considered the best team in the western world. 7. Virtual reality will enhance eSports viewing experience and competitive dynamic. Bottom line: Beyond Activision, we expect to see more publishers such as Thematic Reports Link 1, Link 2, Link 3 Nintendo and EA to also focus on their own eSports leagues (LINK). This will drive increased industry engagement, leading to higher revenue from game sales, tournaments tickets, media rights, team franchises, merchandise, and other. Analyst(s) Macquarie Capital Markets Canada Ltd. We have included a model on page 5 to give investors a better sense of the Jiang Zhang economic drivers behind the valuation of a typical eSports team. Key conclusions: +1 416 848 3549 [email protected] 1) eSports team economics are similar to that of professional sports and this is Greg MacDonald, CFA +1 416 628 3934 [email protected] attracting sports team owners that look to leverage their expertise in team Macquarie Capital (USA) Inc. management and player development as well as VC/PE investors that are looking to Ben Schachter capitalize on an emerging theme, and 2) publishers (and sports leagues) are best +1 212 231 0644 [email protected] Ed Alter positioned for the emerging economics of eSports leagues given their IP ownership. +1 212 231 1272 [email protected] Finally, our proprietary Twitch data (page 12) indicates that engagement Macquarie Capital Securities (Japan) Limited David Gibson, CFA gravitates towards consistent regular season games, evidenced by League of +81 3 3512 7880 [email protected] Legends’ LCS. We expect the upcoming Overwatch League to see similar Damian Thong, CFA viewership benefits from its weekly regular season once it scales up. +81 3 3512 7877 [email protected] Macquarie Capital Limited Key calls within Macquarie’s Global Coverage Universe Wendy Huang, CFA +852 3922 3378 [email protected] Activision, EA, Take-Two, Capcom, Nintendo, CyberAgent, NetEase and Hillman Chan, CFA Tencent among publishers given their IP and benefits from eSports media rights. +852 3922 3716 [email protected] Allen Chang Asustek, Sony and Lenovo in hardware & technology as key beneficiaries of higher +852 3922 1136 [email protected] Macquarie Capital Limited, Taiwan Securities Branch demand for gaming PCs and game consoles. Jeffrey Ohlweiler Facebook, Amazon, Google, and theScore in digital media due to rising +886 2 2734 7512 [email protected] Kaylin Tsai viewership and ad dollar flow into eSports. +886 2 2734 7523 [email protected] For a copy of our proprietary Twitch.TV data, please email us or contact your Macquarie 29 March 2017 account manager.
Please refer to page 28 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Macquarie Research eSports Insights
Fig 1 eSports Cheat Sheet
What is eSports? Popular and emerging eSports media platforms Competitive tournaments of video games, especially among professional gamers. - Dictionary.com
eSports leagues and teams vs. professional sport League of Legends Championship - LA Staple Center (2013)
eSports market size ($'mn)* eSports global viewers ('mn) ($'mn) ('mn) 6,000 600 5,000 +54% CAGR 495 5,000 500 +8% CAGR
4,000 400 365
3,000 300
2,000 200 892 1,000 100
0 0 2016 2020E 2016 2020E
*Revenue estimate include sponsorship, advertising, prize pools, betting, ticketing, merchandise and media rights. ('mn) Viewership of major eSports events has surpassed that of major 114 120 league sports such as MLB, the NBA and the NHL. 90 Professional sports teams that have invested in eSports
60 41 36 28 30 20 20 15 6
0
Cup
NCAA
Series
(Final 4) (Final
(Game 5) (Game
Basketball
Rose Rose Bowl
NBA Finals NBA
Legend
MLB MLB World
DOTA 2 DOTA
Super Bowl Super
League League of
NHLStanley
Championship Championship eSports betting platforms Popular eSports ranking by prize payouts and their respective developers
eSports and virtual reality themes mutually reinforcing
Cyberith VR gear can tranform certain eSports genre to be more physical active vs. the existing passive game-play involving mostly keyboard and mouse.
Other popular eSports include.... Key Macquarie Stock Calls on eSports
Publisher(s): Activision, EA Games, Take-Two, Nintendo, Capcom, Tencent, NetEase
Mobile Publisher(s): CyberAgents, GungHo
Media Distributor(s): Facebook, Google, Amazon, Disney, theScore
Hardware & Technology Innovator(s): Asustek, Lenovo, Sony
Source: Activate, Superdata, eSports Earnings, ESPN, H1 Gambling Capital, Newzoo, Macquarie Research, March 2017 *Rev est.
29 March 2017 2 Macquarie Research eSports Insights Making Sense of the Valuation Sports Business Journal reported that Blizzard is conducting a road show for potential franchise investors in its upcoming professional Overwatch League (LINK) in which a franchise could sell for $2m-$5m in smaller markets and upwards of $30m in key markets such as LA. Recall that Overwatch League was first announced in the previous Blizzcon and is expected to be a world-class eSports ecosystem for professional Overwatch competition with the goal of fostering team sustainability and stability, and establishing career opportunities for players similar to that of the traditional sports.
Fig 2 Overwatch League is part of Activision’s global eSports ambition
Source: Company Data, Macquarie Research, March 2017
The league progression is similar to that of any other major league sport where Blizzard would host tryouts for teams that represent major cities across the US. Players accepted by the teams will be signed to a guaranteed contract that includes a baseline minimum salary and benefits packages. Once the city-based teams have been accepted by the league, Blizzard will look to give them an opportunity to develop their career as full-time Overwatch professional eSports athletes. Interest in joining the Overwatch league is high and professional teams such as Fnatic are already preparing for potential inclusion as indicated by the recent job posting for an Overwatch manager in LA (LINK). Besides bids from professional eSports organizations, we also expect both professional sports owners and investors to participate. Currently, notable team owners from the professional sports world include Rick Fox and Wesley Eden while other professional athletes such as Shaquille O’Neal, Gerard Kelly, Andy Miller, Mark Mastrov, Alex Rodriguez and Jimmy Rollins all have interest in the eSports organization NRG eSports, which participates in Overwatch competitions. Mark Cuban is also invested in eSports through the betting platform Unikrn and has historically refrained from team investment given the fragmentation. A more regulated league structure such as the Overwatch League could attract his interest in participating.
We have tracked the eSports investments by professional sports teams and sports team owners for the past two years. Feel free to send us an email request if you would like to see the list.
29 March 2017 3 Macquarie Research eSports Insights
To better understand the potential valuation behind these franchises, we classify eSports teams into three categories: Semi-professional, Professional and Ultra-Professional Semi-Professional Teams are typically regional teams that command a valuation range of $1m-$5m. Former basketball player Rick Fox invested in a League of Legends team for roughly $1m-$2m while co-owner of the Milwaukee Bucks Wesley Edens invested in Cloud9’s Challenger’s LCS spot along with four of its players for a total of $2.5m ($1.8m for the spot and $0.7m for the players - LINK). At the Professional Level, a typical team valuation tends to be from $5m-$15m. We note that the Philadelphia 76ers reportedly spent this amount for Team Dignitas and Team Apex last September. Teams that command higher valuation tend to be multi-title focused, and have a solid operational history and achievements. We note that Team Dignitas is a global eSports team headquartered in the UK and has been operating since 2003, competing in Counter-Strike (Valve), Hearthstone (Activision), Halo5 (Microsoft), Heroes of the Storm (Activision), League of Legends (Tencent), FIFA (EA) and Smite (Hi-Rez). Some notable achievements include consistently ranked in the top 10 for North America League of Legends Championship Series, consistently ranked in the top 5 for Counter-Strike and 1st place in the recent Heroes of the Storm Global Championship Phase #1 Western Clash. We find the valuation range for the professional teams to be reasonable based on our conversation with industry professionals and team owners in both the US and Canada, where a typical starting point in the valuation discussion is roughly $10m. Ultra-Professional Team could command a valuation north of $40m. These teams are managed and operate at the same level as any other professional sports teams. Typical attributes for these teams include consistent stellar track record of accomplishment, highly diversified footprint in terms of game titles, very professionalized management team, well-known brand equity, ironclad player contract that locks in their superstar for multiple years, impeccable corporate governance in legal and finance, and representation in almost all of the major league tournaments. Team Fnatic, an ultra-professional team based in London that commands a valuation of $42.5m, has been in operation since 2004 and competes in a broad range of titles including Counter-Strike, Dota2, Heroes of the Storm, League of Legends, Overwatch and Vainglory. The team’s track record speaks for itself, which we think justifies the whopping valuation. Notable achievements include the first ever League of Legends World Championship in 2011, the record for the most League of Legends Championship Series split titles, and three CS:GO Majors.
Fig 3 Fnatic excels at multiple eSports titles to justify its $42.5m valuation
Source: Company Data, Macquarie Research, March 2017
29 March 2017 4 Macquarie Research eSports Insights Making Sense of the Economics Much of the current eSports team valuation is based on expected future sponsorship revenue. The logic is that if an investors spends $1m-$5m on an emerging franchise and generates $7m of sponsorship revenue in the following five years, then it would appear to be a sensible investment. In the following pages, we will walk the reader through a basic eSports team model. The purpose of this exercise is to highlight the business mechanics, the micro economic drivers and implied valuation level rather than attempting to value a specific eSports team. There are certainly a lot of assumptions embedded in this exercise, but we consider these assumptions to be reasonable. Key assumptions are: The team operates in a mid-sized eSports market such as Seattle, San Francisco or Houston where there is a growing millennial demographic and proximity to major league sports teams in the NBA, NFL and the MLB. The league operates under a franchise model in which the team is bid on by investors at the local city level. Each season lasts 6 months followed by the playoffs. The team focuses on a single game title (ie. only play League of Legends) and has an experienced management team, analyst, trainer and players. Tax rate of 35%, consistent with US corporate tax rate. 10-year life cycle for the team.
Fig 4 eSports Team Model P&L Statement
(in US$ 000's ) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Revenue Sponsorship 375 469 560 639 699 748 789 821 841 850 Tournaments 162 663 1,021 1,291 1,858 2,307 3,205 3,845 4,307 4,744 Digital Advertising 3 3 3 4 4 5 6 7 8 9 Total Revenue 540 1,134 1,585 1,933 2,562 3,061 4,000 4,672 5,157 5,603
Operating Expenses Salaries - Players 687 738 793 852 916 984 1,058 1,137 1,222 1,314 Salaries - Operation 218 227 237 247 258 270 282 294 307 321 Pre-season Training 75 75 75 75 75 75 75 75 75 75 Marketing 180 189 198 205 213 219 224 229 232 235 Tournaments 73 312 474 595 850 1,052 1,456 1,744 1,952 2,149 Travel 30 31 32 33 34 35 36 37 38 39 Misc. 30 31 32 33 34 35 36 37 38 39 Total Operating Expenses 1,292 1,603 1,840 2,040 2,379 2,669 3,166 3,553 3,865 4,171
Operating Profit (753) (469) (255) (107) 183 391 834 1,120 1,292 1,432
Income Taxes 0 0 0 0 64 137 292 392 452 501
Net Profit (753) (469) (255) (107) 119 254 542 728 840 931
Tax Rate 0% 0% 0% 0% 35% 35% 35% 35% 35% 35%
Source: Macquarie Research, March 2017
29 March 2017 5 Macquarie Research eSports Insights
Our DCF analysis assumes a discount rate from 7%-10% and terminal multiple from 8x-10x, consistent with that of the listed sports organization such as Manchester United and Arsenal, as well as sports media assets such as MSG and ESPN that are typically valued at around 10x terminal multiple.
Fig 5 eSports Team DCF Model
(in US$ 000's ) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 EBIT (753) (469) (255) (107) 183 391 834 1,120 1,292 1,432 Less: Taxes 0 0 0 0 64 137 292 392 452 501
Net Operating Profit After Tax (753) (469) (255) (107) 119 254 542 728 840 931 Less: Cap Ex (75) (75) (75) (75) (75) (75) (75) (75) (75) (75)
Free Cash Flow (828) (544) (330) (182) 44 179 467 653 765 856
Total Enterprise Value
Years 1- 10 PV of Terminal Value Enterprise Value at Discount Discount + at EBITDA Multiple = Terminal EBITDA Multiple Rate Cash Flows 8.0 x 10.0 x 12.0 x 8.0 x 10.0 x 12.0 x
7.0% 15 3,480 4,350 5,220 3,495 4,365 5,235 8.0% (82) 3,171 3,964 4,756 3,089 3,882 4,674 9.0% (169) 2,892 3,615 4,337 2,722 3,445 4,168 10.0% (248) 2,639 3,299 3,959 2,392 3,051 3,711 11.0% (318) 2,411 3,014 3,616 2,093 2,695 3,298 12.0% (382) 2,204 2,755 3,306 1,822 2,374 2,925 13.0% (438) 2,017 2,521 3,025 1,578 2,082 2,586
Source: Macquarie Research, March 2017
Within the parameter of our assumptions, we derive a valuation range of $1.5m-$5.5m for our model eSports team with the mid-point being $3.0m, which is within the $1m-$5m valuation range for the semi-pro team. We used what we believe to be very conservative revenue and cost assumptions to highlight the team economics of an eSports team that specializes on one particular game. If we were to assume a multi-franchise team such as Fnatic or Dignitas then there is certainly upside risk to our valuation estimates.
29 March 2017 6 Macquarie Research eSports Insights Basic Team Economics We assume our model eSports team derives its revenue from three key segments: Sponsorship from brands and organizations Tournament ticket sales from both regular and playoffs Digital revenue from online advertising via team websites We excluded revenue assumptions for team merchandise as we believe they are insignificant for small-to-mid market teams, though we acknowledge that it could be meaningful for the mass-market teams from New York, London and Shanghai. We also exclude potential tournament winnings to be conservative, and also because these winnings are difficult to quantify.
Sponsorship Revenue Model We assume that a semi-pro/pro eSports team in a mid-size market could attract roughly five corporate sponsors that have sizeable marketing budgets. For example, a team based in Toronto could count companies such as Rogers Communications (telecommunication provider), TD Bank (financial services), Maple Leaf Sports (sports media), Tim Horton’s (fast-food chain) and Cineplex (movie theatre operator) as their top sponsors in addition to many other local sponsors. We assume each sponsor commits roughly $75k in its first season, growing that commitment at a CAGR of +9.5% to achieve a total commitment of $170k by year 10. Given most of these companies spend at least $50m-$100m per year in sales and marketing, we do not believe that a $170k budget for eSports is unreasonable since they all have an incentive to target the millennial demographic in basic services such as wireless communication, banking, sports, fast-food and outdoor entertainment.
Fig 6 eSports Team Sponsorship Revenue Model
Sponsorship Revenue Year 1 (US$'000) Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May TOTAL Sponsor #1 13 13 13 13 13 13 75 Sponsor #2 13 13 13 13 13 13 75 Sponsor #3 13 13 13 13 13 13 75 Sponsor #4 13 13 13 13 13 13 75 Sponsor #5 13 13 13 13 13 13 75 Total Sponsorship Revenue $ - $ - $ - $63 $63 $63 $63 $63 $63 $ - $ - $ - 375
Sponsorship Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 CAGR Sponsor #1 75 94 112 128 140 150 158 164 168 170 Sponsor #2 75 94 112 128 140 150 158 164 168 170 Sponsor #3 75 94 112 128 140 150 158 164 168 170 Sponsor #4 75 94 112 128 140 150 158 164 168 170 Sponsor #5 75 94 112 128 140 150 158 164 168 170 Total Sponsorship Revenue $375 $469 $560 $639 $699 $748 $789 $821 $841 $850 9.5%
Assumptions Sponsorship revenue growth % 25% 20% 14% 10% 7% 6% 4% 3% 1%
Source: Macquarie Research, March 2017
29 March 2017 7 Macquarie Research eSports Insights
Tournament Revenue Model Tournament revenue is driven by ticket sales and we conservatively modelled an average ticket price of $9 with 1,000 tickets sold for each game during the first year. The number of regular season games is contingent upon the number of teams in the league (Figure 8), where we assume two match-ups per team in the round robin with one game at home and another away. Assuming 3 tournaments per month and 18 tournaments per season in the first year, we derive $162k in ticket sales during the first year. We also assume +16% in attendance CAGR with steady increase in ticket cost from $9 (similar to what movie theatres charge for a typical eSports event) in the first two years to eventually reach $15 for year 7-10. eSports event tickets are typically priced below that of the best alternative such as movie tickets, which are typically priced from $15-$25 for an adult depending on the seating. For the playoffs, we are assuming that these events are similar to the North America finals that fill sports arenas such as Madison Square Garden, which is estimated to have a seating capacity of roughly 20,000. We modelled a $35 ticket price (similar to the price charged during the North America finals event) and 8k in ticket sales to derive $280k in annual playoff ticket sales. Our assumption is conservative in that we are only assuming one playoff game. Any additional playoff participation would result in upside risk to our estimates. On the cost side, we assumed opex margin of 45% based on our conversation with various eSports teams in North America, and a slightly higher 50% opex margin for the playoffs.
Fig 7 eSports Team Tournament Revenue Model
Tournament Revenue Year 1 (US$'000) Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May TOTAL Regular Season $27 $27 $27 $27 $27 $27 162 Playoffs - Tournament Revenue $ - $ - $ - $27 $27 $27 $27 $27 $27 $ - $ - $ - $ 162
Regular Season 12 12 12 12 12 12 73 Playoffs - Operating expense $ - $ - $ - $12 $12 $12 $12 $12 $12 $ - $ - $ - $ 73
Tournament Operating Profit $ - $ - $ - $15 $15 $15 $15 $15 $15 $ - $ - $ - $ 89
Tournament Assumptions Price per ticket (USD) $9 $9 $9 $9 $9 $9 9 Tickets sold per game 1,000 1,000 1,000 1,000 1,000 1,000 1,000 Ticket sales per game ($'000) $ - $ - $ - $9 $9 $9 $9 $9 $9 $ - $ - $ - 9 Number of games 3 3 3 3 3 3 18 Assumptions Regular Season Opex % 45% 45% 45% 45% 45% 45% Ticket price growth % Ticket unit sales growth % Playoffs Opex %
Tournament Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 CAGR % (US$'000) Regular Season* $162 $383 $741 $1,011 $1,578 $2,027 $2,925 $3,565 $4,027 $4,464 44.6% Playoffs $0 $280 $280 $280 $280 $280 $280 $280 $280 $280 Tournament Revenue $162 $663 $1,021 $1,291 $1,858 $2,307 $3,205 $3,845 $4,307 $4,744 45.5% Regular Season 73 172 334 455 710 912 1,316 1,604 1,812 2,009 44.6% Playoffs 0 140 140 140 140 140 140 140 140 140 Operating expense $73 $312 $474 $595 $850 $1,052 $1,456 $1,744 $1,952 $2,149 45.6% Tournament Operating Profit $89 $350 $548 $696 $1,008 $1,255 $1,749 $2,101 $2,355 $2,595 45.4% Tournament Assumptions Price per ticket (USD) $9 $9 $11 $11 $13 $13 $15 $15 $15 $15 5.8% Tickets sold per game 1,000 1,250 1,531 1,838 2,168 2,515 2,867 3,211 3,533 3,815 16.0% Ticket sales per game ($'000) $9 $11 $17 $20 $28 $33 $43 $48 $53 $57 22.8% # of Franchises 10 18 23 26 29 32 35 38 39 40 16.7% # of New Franchises 10 8 5 3 3 3 3 3 1 1 Number of games** 18 34 44 50 56 62 68 74 76 78 17.7% Games per month 3 6 7 8 9 10 11 12 13 13 Playoffs assumptions Price per ticket (USD) $0 $35 $35 $35 $35 $35 $35 $35 $35 $35 Tickets sold per game - 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 8,000 Assumptions Regular Season Opex % 45% 45% 45% 45% 45% 45% 45% 45% 45% Ticket unit sales growth % 25% 23% 20% 18% 16% 14% 12% 10% 8% Playoffs Opex % 50% 50% 50% 50% 50% 50% 50% 50% 50% *Assume six months in one season **Assumes each play another team twice (home and away) Source: Macquarie Research, March 2017
29 March 2017 8 Macquarie Research eSports Insights
Digital Revenue Drivers Online advertising on team websites is the key driver behind digital revenue streams. For a mid-market eSports team, half a million visits (1.3k visits per day) during the first year is reasonable, in our view, especially when the team operates in a market that has a population of at least 3m-5m. If we assume an average of 5 page views per visit for fans that are interested in reading news updates, checking the score and watching competition highlights, we can derive incremental ad revenue assuming a 5% growth in total visits, average page views per visit and CPM rate.
Fig 8 eSports Team Digital Revenue Model
Digital Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 (US$'000) Advertising Revenue 2.5 2.9 3.4 3.9 4.5 5.2 6.0 7.0 8.1 9.3
Total Visits 500,000 525,000 551,250 578,813 607,753 638,141 670,048 703,550 738,728 775,664 Avg Page Views/Visit 5.0 5.3 5.5 5.8 6.1 6.4 6.7 7.0 7.4 7.8 CPM $1.00 $1.05 $1.10 $1.16 $1.22 $1.28 $1.34 $1.41 $1.48 $1.55
Assumptions Total Visits 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% Avg Page Views/Visit 5% 5% 5% 5% 5% 5% 5% 5% 5% 5% CPM 5% 5% 5% 5% 5% 5% 5% 5% 5% 5%
Source: Macquarie Research, March 2017
29 March 2017 9 Macquarie Research eSports Insights
Cost Drivers Operating expense consists mostly of player salary, payroll-related taxes, benefits, training cost, travel and marketing. A typical team consists of a head coach, assistant coach, six players, three reserves, a trainer and an analyst, although the headcount per team varies greatly by region and by the games being played. Besides the team headcount, the management team includes a CEO, General Manager, Assistant General Manager, Sponsorship Manager and Ad Operations Manager. Again, the headcount for the management team varies by region and by games, but we modelled a team structure which we believe is consistent with that of a pro team. Our salary assumptions for the coaches and the players are consistent with industry standard while the management salary level is leaning towards the upper end of the range due to a higher level of experience.
Fig 9 eSports Team Cost Model – Year 1
(US'$000) Year 1 Operating Expenses Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May TOTAL Team Payroll 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 600 Payroll Tax - Team 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 60 Benefits - Team 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 27 Management Payroll 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 190 Payroll Tax - Management 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 1.6 19 Benefits - Management 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7 9 Pre Seaon Training 25.0 25.0 25.0 ------75 Marketing 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 - - - 180 Travel - - 4.3 4.3 4.3 4.3 4.3 4.3 4.3 - - - 30 Misc 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 2.5 30 Total Operating Expenses 122.9 122.9 127.2 102.2 102.2 102.2 102.2 102.2 102.2 77.9 77.9 77.9 1,220
Team Opex Annual Salary Head Coach 60.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 60 Player 1 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Player 2 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Player 3 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Player 4 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Player 5 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Player 6 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Reserve 1 55.0 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 55 Reserve 2 55.0 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 4.6 55 Trainer/Analyst 40.0 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 3.3 40 Total Team Opex 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 50.0 600
Management Opex Annual Salary CEO 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 General Manager 65.0 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 65 Operations Manager 60.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 5.0 60 Total Management Opex 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 15.8 190
Assumptions Benefits - Medical 5% Payroll Taxes 10%
Source: Macquarie Research, March 2017
29 March 2017 10
March 2017 29 Research Macquarie
Fig 10 eSports Team Cost Model: Year 1 – Year 10
(US'$000) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 CAGR % Operating Expenses
Team Payroll 600 645 693 744 800 859 924 993 1,067 1,147 5.0% Payroll Tax - Team 60 64 69 74 80 86 92 99 107 115
Benefits - Team 27 29 31 33 36 39 42 45 48 52 Management Payroll 190 198 207 216 226 235 246 257 268 280 Payroll Tax - Management 19 20 21 22 23 24 25 26 27 28 Benefits - Management 9 9 9 10 10 11 11 12 12 13 Pre Seaon Training 75 75 75 75 75 75 75 75 75 75 Marketing 180 189 198 205 213 219 224 229 232 235 5.0% Travel 30 31 32 33 34 35 36 37 38 39 3.0% Misc 30 31 32 33 34 35 36 37 38 39 3.0% Total Operating Expenses 1,220 1,291 1,366 1,445 1,529 1,617 1,710 1,809 1,912 2,022
Team Opex Annual Salary Head Coach 60.0 60 65 70 76 82 88 95 103 111 120 8.0% Player 1 65.0 65 70 76 82 88 96 103 111 120 130 8.0% Player 2 65.0 65 70 76 82 88 96 103 111 120 130 8.0% Player 3 65.0 65 70 76 82 88 96 103 111 120 130 8.0% Player 4 65.0 65 70 76 82 88 96 103 111 120 130 8.0% Player 5 65.0 65 70 76 82 88 96 103 111 120 130 8.0% Player 6 65.0 65 70 76 82 88 96 103 111 120 130 8.0% Reserve 1 55.0 55 58 62 66 69 74 78 83 88 93 6.0% Reserve 2 55.0 55 58 62 66 69 74 78 83 88 93 6.0% Trainer/Analyst 40.0 40 42 44 46 49 51 54 56 59 62 5.0% Total Team Opex 600 645 693 744 800 859 924 993 1,067 1,147
Management Opex Annual Salary CEO 65.0 65 68 72 75 79 83 87 91 96 101 5.0% General Manager 65.0 65 68 72 75 79 83 87 91 96 101 5.0% Operations Manager 60.0 60 62 64 66 68 70 72 74 76 78 3.0% Total Management Opex 190 198 207 216 226 235 246 257 268 280
Assumptions Benefits - Medical 5% Payroll Taxes 10%
eSports Insights eSports
Source: Company data, Macquarie Research, March 2017
11
Macquarie Research eSports Insights Macquarie Data and Analytics
We have compiled proprietary data on Twitch.TV to help investors better understand viewership trends of key eSports titles and valuations behind eSports media rights. For a copy of the data please contact your Macquarie account manager.
Premier eSports events remain a major driver – March was a lighter month for blockbuster eSports events, headlined by the qualifiers for Dota 2’s $3mm Kiev Major coming at the end of April, the $250K Intel Extreme Masters Katowice for Counter-Strike, the $250K Hearthstone Winter Championships, and the $200K Call of Duty World League Dallas Open. While this was a solid slate of quality eSports events, without the World Championship level-events from January and February, aggregate Twitch viewership has come back down to December levels of ~650K- 700K average concurrent viewers from over 900K in late January. The trends this month highlight the impact on eSports viewership that premier events like last month’s Counter-Strike ELEAGUE Major have. The ELEAGUE Major attracted over 175K average viewers for the week ending Jan 27, more than triple the game’s average viewers for the month of March. Conversely, we have seen that League of Legends is less reliant on these premier events to reach its consistently high viewership that is double its competition on the average week. LoL is aided by the weekly League Championship Series (LCS) regular season (and soon playoffs) pro-level competition from the world’s best players every weekend. The viewership success and stability of the LCS bodes well for ATVI and its upcoming Overwatch League as ATVI aims to similarly have weekly regular season pro matches that should drive views. Game publishers own the pro leagues, distribution may be next – We have written extensively that as eSports grows, the game developers are consolidating ownership of the top level pro competition has Tencent has done with the LCS, and ATVI is planning to do with the Overwatch League and already does to a certain extent with its Call of Duty World League. The next step beyond the formation of the leagues may be to vertically integrate the broadcasting itself, as ATVI continues to incorporate its December 2015 acquisition of Major League Gaming (MLG) into its eSports operations. ATVI is using MLG as a streaming platform for its Call of Duty World League (CWL), which had its $200k Dallas Open event in March. The broadcast was also available on Twitch.TV, but on a 15 minute delay with a link to the live broadcast on MLG.tv. Looking at the viewership data for Call of Duty (Figure 21), the viewers around its premier CWL Open events do not spike to the same level above the average week when compared to premier events for the larger eSports. We believe this is primarily due to traffic being diverted to MLG for the live broadcast of the event. If ATVI is able to replicate this for the Overwatch League (which is expected to be larger than the CWL), it could encourage other publishers to take a more active role in eSports content distribution.
Fig 11 Aggregate Twitch.TV Activity Fig 12 Viewership by Top eSport Game
Weekly Unique Streams Average Viewers League of Legends Hearthstone CS:GO Dota 2 Overwatch 1,000 3.0 200 900 180 800 2.5 160 140 700 2.0 600 120 500 1.5 100 400 80 300 1.0 60
Average Average Viewers(Thousands) 40 200 0.5
Average Average Viewers(Thousands) 100 20 Weekly Weekly Unique Streams(Millions) 0 0.0 0 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
Source: Twitch.tv,Sullygnome.com, Macquarie Research, March 2017 Source: Twitch.tv,Sullygnome.com, Macquarie Research, March 2017
29 March 2017 12 Macquarie Research eSports Insights
Fig 13 Top 10 Most Viewed Games by Week
12/30/2016 1/6/2017 1/8/2017 1/16/2017 1/20/2017 1/27/2017 2/3/2017 2/10/2017 2/17/2017 2/24/2017 3/3/2017 3/10/2017 3/17/2017 3/24/2017 league of Legends 1 1 1 1 1 2 1 1 1 1 1 1 1 1 Hearthstone 2 2 2 2 2 4 4 4 3 3 3 3 3 2 CS:GO 4 5 5 4 3 1 2 3 2 2 2 4 4 3 Dota 2 3 3 3 3 4 3 3 2 5 4 4 2 2 4 Playerunknown's Battlegrounds 10 8 8 5 Overwatch 5 4 4 5 5 6 6 5 6 6 7 6 5 6 Power Rangers (TV Show) 7 H1Z1: King of the Hill 6 6 6 6 6 7 7 7 7 7 6 7 6 8 Mass Effect: Andromeda 9 IRL (In Real Life) 10 9 10 Zelda: Breath of the Wild 5 7 World of Warcraft 7 8 8 8 7 8 10 9 8 8 8 9 10 Ghost Recon Wildlands 10 Horizon Zero Dawn 5 For Honor 8 4 5 9 FIFA 10 10 7 8 10 10 9 Nioh 8 9 Conan Exiles 5 6 Resident Evil 7 Biohazard 5 9 Minecraft 9 7 7 10 10 9 Gaming Talk Shows 8 9 9 9 10 RuneScape 9 Smite 10
Source: Twithc.tv,Sullygnome.com, Macquarie Research, March 2017
Fig 14 Top 5 Most Viewed Games by Week
league of Legends
Hearthstone 0 CS:GO
1 Dota 2
Playerunknown's Battlegrounds 2 Overwatch
Zelda: Breath of the Wild 3 Horizon Zero Dawn
For Honor 4 Conan Exiles
Resident Evil 7 Biohazard 5
Source: Twithc.tv,Sullygnome.com, Macquarie Research, March 2017
29 March 2017 13 Macquarie Research eSports Insights
Fig 15 League of Legends Viewership Fig 16 Counter-Strike: Global Offensive Viewership
Peak viewers Average Viewers Peak viewers Average Viewers
180 900 200 1,200 160 800 180 1,000 140 700 160 140 120 600 800 120 100 500 100 600 80 400 80 60 300 400 60
40 200 Peak Viewers (Thousands) 40 PeakViewers (Thousands)
200 Average Average Viewers(Thousands) 20 100 Average Viewers(Thousands) 20 0 0 0 0
Twitch.tv,Sullygnome.com, Macquarie Research, March 2017 Twitch.tv,Sullygnome.com, Macquarie Research, March 2017
Fig 17 Dota 2 Viewership Fig 18 Hearthstone Viewership
Peak viewers Average Viewers Peak viewers Average Viewers
100 700 80 350 90 600 70 300 80 60 70 500 250 50 60 400 200 50 40 150 300 40 30 100
30 200 20 PeakViewers (Thousands)
20 PeakViewers (Thousands)
10 50 Average Average Viewers(Thousands) Average Average Viewers(Thousands) 100 10 0 0 0 0
Twitch.tv,Sullygnome.com, Macquarie Research, March 2017 Twitch.tv,Sullygnome.com, Macquarie Research, March 2017
Fig 19 Overwatch Viewership Fig 20 Call of Duty: Infinite Warfare Viewership
Peak viewers Average Viewers Peak viewers Average Viewers
60 250 10 120 9 50 100 200 8 40 7 150 80 6 30 5 60 100 20 4 40
50 PeakViewers (Thousands) 3
10
PeakViewers (Thousands) Average Average Viewers(Thousands) Average Average Viewers(Thousands) 2 20 0 0 1 0 0 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17
Source: Twitch.tv,Sullygnome.com, Macquarie Research, March 2017
29 March 2017 14 Macquarie Research eSports Insights
About Macquarie’s Twitch Analytics Twitch.TV is the largest streaming platform for live eSports events and live competitive video gaming as a whole. Analysing what games are popular on Twitch and why they are popular gives great insight into the interest in eSports and the competitive video games landscape as a whole. The data shown below is from Sullygnome.com, a user-generated Twitch tracking site that aggregates viewership data pulled directly from Twitch’s API. The site scrapes Twitch around four times an hour to aggregate the data, and while there is no way to be 100% accurate, it is by far the best source to get this level of granularity of viewership data on Twitch. The site does not archive the data, and only provides detail going back 30 days, but we have been recording the data ourselves for the past 6 months to be able to provide a detailed analysis of trends on Twitch, and more importantly, the impact for eSports and competitive gaming. Average viewers – The average viewer numbers shown below are average concurrent views at all times over the measured period. Peak viewers – Peak concurrent viewers for a game over the measured period is more than likely due to an eSports event, certainly for the popular eSports games. Other reasons would include the launch of a new game update or a large streamed product announcement by the developer, but for the purposes of tracking interest the top eSports games, we assume the peak viewers correlates to the max eSports interest in the game. Weekly unique streams – If views shows the demand for competitive video game content, then the number of weekly streams going live is the supply. The overwhelming majority of streaming activity on Twitch is user generated, and weekly unique streams tracks the amount of users going live to engage with the site. That said, only the top handful of streams for each game drive the majority of the view traffic with most streams only broadcasting to a handful of viewers, but unique streams does provide a good trend for overall engagement on the site. Shift in tracking methodology – Data from the Twitch tracking site Sullygnome.com can be viewed over either 30-day or 7-day time periods. We initially tracked the 30-day number for more representative average viewer trends, but with the start of the new year and this monthly publication, we have are transitioning to track the 7-day figures to better track peak viewers on a weekly basis, which should provide better insight into the changes in peak eSports viewership.
29 March 2017 15 Macquarie Research eSports Insights Macquarie Top Picks eSports Basket We utilize a simple equal-weighted basket of our top picks (bottom of front page) that we believe have the best exposure to the theme.
Fig 21 Macquarie eSports Top Picks Portfolio
EV/Revenue PER Macquarie Stock Target Return to Mkt Cap. 30-Day ADTV Company Ticker Analyst Rating Price Target (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E
US Activision ATVI Schachter OP $48.00 (2.6%) 37,412 357.8 5.8x 5.3x 26.2x 22.4x US EA Games EA Schachter OP $88.00 (1.1%) 27,664 234.5 4.9x 4.3x 23.2x 21.0x US Take-Tw o TTWO Schachter OP $60.00 2.4% 5,964 118.1 3.4x 2.6x 31.8x 27.3x JP Nintendo 7974 Gibson OP ¥30,000 12.6% 34,102 487.3 5.3x 3.2x 54.3x 41.2x JP Capcom 9697 Gibson OP ¥3,125 38.4% 1,382 13.3 1.2x 0.9x 14.1x 12.1x JP CyberAgent 4751 Gibson OP ¥4,040 22.1% 3,782 30.0 1.0x 0.9x 26.0x 17.9x JP GungHo 3765 Gibson OP ¥290 15.5% 2,160 8.6 1.3x 1.4x 7.0x 8.3x CH Tencent 700 Huang OP HKD 265 17.3% 275,743 516.7 9.4x 7.5x 33.1x 26.1x CH NetEase NTES Chan OP $372.00 28.6% 38,368 373.6 4.4x 3.5x 15.1x 13.7x Developers Average 4.1x 3.3x 25.6x 21.1x
US Alphabet GOOGL Schachter OP $995.00 18.7% 573,924 1,233.2 5.4x 4.4x 20.7x 18.6x US Amazon AMZN Schachter OP $895.00 5.7% 408,458 2,260.5 2.3x 1.9x 115.1x 48.6x US Facebook FB Schachter OP $160.00 14.0% 409,684 2,099.4 9.8x 7.3x 26.7x 22.6x CDA theScore SCR MacDonald OP C$ 0.45 125.0% 42 0.0 1.7x 1.4x nmf nmf M edia Average 4.8x 3.7x 54.2x 29.9x
JP Sony 6758 Thong OP ¥ 4,250 17.9% 41,168 150.0 0.7x 0.6x 102.8x 15.5x HK Lenovo 992 Chang OP HKD 7.50 47.6% 7,265 49.3 0.2x 0.1x 13.5x 8.8x TW Asustek 2357 Ohlw eiler OP NT$300.00 1.0% 7,308 15.3 0.3x 0.3x 10.4x 10.1x 0.4x 0.4x 42.2x 11.5x Technology & Hardware Average Source: Bloomberg, Macquarie Research, March 2017
We run the model portfolio from June 22, 2015, the date when we published our first eSports thematic (LINK) and compare that against the MSCI World Index given the diverse set of companies in our portfolio. Since the onset, our portfolio has outperformed MSCI by 8.5%.
Fig 22 Macquarie eSports Top Picks Portfolio vs. MSCI World Index
MSCI World Index MQ eSports Portfolio
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0%
-20.0%
16
16 17 15 16
15 16
15 16
16 17
15 16
15 16
15 16
16 17
15 16
16
-
- - - -
- -
- -
- - - -
- -
- -
- - - -
-
Jul Jul
Jan Jan
Jun Jun
Oct Oct
Apr
Feb Feb Sep Sep
Dec Dec
Aug Aug
Nov Nov
Mar Mar May Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 16 Macquarie Research eSports Insights
Fig 23 MQ eSports Top Picks Portfolio vs. MSCI World Out/Underperform %
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
-2.0%
16 15
15 16
15 16
16
17 16
15 16
16 16 15 17
16
16 15
15 16
16 17
- -
- -
- -
-
- - - -
- - - - -
- -
- -
- -
Jul Jul
Jan Jan
Jun Jun
Oct Oct
Apr
Feb Sep Sep Feb
Dec Dec
Aug Aug
Nov Nov
Mar Mar May Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 17 Macquarie Research eSports Insights Macquarie eSports Basket Performance We utilize a simple equal-weighted basket that consists of both covered and non-covered companies that we believe have the best exposure to the theme. Our index selection is based on MSCI World sector indices given the diverse set of companies in our index.
Macquarie eSports Developers Basket Our publishers/developers basket consists of companies we cover globally that have the most favourable economic leverage to eSports. Activision, EA and Tencent all have set up their dedicated eSports division/business unit while Take-Two took a different approach by creating an eLeague with the help of the NBA. In Japan, Nintendo and Capcom are looking to ramp up on their respective eSports exposure by leveraging their attractive IP while CyberAgent and GungHo are favourably exposed to the fast growing mobile eSports trend.
Fig 24 Macquarie eSports Publishers/Developers Basket
EV/Revenue PER Macquarie Stock Target Return to Mkt Cap. 30-Day ADTV Company Ticker Analyst Rating Price Target (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E US Activision ATVI Schachter OP $48.00 (2.6%) 37,412 357.8 5.8x 5.3x 26.2x 22.4x US EA Games EA Schachter OP $88.00 (1.1%) 27,664 234.5 4.9x 4.3x 23.2x 21.0x US Take-Tw o TTWO Schachter OP $60.00 2.4% 5,964 118.1 3.4x 2.6x 31.8x 27.3x JP Nintendo 7974 Gibson OP ¥30,000 12.6% 34,102 487.3 5.3x 3.2x 54.3x 41.2x JP Capcom 9697 Gibson OP ¥3,125 38.4% 1,382 13.3 1.2x 0.9x 14.1x 12.1x JP CyberAgent 4751 Gibson OP ¥4,040 22.1% 3,782 30.0 1.0x 0.9x 26.0x 17.9x JP GungHo 3765 Gibson OP ¥290 15.5% 2,160 8.6 1.3x 1.4x 7.0x 8.3x CH Tencent 700 Huang OP HKD 265 17.3% 275,743 516.7 9.4x 7.5x 33.1x 26.1x CH NetEase NTES Chan OP $372.00 28.6% 38,368 373.6 4.4x 3.5x 15.1x 13.7x
Source: Bloomberg, Macquarie Research, March 2017
Fig 25 Macquarie eSports Developers Basket vs. MSCI World Software Index
MSCI World Software Index MQ eSports Developers Basket
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 18 Macquarie Research eSports Insights
Fig 26 MQ eSports Developers Basket vs. MSCI World Software Out/Underperform %
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 19 Macquarie Research eSports Insights
Macquarie eSports Hardware and Technology Basket Our technology basket consists mostly of PC makers and component makers that are leveraged to the gaming PC trend. Though we are negative on the PC industry and expect shipments to decline 2.4% in 2017, we are positive on some subsectors including gaming PC. This is one of the reasons we like Asustek, which is a leading global gaming PC, motherboard, and graphic card brand. Additionally, we like Lenovo post our recent NDR (LINK). We maintain our positive view on Lenovo’s transformation and see limited downside risk on the stock as we believe that its PC division remains a sustainable cash cow that will continue to support the company’s mobile and enterprise businesses. The recent launch of new gaming PCs has gained solid reviews and this is certainly supportive of our positive outlook. For the non-covered names, we think MSI, Nvidia, Logitech and Chicony are well positioned for the broader eSports theme.
Fig 27 Macquarie eSports Hardware and Technology Basket
EV/Revenue PER Macquarie Stock Target Return to Mkt Cap. 30-Day ADTV Company Ticker Analyst Rating Price Target (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E JP Sony 6758 Thong OP ¥ 4,250 17.9% 41,168 150.0 0.7x 0.6x 102.8x 15.5x HK Lenovo 992 Chang OP HKD 7.50 47.6% 7,265 49.3 0.2x 0.1x 13.5x 8.8x TW Asustek 2357 Ohlw eiler OP NT$300.00 1.0% 7,308 15.3 0.3x 0.3x 10.4x 10.1x US Microsoft MSFT Hindlian N $63.00 (3.2%) 504,530 1,383.6 6.5x 5.7x 22.0x 20.2x TW Chicony 2385 NC NR N/A N/A 1,880 2.9 0.7x 0.7x 11.9x 11.0x TW MSI 2377 NC NR N/A N/A 1,984 11.6 0.5x 0.4x 11.9x 10.6x US Intel INTC NC NR N/A N/A 168,317 839.7 2.8x 2.8x 12.7x 12.1x US Logitech LOGI NC NR N/A N/A 5,432 9.5 2.2x 2.1x 25.2x 22.5x US Nvidia NVDA NC NR N/A N/A 63,429 1,757.5 7.4x 6.6x 32.7x 27.5x
Source: Bloomberg, Macquarie Research, March 2017
Fig 28 Macquarie eSports HW & Tech Basket vs. MSCI World HW & Tech Index
MSCI World Tech&Hardware Index MQ eSports Tech&Hardware Basket
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 20 Macquarie Research eSports Insights
Fig 29 MQ eSports Tech Basket vs. MSCI World Tech Out/Underperform %
45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0%
Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 21 Macquarie Research eSports Insights
Macquarie eSports Media Basket Our media basket consists of internet and traditional media companies that have exposure to the video game streaming theme. Despite the lack of pure-plays, we think Alphabet and Amazon are best positioned given their online games portals. Traditional media outlets such as Disney and Time Warner have also invested in eSports as a hedge to their viewership and engagement metrics. On the mobile side, we like theScore given its leadership in mobile eSports app. In Asia, Alibaba made a major investment in the International eSports Federation with the goal of promoting eSports globally and through its Youku online video platform. For the non-covered names, Cineplex is a Canadian movie theatre operator that is looking to host eSports competition across its theatres as a way to drive traffic.
Fig 30 Macquarie eSports Media Basket
EV/Revenue PER Macquarie Stock Target Return to Mkt Cap. 30-Day ADTV Company Ticker Analyst Rating Price Target (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E US Alphabet GOOGL Schachter OP $995.00 18.7% 573,924 1,233.2 5.4x 4.4x 20.7x 18.6x US Amazon AMZN Schachter OP $895.00 5.7% 408,458 2,260.5 2.3x 1.9x 115.1x 48.6x US Facebook FB Schachter OP $160.00 14.0% 409,684 2,099.4 9.8x 7.3x 26.7x 22.6x US Disney DIS Nollen OP $125.00 11.2% 178,760 630.3 3.3x 3.2x 19.0x 16.6x US Time Warner TWX Nollen N $100.00 2.7% 75,358 314.9 2.8x 2.3x 16.4x 14.6x CH Alibaba BABA Huang OP $123.00 13.8% 268,991 944.7 11.7x 8.9x 30.7x 24.8x CH Leshi Internet 300104 Huang OP CNY 50.00 57.5% 9,198 149.9 1.8x 1.5x 49.1x 35.2x CDA theScore SCR MacDonald OP C$ 0.45 125.0% 42 0.0 1.7x 1.4x nmf nmf CDA Cineplex CGX NC NR N/A N/A 2,380 10.1 2.2x 2.1x 28.1x 23.4x CH YY YY NC NR N/A N/A 2,571 62.6 1.4x 1.2x 9.8x 8.4x SS Modern Times MTGB NC NR N/A N/A 2,377 5.4 1.3x 1.2x nmf 17.3x
Source: Bloomberg, Macquarie Research, March 2017
Fig 31 Macquarie eSports Media Basket vs. MSCI World Media Index
MSCI World Media Index MQ eSports Media Basket
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 22 Macquarie Research eSports Insights
Fig 32 MQ eSports Media Basket vs. MSCI World Media Out/Underperform %
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
Source: Bloomberg, Macquarie Research, March 2017
29 March 2017 23 Macquarie Research eSports Insights Last But Not Least – Notable Tidbits Amazon names video-game veteran to head studio (Seattle Times) Amazon.com has added another video-game industry veteran to its ranks, naming Louis Castle head of the company’s Seattle game-production studio. Castle co-founded Westwood Studios, best known as the maker of the “Command & Conquer” series, an early hit in the genre of real- time strategy games that put players in control of a battlefield from a bird’s-eye view. He stayed on in a senior role at Electronic Arts when the gaming giant acquired the studio. Castle is the latest luminary scooped up by Amazon, which has drawn notice in the video-game industry for hiring away veterans of the likes of Microsoft, Valve and Electronic Arts. YouTube makes its biggest eSports bet with FACEIT streaming deal (Reuters) Alphabet Inc's YouTube is doubling down on the lucrative business of competitive gaming, where players square off on virtual games for big prize money in tournaments. The video site made its biggest investment in the business to date, signing a multi-year deal with e-sports platform FACEIT to stream its competitive gaming league, the Esports Championship Series (ECS). Cloud9 eSports Team Closes Series A Funding, Investors Include Joe Montana, Alexis Ohanian (LA Times) The team announced Tuesday it had received an unspecified investment of at least several million dollars. The money probably will pay for entry fees and also could go toward university partnerships and a more central headquarters. The series A round also saw participation from a plethora of major names in game developer, professional sports, and investing. Those include San Francisco Giants outfielder Hunter Pence, Signia Venture Partners cofounder Rick Thompson, Founders Fund cofounder Ken Howery and partner Brian Singerman, Reddit cofounder Alexis Ohanian, Bonfire Studios cofounders Min Kim and Rob Pardo, Jam City cofounder Josh Yugado, L.A. Dodgers co-owner Todd Boehly, United Talent Agency, Hall of Fame San Francisco 49ers QB Joe Montana, NBA star Andrew Bogut, Golden State Warriors co-owner Chamath Palihapitiya, and Tesla board director Antonio Gracias, Kimbal Musk, and Bill Lee. 'League of Legends' creators sue cheating service, win $10 million (Mashable) League of Legends creators Riot Games won a lawsuit against the makers of a cheating and hacking service called LeagueSharp, earning Riot $10 million. On top of the steep penalty, the creators of LeagueSharp received a court-ordered ban from playing League of Legends and any other future Riot games as well as an order to hand over their LeagueSharp-affiliated websites to Riot. D.C. is gearing up to become the capital of eSports, sponsors team NRG eSports (Mashable) North American esports team NRG Esports is now being sponsored by D.C., the district's official convention and sports authority, Events D.C. revealed to me in a series of interviews yesterday. Not only is the city's sponsorship one of the first of its kind, it marks the District of Columbia's official push into the world of professional competitive gaming. Madden NFL 17 Event Kicking Off At New Las Vegas eSports Arena (eSportsBetting) Millennial Esports formally opened its new eSports arena in downtown Las Vegas and has hosted the first ever EA Sports-sanctioned Madden NFL tournament on the West Coast. The event took place on March 25 and 26 and consisted of a doubleheader Madden Championship Series Madden NFL 17 Tournament on Xbox One and PlayStation 4. A prize pool of $10,000 was featured and this event is one of many that leads to the $500,000 Madden Championship in May. Twitch and esports event group DreamHack renew their partnership for 2017 (VentureBeat) Twitch announced that it has renewed its deal with DreamHack, which runs competitive gaming shows in North America and Europe. DreamHack is one of the site’s oldest partners, making this the ninth year Twitch will broadcast its competitions. According to DreamHack, its events in 2016 drew 233,000 visitors and over 135 million broadcast viewers. Twitch is the leader in the livestreaming field, attracting over 100 million users a month.
29 March 2017 24
March 2017 29 Research Macquarie
Fig 33 Publishers with eSports exposure
28-Mar-17 EV/Revenue PER Macquarie Stock Price % of 52- Target Return to Mkt Cap. Ent Value 30-Day ADTV
Company Ticker Analyst Rating (FX Local) wk High Price Target (US'Mn) (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E The eSports angle
US Activision ATVI Schachter OP $49.30 99.6% $48.00 (2.6%) 37,412 39,054 357.8 5.8x 5.3x 26.2x 22.4x Owns multiple franchise each of them could potentially become an eSports hit. First to create a dedicated eSports
division with Call of Duty and Overwatch. A key beneficiary of eSports streaming rights and league consolidation.
US EA Games EA Schachter OP $89.02 97.7% $88.00 (1.1%) 27,664 24,435 234.5 4.9x 4.3x 23.2x 21.0x Focuses on mostly sports and shooter franchise. Followed ATVI to launch own eSports division. Could potentially drive the under-represented sports genre in eSports. FIFA-series is already a hit in Europe where professional soccer teams have made significant investments in FIFA eSports.
US Take-Two TTWO Schachter OP $58.57 97.7% $60.00 2.4% 5,964 4,779 118.1 3.4x 2.6x 31.8x 27.3x NBA 2K series has been a hit among gamers and fans. Although not widely known as a deveoper for eSports titles, 2K series could potentially be a winner.
JP Nintendo 7974 Gibson OP ¥26,635 81.5% ¥30,000 12.6% 34,102 25,799 487.3 5.3x 3.2x 54.3x 41.2x Splatoon shined the eSports spotlight on Nintendo and could be on its way of becoming a dedicated eSports league. Other franchises such as Super Smash Bros, Mario Kart and Pokemon could expand the addressable eSports gamer base consisting of more casual gamers.
JP Capcom 9697 Gibson OP ¥2,258 78.5% ¥3,125 38.4% 1,382 1,371 13.3 1.2x 0.9x 14.1x 12.1x Street Fighter franchise remains the hallmark of the fighting game genre given that it was built from the ground up with eSports in mind. Expansion of non-MOBA genre presents an attractive long-term opportunity.
JP CyberAgent 4751 Gibson OP ¥3,310 95.3% ¥4,040 22.1% 3,782 3,512 30.0 1.0x 0.9x 26.0x 17.9x Recently hosted the first mobile eSports tournament in Japan focusing on Vainglory (Super Evil Megacorp), the first successful mobile MOBA. CyberAgents' Shadowverse, a strategic multiplayer digital card game, could benefit from the shift towards mobile eSports.
JP GungHo 3765 Gibson OP ¥251 72.5% ¥290 15.5% 2,160 1,875 8.6 1.3x 1.4x 7.0x 8.3x Puzzle & Dragon has become a mobile eSports hit in the non- MOBA genre. GungHo has seen strong success hosting P&D tournaments in Japan and the recent international competition featuring P&D Super Mario Bros.
CH Tencent 700 Huang OP HKD 226 98.3% HKD 265 17.3% 275,743 275,330 516.7 9.4x 7.5x 33.1x 26.1x Taking control of Riot Games allowed Tencent to secure "League of Legends", which remains the top played eSports title globally. The acquisition of Supercell could drive mobile eSports growth in the medium-term.
CH NetEase NTES Chan OP $289.25 93.7% $372.00 28.6% 38,368 33,714 373.6 4.4x 3.5x 15.1x 13.7x One of the earlier promoters of eSports in China. The official operator of Blizzard's StarCraft2 in China and Heroes of Three Kingdoms, which mirrors that of the popular DOTA series.
eSports Publishers Average* 90.5% 14.8% 3.9x 3.3x 22.1x 18.6x * Excludes Nintendo
eSports Insights eSports Source: Company Data, Bloomberg, Thomson, Macquarie Research, March 2017
25
March 2017 29 Research Macquarie
Fig 34 Hardware and technology companies with eSports exposure
28-Mar-17 EV/Revenue PER Macquarie Stock Price % of 52- Return to Mkt Cap. Ent Value 30-Day ADTV
Company Ticker Analyst Rating (FX Local) wk High Target Price Target (US'Mn) (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E The eSports angle
US Microsoft MSFT Hindlian N $65.10 99.1% $63.00 (3.2%) 504,530 466,719 1,383.6 6.5x 5.7x 22.0x 20.2x Halo remains a marquee eSports title for MSFT but the company is scheduled to roll out custom-tournaments features and gaming broadcasting for Win10 and Xbox. MSFT's rationale? Drive Xbox and game sales to prep for the eventual adoption of its Hololens product.
JP Sony 6758 Thong OP ¥ 3,605 98.4% ¥ 4,250 17.9% 41,168 41,623 150.0 0.7x 0.6x 102.8x 15.5x The eSports trend is supportive of Sony's PS4 sales in the near-term. Longer-term we think PS VR could further drive viewer and player engagement.
HK Lenovo 992 Chang OP HKD 5.08 77.2% HKD 7.50 47.6% 7,265 7,141 49.3 0.2x 0.1x 13.5x 8.8x Lenovo's recent entry into gaming PC has been met with mostly positive reviews as its product and we see this to be a good indicator of future growth. Broadly speaking, we believe PCs are a sustainable cash cow that will continue to support the company’s mobile and enterprise businesses.
TW Asustek 2357 Ohlweiler OP NT$297.00 99.7% NT$300.00 1.0% 7,308 4,669 15.3 0.3x 0.3x 10.4x 10.1x A key beneficiary of gaming PC demand. VR-enabled PC and VR headset will be well-positioned as eSports VR takes off in the med to long-term.
TW Chicony 2385 NC NR NT$79.70 96.6% N/A N/A 1,880 1,986 2.9 0.7x 0.7x 11.9x 11.0x A leading electronics ODM catering to various hardware brands that are leveraged to the eSports theme.
TW MSI 2377 NC NR NT$70.90 78.0% N/A N/A 1,984 1,603 11.6 0.5x 0.4x 11.9x 10.6x World’s leading gaming PC, motherboard, and graphic card brand with No.1 mkt shr (19%) in global professional gaming NB.
US Intel INTC NC NR $35.60 92.6% N/A N/A 168,317 170,321 839.7 2.8x 2.8x 12.7x 12.1x Sponsors the annual Intel Extreme Masters eSports event that is already in its 11th season with the championship held at Katowice Poland in March 2017.
US Logitech LOGI NC NR $31.38 98.3% N/A N/A 5,432 4,919 9.5 2.2x 2.1x 25.2x 22.5x A frequent sponsor of top eSports teams around the world. Logitech provides cutting-edge keyboard, mouse and other hardware that are necessary for the gamers to bring their games up to the next level.
US Nvidia NVDA NC NR $107.69 89.1% N/A N/A 63,429 59,447 1,757.5 7.4x 6.6x 32.7x 27.5x Growing interest in video game drives graphic card sales and this is a positive to NVDA. Meanwhile, NVDA is teaming up with ESL to promote its GTX graphics.
eSports Hardware/Technology Average 92.5% 15.8% 2.3x 2.1x 27.0x 16.0x
eSports Insights eSports
Source: Company Data, Bloomberg, Thomson, Macquarie Research, March 2017
26
March 2017 29 Research Macquarie
Fig 35 Media companies with eSports exposure
28-Mar-17 EV/Revenue PER Macquarie Stock Price % of 52- Return to Mkt Cap. Ent Value 30-Day ADTV
Company Ticker Analyst Rating (FX Local) wk High Target Price Target (US'Mn) (US'Mn) (US'Mn) 2017E 2018E 2017E 2018E The eSports angle
US Alphabet GOOGL Schachter OP $838.51 96.1% $995.00 18.7% 573,924 485,648 1,233.2 5.4x 4.4x 20.7x 18.6x Established YouTube Gaming, an eSports-oriented streaming/video platform, in response to AMZN's acquisition
of Twitch.TV and a way to capture a portion of the eSports ad dollar.
US Amazon AMZN Schachter OP $846.82 99.2% $895.00 5.7% 408,458 402,887 2,260.5 2.3x 1.9x 115.1x 48.6x Acquired Twitch.TV in August 2014 for $970mn in cash. Twitch.TV operates the world's largest video game streaming platform with >55m users globally. Currently expanding casual eSports tournaments on games such as Fruit Ninja, Crossy Road, Pac-Man.
US Facebook FB Schachter OP $140.32 99.6% $160.00 14.0% 409,684 380,235 2,099.4 9.8x 7.3x 26.7x 22.6x Media reported that FB is looking to buy streaming rights from ATVI. With ad$ flowing into eSports, FB clearly does not want to miss out. Oculus also offers attractive opportunity from the hardware side if VR-eSports takes off.
US Disney DIS Nollen OP $112.38 99.8% $125.00 11.2% 178,760 199,481 630.3 3.3x 3.2x 19.0x 16.6x ESPN's dedicated eSports coverage and plans to televise more coverage of high profile tournaments is a good indication that mainstream media is recognizing eSports as a professional sports. Potential streaming deals with developers could also maintain the engagement on ESPN's digital platforms.
US Time Warner Inc. TWX Nollen N $97.36 98.0% $100.00 2.7% 75,358 98,189 314.9 2.8x 2.3x 16.4x 14.6x Turner doubles down on eSports with season 2 of the Eleague featuring Counter Strike: Global Offensive and Overwatch. This is a move on TWX to offer differentiated content to its viewers and protect the bundle.
CDA theScore SCR MacDonald OP C$ 0.20 57.6% C$ 0.45 125.0% 42 33 0.0 1.7x 1.4x nmf nmf Owns one of the leading mobile apps on eSports globally, featuring stats, news and streaming services. Accumulated over 750k users in less than a year after launch.
CH Alibaba BABA Huang OP $108.08 98.1% $123.00 13.8% 268,991 262,798 944.7 11.7x 8.9x 30.7x 24.8x Invested $150mn in the International eSports Federation in a move that further drives eSports towards Olympic status.
CH Leshi Internet 300104 Huang OP CNY 31.75 52.1% CNY 50.00 57.5% 9,198 9,596 149.9 1.8x 1.5x 49.1x 35.2x A leading Chinese online video portal with a wide variety of channels, including gaming and eSports. Parent company has been aggressive in securing sports media rights which we think could include eSports media rights in the future.
CH YY YY NC NR $46.34 72.5% N/A N/A 2,571 2,203 62.6 1.4x 1.2x 9.8x 8.4x Chinese video streaming site featuring competitive gaming similar to that of Twitch. One of the earlier movers in the space but growing eSports popularity in China also resulted in greater competition.
CDA Cineplex CGX NC NR C$ 50.09 93.8% N/A N/A 2,380 2,661 10.1 2.2x 2.1x 28.1x 23.4x Acquired World Gaming eSports platform for $10mn and plans to invest up to $5m to expand eSports across Canada.
SS Modern Times Group MTGB NC NR SEK 308 99.8% N/A N/A 2,377 2,636 5.4 1.3x 1.2x nmf 17.3x Acquired 74% of Turtle Entertainment, the world’s largest esports company that operates under the well-known ESL brand that frequently reaches 70mn viewers.
eSports Insights eSports
eSports Media and Entertainment Average 87.9% 31.1% 4.0x 3.2x 35.1x 23.0x Source: Company Data, Bloomberg, Thomson, Macquarie Research, March 2017
27
Macquarie Research eSports Insights Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical price All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be expected catastrophe reserves, IFRS derivatives & hedging, IFRS to move up or down 60–100% in a year – investors impairments & IFRS interest expense Benchmark return is determined by long term nominal should be aware this stock is highly speculative. Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend yield revals, appraisal value uplift, preference dividends & Macquarie – Asia/Europe High – stock should be expected to move up or minority interests Outperform – expected return >+10% down at least 40–60% in a year – investors should Neutral – expected return from -10% to +10% be aware this stock could be speculative. EPS = adjusted net profit / efpowa* Underperform – expected return <-10% ROA = adjusted ebit / average total assets Medium – stock should be expected to move up or ROA Banks/Insurance = adjusted net profit /average Macquarie – South Africa down at least 30–40% in a year. total assets Outperform – expected return >+10% ROE = adjusted net profit / average shareholders funds Neutral – expected return from -10% to +10% Low–medium – stock should be expected to move Gross cashflow = adjusted net profit + depreciation Underperform – expected return <-10% up or down at least 25–30% in a year. *equivalent fully paid ordinary weighted average number Macquarie - Canada of shares Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or Neutral – return within 5% of benchmark return down at least 15–25% in a year. All Reported numbers for Australian/NZ listed stocks are Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks modelled under IFRS (International Financial Reporting only Standards). Macquarie - USA
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Research
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