Berenberg Thematics

Esports: a game-changer

31 January 2018

Oyvind Bjerke Analyst +44 20 3753 3082 [email protected]

Robert Berg Analyst +44 20 3465 2680 [email protected]

Saliha Shariff Analyst +44 20 3753 3097 [email protected]

Nick Anderson Analyst +44 20 3207 7838 [email protected]

Asad Farid, CFA Analyst +44 20 3207 7932 [email protected]

Chris Armstrong Specialist Sales +44 20 3207 7809 [email protected]

ATLAS ALPHA • THOUGHT LEADERSHIP • ACCESS • SERVICE Berenberg Thematics

What is Berenberg Thematics?

Under our Thematics brand, we will focus on big, longer-term themes --- specifically, disruptive technologies, demographics and corporate governance issues --- which we feel investors should be looking at. Within each note, we will highlight trends and issues that we believe to be of interest to investors, and the effect of these on sectors and stocks which we view as beneficiaries or at risk from the specific theme. The companies that we will consider will include those already under coverage, those not covered, and also relevant privately-owned businesses, which we believe will be affected.

THE TEAM

Oyvind Bjerke joined Berenberg in November 2016 as part of the Thematics team. He previously worked as a cost controller in the oil service company Technip. Oyvind graduated with a first-class MA degree from the University of Edinburgh and holds an MSc in Behavioural Finance with distinction from the Warwick Business School.

Robert Berg joined the Berenberg Media research team in March 2013. Prior to this, he spent over three years at Nomura as an analyst covering the cable and satellite sectors. He is a qualified chartered accountant (ACA) and began his career at KPMG, where he spent four years serving TMT clients in both transaction services and restructuring.

Saliha Shariff joined Berenberg in 2016 on the graduate scheme. After completing the programme, she joined the Thematics team in October 2017. Saliha graduated from the University of Cambridge with a BA (Hons) in Economics, and is a CFA Level II candidate.

Nick And erson joined the Thematics team in 2016 having previously built up and led the banks team; he joined Berenberg in 2010. Nick has more than 20 years’ experience as a top- ranked sell-side equity analyst including spells as co-head of the Lehman Brothers European banks team and as a transport analyst at both Lehman Brothers and HSBC James Capel. In addition, he has worked as a management consultant at McKinsey. Nick has degrees in economics and management studies from the University of Cambridge and in wine production from the University of Brighton.

Asad Farid has been working at Berenberg for the past four years. His previous focus was on the oil and gas sector where he was the lead analyst for oil field services. Before joining Berenberg, he worked as an economist and banking analyst at AKD Securities and has eight years of sell-side research experience. Asad is an MBA from University of Cambridge and is a CFA charter holder. As apart of his MBA programme, Asad completed internships at Google and with Berenberg's Technology Hardware team.

Chris Armstrong has 20 years of experience on both the buy-side (as an analyst and portfolio manager) and on the sell-side, most recently as industrial specialist sales. Chris joined Berenberg as a Swiss equity salesman in 2006, before specialising in industrials in 2009. He has previously been a portfolio manager/analyst at Axa Framlington, Bank of Tokyo-Mitsubishi and NatWest, and holds a BA in Economics from Durham University.

For our disclosures in respect of Article 20 of Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation – MAR) and our disclaimer please see the end of this document.

Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.

Berenberg Thematics

Table of contents

Esports: a game-changer 4

Executive summary 5

The rise of esports 13

Esports: driving gaming demand 22

Mobile esports: a catalyst for mobile gaming? 34

Esports economics: a USD20bn market by 2025 37

Gaming companies: ultimate beneficiaries of esports 48

Esports team investment: a gamble 68

Tech giants: battling for eyeballs 73

Media companies: trying to stay relevant 77

PC hardware companies: an esports boost 89

Western telcos: marketing through esports 100

Esports betting: bookmakers flooding in 102

Esports risks 107

Appendix 108

3 Berenberg Thematics

Esports: a game-changer

● Esports is professional video gaming watched by an audience on TV, online or in stadiums, similar to how people consume traditional sports. In 2017, an estimated 385m people watched esports, having had a 24% CAGR since 2014. By 2025, we expect this viewership to rise to c850m and for esports to be a USD20bn industry. In 10-20 years’ time it could potentially rival the traditional sports industry. The main beneficiaries of esports will be the video gaming companies due to marketing and monetisation opportunities. Other winners include PC hardware companies, tech giants, telcos and gambling companies, as esports acts as a catalyst for their goods and services. ● Esports’ economic explosion: In 2017, the esports industry generated revenues of only cUSD0.7bn, largely due to it being under-monetised at USD1.8 per fan, compared to USD54 for traditional sports. We forecast that by 2025, esports will generate USD24 per fan, which equates to a USD20bn market. This is conservative compared to some estimates. The Chinese tech giant Tencent (cUSD570bn market cap), which currently dominates the esports space, believes the esports market in China alone will be worth at least USD15bn by 2022, approximately the size of the NFL. This is in line with our bull case of USD40bn globally by 2025. ● Drivers of revenue growth: Esports revenues have had a 46% CAGR since 2015, and we believe this will continue. This will be largely driven by the sale of media rights to companies such as Twitch, a game streaming platform with 100m users that was bought by Amazon in 2014 for USD842m. Other companies buying media rights include Facebook and Disney. Additionally, there has been an expansion in companies creating and selling esports content, such as Time Warner, Modern Times Group and Alibaba. Furthermore, sponsorship deals are growing rapidly, with more than 600 new deals between 2016 to mid-2017 from brands such as Mercedes and Visa, which are eager to reach the millennial esports demographic. ● Catalyst avalanche: Due to its popularity in Asia, esports will now be an official event at the 2022 Asian Games, with a strong possibility for it to become an Olympic sport in 2024. As a result, Japan, the sleeping esports giant, is reconsidering its regulations so that it, too, can compete on the world stage and become the next great esports nation. Additionally, a range of companies now want to make their brands synonymous with the esports movement, with Russian internet company Mail.Ru purchasing an esports team for USD100m and telecoms company Telefónica building an esports centre for its seven teams. ● Sector impact: Gaming companies that are able to create successful esports will be the greatest beneficiaries of the trend. This is because they own the games and will therefore be in the best position to monetise the esports ecosystems. Esports will also boost the economic value of their games by driving user engagement. Meanwhile, esports will drive demand for the gaming products of PC hardware companies and tech giants will benefit as esports broadcasting will strengthen their ecosystems. Telcos will benefit to some extent as esports generates demand for high-speed internet, but media companies will likely be losers in the long run as TV will not be the primary medium for esports viewing. Finally, gambling companies will also potentially benefit as demand for esports betting grows. ● Gaming companies: Tencent (n/r), Activision Blizzard (n/r), Ubisoft (Buy), Take Two (n/r), Keywords Studios (Buy), Sea (n/r). ● Tech giants: Amazon (n/r), Facebook (n/r), Alphabet (n/r), Alibaba (n/r). ● Media companies: Time Warner (n/r), Modern Times Group (n/r), Disney (n/r). ● PC hardware companies: Intel (n/r), Nvidia (n/r), Razer (n/r), Logitech(n/r).

● Other: Telefónica (Buy), Madison Square Garden (n/r), William Hill (Hold). 31 January 2018

Oyvind Bjerke Robert Berg Nick Anderson Chris Armstrong Analyst Analyst Analyst Specialist Sales +44 20 3753 3082 +44 20 3465 2680 +44 20 3207 7838 +44 20 3207 7809 [email protected] [email protected] [email protected] [email protected]

Berenberg Thematics

Executive summary

Explosive growth in viewership In recent years, growth in esports viewership has been extremely rapid. In 2017, it was estimated that there were 385m esports viewers and we expect this to grow to 850m by 2025. Although there are many factors that are contributing to this growth, the core reason is clear. Currently, there are c2.2bn gamers globally, and many of the games played are competitive in nature. And just as with traditional sports, where people enjoy watching the best teams compete, support their favourite team and want to be part of a community, these same human instincts apply to esports. And just as with sports, when there are large and passionate audiences there are also significant commercial opportunities.

Figure 1: Rapid esports viewership growth – 850m viewers by 2025

900 850 Casuals Enthusiasts 800 10% CAGR 700 425 600 24% CAGR 500 385 400 Viewers Viewers Viewers Viewers (millions) (millions)

(millions) (millions) 323 300 235 194 204 161 425 200 115 114 100 162 191 90 120 0 2014 2015 2016 2017 2025E Source: Newzoo , Berenberg estimates

Figure 2: League of Legends World Championship 2014 – Seoul, South Korea (it’s real)

Source: https://euw.leagueoflegends.com/sites/default/files/styles/scale_xlarge/public/upload/photo -1_0.jpg?itok=xCcRr97F

5 Berenberg Thematics

Esports: people watching other people play video games Just like people enjoy watching professionals play football, people enjoy watching professionals play esports. Just like with football, two teams compete to win a match. Just like with football, you can watch the matches on TV, online or in a stadium (on large screens). And just like with football, there are commentators analysing the match and there are fans cheering on their favourite teams. The only real difference is, it is an electronic sport, an esport. “The finale in Beijing in early November attracted over 60m unique viewers, placing it among the most-watched live sports events of any kind this year in China.” James Gordon Mitchell, chief strategy officer, Tencent (Q3 2017 earnings call)

Figure 3: League of Legends World Championship – 2017, Beijing, China a) Fans watching the match on the screen b) Commentators

Source: http://www.lolesports.com , https://www.flickr.com/photos/lolesports/

6 Berenberg Thematics

Esports: a USD20bn market by 2025 Despite its audience size, esports is currently only a cUSD0.7bn market, a tiny fraction compared to the sports industry. However, we believe esports will be able to generate cUSD20bn in annual revenues by 2025, a significant leap. This growth will not only be driven by an expanding audience, but also by monetising esports fans more efficiently. At present, an esports fan only generates USD1.8 annually, compared to USD54 in sports, so there is large upside potential. A large portion of new revenues will come from the sale of media rights for esports content, as there is currently a surge of companies creating new esports content such as Time Warner and Alibaba as well as a significant rise in companies buying esports content, such as Facebook, Disney and the BBC. Additionally, there has been an ignition of interest from sponsors to become involved in esports. Both broadcasters and sponsors are also particularly attracted to the esports demographic due to its high concentration of millennials, which are hard to reach through other mediums. Altogether, these drivers will allow esports to close the monetisation gap with sports.

Figure 4: Bear, base and bull-case scenario for esports revenues in 2025

Source: Deloitte, company reports, Newzoo, howmuch, Berenberg estimates Note: For sports leagues, the given year is for the season end

Figure 5: Global revenue per fan per annum – large upside Figure 6: USD20bn revenue by sources – 2025 base case

60 54 50 40 36 Media rights USD6.1bn 30 24 Sponsorship 20 USD11.1bn Merchandise, 10 6 USD3.0bn tickets, other RevenueRevenue perper fanfan (USD) (USD) RevenueRevenue perper fanfan (USD) (USD) 1.8 0 2017 2017 2025E 2025E 2025E Sports Esports Esports Esports Esports Bear case Base case Bull case

Source: Newzoo, Berenberg estimates Source: Berenberg estimates

Figure 7: Esports economy forecast for 2025 – bear, base and bull case

Revenue, Revenue per fan, Fans Fans CAGR Hours viewed per Hours viewed per annual annual fan, annual fan CAGR (USDbn) (USD) (millions) (%) (%) Bear case 3 6 500 3 28 3 Base case 20 24 850 10 46 10 Bull case 40 36 1100 14 61 14 Source: Berenberg estimates

7 Berenberg Thematics

Due to the attractiveness of marketing through esports, the industry is already seeing significant growth in brand investment. This growth is originating from both longstanding esports sponsors such as Intel and Logitech, as well as new entrants such as Audi and Gillette. “The percentage [of Intel’s marketing budget] that we’re investing into esports is growing as part of our portfolio – it’s becoming a significant item.” John Bonini, vice president of esports and gaming, Intel (5 November 2017) “High-profile sponsor Audi received more than a 10x return on sponsorship exposure during the Eleague Finals and DreamHack Las Vegas earlier this year.” Nielsen (17 August 2017) “The esports audience includes some of the hardest to reach and most sought-after demographics for marketers and advertisers, with the share of millennials two to three times higher than any of the big four US sports.” Robert Kotick, CEO, Activision Blizzard (Q1 2017 earnings call)

Figure 8: Timeline of notable esport brand investments – growing commercial interest

Source: Berenberg research

8 Berenberg Thematics

Esports sector beneficiaries We believe there will be several sectors that will benefit from the esports trend and we think there are certain companies who are better positioned than others. ● Gaming companies: very well positioned due to marketing and monetisation opportunities from esports. ● PC hardware companies: well positioned as esports is a catalyst for their products. ● Tech giants: well positioned to leverage their platforms for esports broadcasting. ● Media companies: not very well positioned as TV is not the primary medium for esports consumption. ● Telcos: marginally well positioned due to esports generating demand for high-speed internet. ● Gambling companies: well positioned as esports betting creates incremental demand.

Figure 9: Esports exposure for different companies

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Esports revenue source(s) LTM importance strength esports revenues Video gaming Activision Blizzard 48 7.0 events Keywords 1.3 0.13 events Sea 4.4 0.37 broadcasting, events Tencent 493 32 broadcasting, events Ubisoft 8.6 1.8 events Tech giants Alibaba 441 29 events Alphabet 729 104 broadcasting Amazon 564 161 broadcasting Facebook 513 36 broadcasting Media Disney 162 55 broadcasting, teams Gfinity 0.07 0.003 events Modern Time Group 2.8 2.0 broadcasting, events Time Warner 71 31 broadcasting, events PC hardware Intel 216 62 Logitech 5.8 2.3 Nvidia 117 9.0 events Razer 4.5 0.4 team Gambling Paddy Power Betfair 10.1 2.1 William Hill 3.7 2.1 Others Madison Square Garden 5.0 1.4 events, team Telefónica 51 58 broadcasting, events, teams

Key: positioning strength Key: direct revenues strong all good material good potential small neutral immaterial weak none Source: Bloomberg, FactSet, Berenberg research

9 Berenberg Thematics

Gaming companies ––– greatest beneficiaries of esports Gaming companies that can create successful esports will be the greatest beneficiaries of the esports trend for two reasons. The first is that esports helps drive user engagement and extends longevity of games, thus increasing the games economic value. As has been seen over the past years, gaming companies are changing their strategy; they are moving away from the “day one game”-type business model, where all the revenues are generated very early on when the game is newly released, to a “live game” model where the game is monetised over time. However, in order to do this effectively, the gaming companies need to keep the gamers engaged, and this is where esports has played a central role. Esports fosters a strong community and makes the players more emotionally invested in the game, which helps retain and grow game users. The second reason we believe that the gaming companies will be the greatest beneficiaries of esports is because they essentially control the economics of the esports ecosystem. If esports becomes a USD20bn market by 2025, most of that revenue will go towards the top line of the gaming companies, representing c10% of global video gaming revenues. For dominant esports companies such as Tencent, this could be materially higher. And although there will be significant costs in terms of paying teams and players, this could still potentially be a very high-margin business.

Figure 10: Old “day one game” business model – activity declines Figure 11: New “live game” business model – activity grows

Source: Ubisoft Source: Ubisoft , Rainbow Six

Figure 12: League of Legends ’ growing player base and viewers for the World Championship finals

120 Active players Unique finals viewers 100 100

80 67 60 60 People People People People 43 (millions) (millions) (millions) (millions) 36 40 32 27 32 20 12 8 1.6 0 2011 2012 2013 2014 2015 2016 2017

Source: Riot Games, company reports

10 Berenberg Thematics

PC hardware companies ––– riding the esports trend “75% of new [GeForce] purchases in emerging markets in China are motivated by esports. In developed markets, it’s about 55%. The combination of new gamers coming into esports, the motivation to buy GPUs is really a key driver of our business.” Jeffrey D. Fisher, senior vice president, GeForce, Nvidia (10 May 2017) We also think the PC hardware companies are generally well positioned to benefit from esports. First, esports provides an excellent avenue for them to advertise their goods, as the audience are gamers, their key demographic. Second, as esports is likely to grow not only the gaming industry, but also elevate the importance of gaming on a personal and cultural level (East Asia), it should also increase what gamers are willing to spend on hardware equipment. With regards to which company will benefit the most from the trend, we believe this will be Nvidia, as it dominates the graphics processing unit (GPU) market, the most important gaming component. However, although we think esports is a tailwind for the hardware companies in general, the rise of mobile gaming and mobile esports may provide some headwinds in the future.

Figure 13: Nvidia’s gaming hardware revenues growing

5 100% USDbn (lhs) % (rhs) 4 80%

3 60%

2 40% ofof total total revenue revenue (%) (%) 1 20% ofof total total revenue revenue (%) (%) GamingGaming revenue revenue shareshare GamingGaming revenue revenue shareshare GamingGaming revenue revenue (USDbn) (USDbn) GamingGaming revenue revenue (USDbn) (USDbn) 0 0% 2014 2015 2016 2017 Note: January fiscal year end Source: Bloomberg, company reports

Tech giants ––– leveraging esports to strengthen their ecosystems We believe the tech giants are well positioned to benefit from the esports trend. This is because their online broadcasting platforms, in our view, provide the natural environment to consume esports content. Esports is not only beneficial in terms of monetising viewership, but it also helps the companies solidify and expand their ecosystems. Amazon for instance, which bought the game streaming platform Twitch with 100m monthly users, is providing incentives for Twitch users to become Amazon Prime subscribers. Amazon is also using Twitch to advertise its goods and services. However, given the relative size of the tech giants, we do not think this is a game-changer for them in the short to medium term. With regards to potential weaknesses for the western tech giants, we think they will struggle to get a foothold in China, which is, in our view, the most important esports market.

Media companies ––– trying to stay relevant Due to our belief that online broadcasting, rather than TV, will be the primary viewing medium for esports, we do not think the media companies are generally well positioned to benefit from esports in the long run. However, there are several media companies such as Modern Times Group and Time Warner that are actively pursuing the esports content creation business by running esports leagues and hosting esports events. Although we believe these business models have merit, we only have a marginally positive view on them overall. This is because they are extremely dependent on the gaming companies that hold the majority of the bargaining power in the esports ecosystem, thus limiting future profit margins.

11 Berenberg Thematics

Telcos ––– a gentle tailwind from esports Although we do not think telcos will be a significant beneficiary of esports, we believe it could help boost demand for their high-speed internet services. This is because playing esports games and streaming live esports usually requires good latency and bandwidth. Additionally, esports also presents a potential marketing opportunity and several telcos are already investing in teams and sponsoring esports events in order to make their brands synonymous with the movement. Although the South Koreans, the pioneers of esports, have seen their telcos successfully market through esports for nearly two decades, it is has only been in the past couple of years that the major international telcos have started to pursue this opportunity, with Telefónica being particularly active.

Gambling companies ––– esports growing the pie “The bookies have certainly seen a growth since they first started betting on the sport, with William Hill reporting that turnover on the sport has grown over 500% since it was first offered in 2015.” William Hill, press release (19 April 2017) We generally view the esports trend as positive for the gambling industry. Over the past few years, growth in esports betting has been extremely high and the amount of bookmakers offering esports betting has roughly been doubling annually. We think this strong growth will continue as esports betting will continue to unlock new revenue streams from gamers who did not previously gamble. However, we expect it will take at least five years before esports betting will make a meaningful impact on revenues. Therefore, despite the fact that the publically listed gambling companies such as William Hill and Paddy Power are still laggards in this space compared to the private companies, there is still plenty of time for them to become more involved.

Figure 14: Pinnacle forecasted total bets to double in 2017

Source: https://www.legalsportsreport.com/13132/esports -betting -and - audience-growth-2020/

12 Berenberg Thematics

The rise of esports

● Esports viewership have been growing rapidly (24% CAGR, 2014-17) and reached 385m viewers in 2017. This has been driven by a variety of factors, which includes increased popularity of video games and greater internet penetration, as well as game developers and third parties actively promoting esports events. ● South Korea was the first nation where esports entered mainstream. China is the fastest-growing esports market and the largest. Growth is more gradual in the West. ● Due to esports’ popularity in East Asia, esports will be an official medal event at the Asian Games in 2022. There are also preliminary discussions about esports becoming an Olympic event.

What are esports? Esports, which is short for electronic sports, are multiplayer video games played competitively for spectators, who can watch either in person, online or on TV, just as with regular sports. Esports are typically played on computers, smartphones or consoles such as Xbox or PlayStation. Just as with regular sports, there are a wide variety of esports. Two of the most popular esports are League of Legends and Dota 2 , which are fantasy multiplayer online battle arena (MOBA) games. Other esports include strategy games, such as Starcraft 2 and Warcraft 3, first-person shooter games, such as Overwatch and Counter-Strike , and sports games, such as FIFA 18 and NBA 2K18 . Esports viewership – 385m viewers Esport viewership has grown rapidly over recent years. Between 2014 and 2017, viewership was estimated to have had a CAGR of c24% and reach an estimated size of 385m, according to the market intelligence provider Newzoo. Roughly half of these viewers are considered enthusiasts, and the other half are considered casual viewers.

Figure 15: Esports viewership estimated to grow to 589m by 2020

700 Casuals Enthusiasts 15% CAGR 589 600

500 24% CAGR 385 303 400 323 300 Viewers Viewers Viewers Viewers 194

(millions) (millions) 235 (millions) (millions) 204 161 200 115 114 286 100 162 191 90 120 0 2014 2015 2016 2017E 2020E

Source: Newzoo

Drivers of esports growth There are several factors that have contributed to the growth of esports viewership. A key factor is that video gaming has become extremely popular, with an estimated 2.2bn gamers globally in 2017. And just as people enjoy watching professional sports that they themselves participate in or have participated in, people enjoy watching professional esports that they themselves play. Additionally, gaming companies such as Tencent and third parties such as the Electronic Sports League (ESL) have been actively promoting and hosting esports events, which have attracted growing audiences that commonly fill up sports stadiums and attract millions of online viewers. Substantial growth in prize money

13 Berenberg Thematics

has also helped raise the profile of esports, reaching a total of USD93.3m for 2016, as shown in Figure 18. Additionally, in 2017 a single esports tournament had a record prize pool of USD25m, which is comparable to the FA Cup at GBP15m.1 Another factor that has accelerated esports growth is the increasing reach of the internet and improvements in internet speed. Furthermore, the rise of video game streaming websites such as Twitch has been crucial as they have provided a platform to broadcast esports to the masses.

Figure 16: Gamers by region Q2 2017 – 2.2bn video gamers Figure 17: Game revenue by region 2016 – USD100bn globally globally

Eastern Western Eastern Europe Europe Europe 155m USD17bn USD3bn Western Europe South 188m Asia Pacific America South USD47bn Asia Pacific USD4bn America 1145m 206m North North America America 180m Middle East USD25bn Middle East and Africa and Africa 336m USD3bn

Source: Newzoo Source: Newzoo

Figure 18: Growth in esports prize money driving interest

100 93 90 80 70 61 60 50 36 (USDm) (USDm) (USDm) (USDm) 40 PrizePrize money money PrizePrize money money 30 20 20 13 10 10 4 5 0 2009 2010 2011 2012 2013 2014 2015 2016

Source: Newzoo

South Korea – the esports epicentre South Korea is generally considered to be the birthplace of esports. Although it is hard to pinpoint exactly when the esports movement began, it appears to have accelerated significantly around the year 2000. This acceleration was driven largely by the investment of broadband across the country, which was part of the government’s initiative of developing IT infrastructure in order to recover from the Asian financial crisis.2 Additionally, the government set up institutions such as the Korea e-Sports Association in 2000, aimed to regulate and promote esports, and it is still active to this day.

1 http://www.thefa.com/competitions/thefacup/more/prize-fund 2 Yun, K., Lee, H. and Lim, S.H., 2002. The growth of broadband Internet connections in South Korea: Contributing factors. Asia-Pacific Research Center, Stanford Institute for International Studies

14 Berenberg Thematics

Figure 19: South Korea’s rapid internet penetration expansion Figure 20: South Korea’s early broadband penetration

Household broadband penetration, FebFeb----2001 (%)(%)(%) 0.0 20.0 40.0 60.0 80.0 60 South Korea 57.3 50 United States 11.1 Hong Kong 8.1 40 Singapore 7.1 30 Taiwan 6.2 (%) (%) (%) (%) France 6.0 20 Denmark 5.8 10 Germany 5.0 InternetInternet users users inin the the population population InternetInternet users users inin the the population population Spain 3.1 0 United Kingdom 3.1 China 0.4

Note: Excludes children under 8 years old Source: Yun, K., Lee, H. and Lim, S.H., 2002, Stanford Source: Yun, K., Lee, H. and Lim, S.H., 2002 , Stanford

Figure 21: Broadband internet subscriptions per 100 inhabitants

45 South Korea United Kingdom United States OECD Japan 40

35

30

25

20

15 (per(per 100 100 inhabitants) inhabitants) (per(per 100 100 inhabitants) inhabitants) 10 FixedFixed line line broadband broadbandsubscriptions subscriptions FixedFixed line line broadband broadbandsubscriptions subscriptions 5

0

Source: OECD

Figure 22: High-speed fibre broadband versus total broadband

2016 Fibre broadband (%)(%)(%) 0 20 40 60 80 Japan 75 South Korea 74 Sweden 55 Spain 35 Denmark 26 OECD 21 Australia 19 United States 11 France 8 Germany 2

Source: OECD

15 Berenberg Thematics

Currently, South Korea is the most developed esports nation and is traditionally home to most of the top gaming talent. South Koreans, particularly the younger generation, spend much of their leisure time playing together at internet cafés, known as PC bangs, which are extremely widespread in the country. Esports have become ingrained in their culture and a platform for socialising. The social gaming culture is also believed to be one of the reasons that South Koreans have excelled at esports, as this allows them to more easily learn from one another. Esports are also frequently televised in South Korea and there are several channels purely dedicated to them. Although esports have now become part of the mainstream in South Korea, it still divides the generations, as elders worry about the impact of gaming on their children’s education, as well as addiction issues. One study in 2010 found that 8% of the population aged between nine and 39 were addicted to the internet. 3 In response to these concerns, the government rolled out several initiatives such as the Shutdown Law, also known as the Cinderella Law. This was introduced in 2011 and bans children under the age of 16 from playing between midnight and 6am, as well as shutting off their access to online games at these times. South Korea is a good case study to see how fast esports can potentially spread within a nation once there is political support and a strong internet infrastructure. However, other factors such as culture and economics have also likely had a role, too. In China for instance, government support for esports has appeared more moderate compared to South Korea, yet its esports growth has been explosive. China – 180m video game viewers In recent years, China has become the leading source of esports viewers. Market research firm IHS estimated that China accounted for 57% of global esports hours viewed in 2016. 4 The China Internet Network Information Center (CNNIC) found that by Q2 2017, game streaming viewers had grown to 180m, from 117m the previous year. This represents a 54% yoy growth and has outpaced the growth of other media content such as traditional sports.

Figure 23: China’s live streaming viewers – video game streaming grew yoy by 54% to 180m

200 Jun-16 Dec-16 Jun-17 180 160 140 120 100 ViewersViewers ViewersViewers (millions) (millions) (millions) (millions) 80 60 40 20 0 Video gaming Host shows Sports Concerts

Source: CNNIC

There are several factors that have driven this trend. One is improved economic conditions allowing more people to afford the equipment to play online video games. And with more people playing video games, the more likely it is that they also become interested in watching video games, too. Additionally, China’s internet penetration has grown dramatically, which now reaches more than half the population with 751m internet users by Q2 2017. Furthermore, there have been significant improvements in internet speed providing additional gaming options and the possibility to stream esports online.

3 http://edition.cnn.com/2011/11/22/world/asia/south-korea-gaming 4 http://news.ihsmarkit.com/press-release/technology/global-market-esports-video-booming- china-leading-way-ihs-markit-reports

16 Berenberg Thematics

“To put some colour around these trends, increasingly fast broadband speeds are enabling more PC gamers to enjoy real-time player versus player games such as League of Legends .” James Gordon Mitchell, chief strategy officer, Tencent (Q3 2016 earnings call)

Figure 24: China reached 751m internet population in June 2017

1600 Population Internet users 1400 1200 1000 800 People People People People (millions) (millions) (millions) (millions) 600 400 200 0 Dec-00 Dec-04 Dec-08 Dec-12 Dec-16

Source: CNNIC, World Bank, Internet World Stats

Figure 25: China has the world’s largest internet population – 2017

People (millions) 0 500 1000 1500

China 751 India 462 United States 287 Brazil Population Internet users 139 Indonesia 133 Japan 118 Russia 110 Nigeria 92 Bangladesh 73 Mexico 73 Germany 72 United Kingdom 62 Philippines 58 Iran 57 France 56 Italy 52 Vietnam 51 South Korea 47 Turkey 47 Thailand 41

Note: estimated year-end 2017 population Source: CNNIC, World Bank, Internet World Stats

17 Berenberg Thematics

Figure 26: 507m gamers in H1 2017 Figure 27: 422m online gamers by June 2017

600 500 Online gamers Mobile online gamers Gamers Mobile gamers 417 422 500 391 391 400 400 385 300 352 300 302 279 Gamers Gamers Gamers Gamers Gamers Gamers

Gamers Gamers 200 (millions) (millions) (millions) (millions) (millions) (millions)

200 (millions) (millions) 100 100

0 0 Dec-15 Jun-16 Dec-16 Jun-17

Source: GPC, CNG, IDC , CGICG Source: CNNI C

The proliferation of smartphones also appears to have had a meaningful impact on the amount of gamers as it has made gaming more accessible to the masses. In H1 2017, there were an estimated 385m online mobile gamers in China. One of the most popular titles has been Honor of Kings (also known as King of Glory ), which was released in Q3 2015 by Tencent and had more than 200m registered users by the end of 2016 and 50m daily active users according to the company. In July 2017, the South China Morning Post (SCMP ) reported that daily active users had grown to 80m.5

Figure 28: Honor of Kings daily user growth

100

80 80 60 50 40 (millions) (millions) (millions) (millions) 40 DailyDaily users users DailyDaily users users 30 20

0 Jun-16 Oct-16 Feb-17 Jun-17

Source: Company reports, SCMP

A likely reason that Honor of Kings has experienced such extreme growth is that it is very similar to the popular PC game League of Legends . Another catalyst is that Honor of Kings is merged with social media as players log in to the game via the messaging services WeChat, Weixin or QQ, where WeChat and Weixin had more than 980m active monthly users as of October 2017. Additionally, friends can see each other’s game rank through the messaging services, creating a form of peer pressure to be successful in the game. 6 The game is therefore having a significant and growing social impact for a wide range of demographics, from young children to company executives. “Now that the summer holiday is here, I think my son can play it for a while, otherwise he won’t be able to join in the conversation with his peers. “He can play together with his friends and see each other’s ranking in the game. It’s a kind of group communication and that’s quite absent in the kids’ life nowadays.” Wu Lin, mother of a nine-year-old, interviewee, SCMP (9 July 2017)

5http://www.scmp.com/business/china-business/article/2101210/tencent-loses-us175-billion- market-value-after-peoples-daily 6http://www.scmp.com/week-asia/business/article/2101498/how-tencent-blurred-lines-gaming- social-networking-honour-kings

18 Berenberg Thematics

“Since your ranking is visible to your friends, it has created a sense of competition. “You don’t want to make others feel that you are not as good as them.” Zhao Lei, interviewee, SCMP (10 July 2017) “In a place where 60 or 70% of students play Honour of Kings , how can you make friends without playing?” Xuan Xiaoye, high school student, interviewee, SCMP (9 July 2017) “Half of my former high school’s male classmates play it. We call each other to form a team on WeChat to play the game side by side.” Bruno Zhao, lawyer, interviewee, SCMP (9 July 2017) “Honour of Kings is so popular in China. If you can’t play it well, others laugh at you.” Wang Jin, CEO of coaching start-up, interviewee, SCMP (10 July 2017) “My ranking is low, making me lose face in my company. Thus I hired a proxy player.” Marketing executive, interviewee, SCMP (9 July 2017) “The sellside tries a lot of ways to please clients nowadays. “If you play the game well, and help your clients get to a higher level, that’s good for your relationships and may be helpful for deals.” Alex Shi, stock analyst, interviewee, Financial Times (3 October 2017) Industry experts also claim that another driver for the proliferation of gaming in China is due to cities often being heavily polluted and that there is a general lack of outside activities. This, therefore, drives people to spend more time indoors gaming. Additionally, many workers have long commutes, so mobile gaming can help pass the time.

Figure 29: Gamers’ leisure time spent on gaming and esports – May 2016

16 15 14 12 12 11 11 10 10 9 8 8 (%) (%) (%) (%) 6 4 2 GamingGaming and and esports esports leisure leisure time time GamingGaming and and esports esports leisure leisure time time 0 Germany United France Mexico United Brazil China Kingdom States

Source: Statista

Internet cafés are also prevalent in China. According to Niko Partners, there were 146,000 internet cafés in China by the end of 2015, and the number is growing. As with South Korea, spending time at an internet café has become a social activity where people can play video games and watch esports together. This is similar to people in the West going to pubs with friends to watch football. “I come here to play League of Legends . The culture here is like a family.” 7 David Wei, internet café customer, interviewee, The Knockturnal (23 June 2016)

7 https://theknockturnal.com/inside-world-shanghai-gaming-bars/

19 Berenberg Thematics

“We are witnessing a resurgence in the use of internet cafés in China because of demand for a social setting to play team-based games such as League of Legends and the desire to watch professional live or televised esports tournaments alongside other gamers.” Lisa Cosmas Hanson, managing partner, Niko Partners (3 May 2016)

Figure 30: High-end Chinese internet café, Wolfz – owned by Taiwanese pop star Jay Chou

Source: http://mashable.com/2017/04/13/jay -chou -wolfz -internet -cafe/#tOun2GT33Oqn

In many ways, China is following in South Korea’s footsteps when it comes to the development of the video gaming and the esports industry. This also includes some of the more negative consequences of the industry, too, such as gaming addiction, which now receives considerable media attention. The Chinese government has responded by rolling out programmes to combat the issue, such as treatment centres and addiction boot camps (Jae Sik Ha, 2016). Additionally, according to a report by Reuters, after the Chinese state- owned media outlet called Honor of Kings “poison”, Tencent took action by limiting the amount of game time children could play. Users below the age of 12 can now play a maximum of one hour a day and cannot login after 9pm. Users between 12 and 18 years old can only play a maximum of two hours a day. 8 “There are no rules to prevent indulgence in mobile games in China, but we decided to be the first to try to dispel parental worries by limiting play time and forcing children to log off.” Tencent, Reuters (2 July 2017) North America and Europe – esports growing steadily North America and Europe have also seen a rise in esports viewers over the past years. Newzoo estimated that by Q2 2017 there were 50m viewers in the US and 69m in Europe, where they have had a 21% and 35% CAGR, respectively, since 2014. Just under half of these viewers were considered esports enthusiasts. Although esports are generally watched online through streaming sites such as Twitch, they are also being broadcast on TV from traditional broadcasters such as ESPN and BBC. However, compared to East Asia, esports viewership in North American and Europe is relatively small, accounting often for less than 10% of global viewership for major events.

8 http://uk.reuters.com/article/us-tencent-games-idUKKBN19O0K0

20 Berenberg Thematics

Figure 31: North American and Europe’s rapid esport growth

40 2014 2017

30

20 (millions) (millions) (millions) (millions) 10 EsportEsport enthusiasts enthusiasts EsportEsport enthusiasts enthusiasts

0 North America Europe Source: Newzoo, Berenberg estimates

Although esports is not yet considered part of mainstream in the West, it is slowly seeping into society through different channels. For instance, esports is starting to emerge in different areas of education, with York University now offering esports classes, Staffordshire University offering an esports degree and Columbia College offering esports scholarships. 9 There are also rising regulatory concerns about esports, and the European Union included a discussion of esports in its EU Sport Forum 2017 report. 10 It was also the topic of an EU Parliamentary discussion titled “Esports in Europe: What Policy Response?”, where industry experts educated members of parliament on esports.11 “We had the chance to discover all the main actors involved in the sector. Although we didn’t reach a clear conclusion on whether it is a sport or not, we discovered a whole new business growing day by day which has no proper legal framework. We think it is positive that the sector has already established codes of conduct to prevent the risks involved in such activities.” The European Parliament’s Sports Intergroup (7 September 2017) Additionally, esports may be contributing to increased computer leisure time by young men in the US. See Appendix one for further details. Esports catalyst: Asian Games and Olympics – big in Japan? Due to the popularity of esports in Asia, it will now be an official medal event at the Asian Games 2022 in China. Alisports, which was established by the Chinese e-commerce giant Alibaba in 2015, will be a strategic partner for the event. The International Olympics Committee (IOC) is also considering whether esports should be included in the Olympics. See Appendix two for further details. The prospect of esports becoming an Olympic event is now acting as a potential catalyst for the esports industry. In Japan, for instance, despite being one of the largest video gaming nations by revenue, the esports scene has been extremely limited as it has been illegal for people to earn money from video gaming tournaments. However, Japan’s ruling party is now planning to make this legal in order to develop an esports scene so that the country can be a serious esports contender at the Olympics.12 This may potentially enable Japan to become one of the great esports nations in the future. “If esports becomes an Olympic medal sport, we must field a strong Japanese team.” Takeo Kawamura, Liberal Democratic Party of Japan, Bloomberg (18 January 2018)

9 http://www.columbiacougars.com/news/2015/10/30/GEN_1030152307.aspx 10 https://esportsobserver.com/esports-eu-parliament-discussion/ 11 https://ec.europa.eu/sport/sites/sport/files/eu-sport-forum-report_en.pdf 12 https://www.bloomberg.com/news/articles/2018-01-18/shinzo-abe-s-party-wants-japan-ready- for-video-games-in-olympics

21 Berenberg Thematics

Esports: driving gaming demand

“[Esports is] a significant investment that we’re not making money from. It’s an investment into the game, for our fans, just like we’d invest in any other feature within the game. It’s a worthwhile thing for us to do because it’s such a high- quality, engaging experience for our fans.” 13 Dustin Beck, VP of esports, Riot/Tencent (July 2013)

● Video gaming companies have primarily seen esports as a marketing expense in order to increase user engagement and extend the lifespan of their games. ● Tencent has been at the forefront of esports as it helps drive demand for its gaming business (31% CAGR, Q1 2014 to Q3 2017), and accounts for approximately half of its gross profit. ● Due to volatility in the professional esports scene, Tencent, as well as Activision Blizzard, are now introducing esports franchise models similar to traditional sports. This should help improve the stability of the esports scene and potentially make esports itself profitable.

Historically, esports were not driven by the video gaming companies, but rather by grassroot movements. The gaming companies themselves were initially not too concerned with esports as they did not see how it benefited them. However, gradually they started to realise that esports actually drove user engagement and the companies began to see esports as a crucial marketing tool to extend the lifespan of their games. Although several companies began to slowly increase their investment in esports, Tencent was the first company to truly seize the opportunity and invest in a structured format that has allowed esports to thrive. Tencent – the world’s largest video gaming company Tencent has grown at an extreme rate over the past years on most metrics and is now the world’s largest gaming company. The company’s share price has doubled over the past year, reaching a market capitalisation of USD493bn at the end of 2017 and making it one of the most valuable companies in the world. This growth has largely been driven by its online games such as League of Legends and more recently, Honor of Kings . From Figure 32 we can see that online games accounted for 41% of revenues in Q3 2017. We also estimate that online games accounts for roughly half of Tencent’s gross profit. Although Tencent does not disclose the gross margin of its online games segment, it does report the gross margin of value-added services (VAS) at c60%, which is a combination of about tw0-thirds online games and about one-third social networks, shown in Figure 33. We think it is reasonable to assume that the gross margin of c60% is representative for online games, seeing as competitors with similar business models, such as NetEase, have a similar gross margin for their online games business.

13 https://www.pcgamesn.com/leagueoflegends/lcs-significant-investment-we-re-not-making- money-riot-love-it-anyway

22 Berenberg Thematics

Figure 32: Tencent quarterly revenues by segments – 44% CAGR

70 Social networks Online games Online advertising Others 60 18%

17% 50 17% 15% 18% 40 15% 12% 14% 10% 19% 7% 18% 30 5% 18% 41% RevenueRevenue RevenueRevenue 19% 15% (RMB(RMB billions) billions) (RMB(RMB billions) billions) 42% 19% 46% 20 12% 17% 42% 10% 13% 45% 15% 10% 12% 48% 6% 52% 53% 54% 57% 59% 55% 10 56% 56% 57% 23% 24% 25% 23% 23% 25% 24% 24% 22% 23% 24% 25% 24% 23% 23% 0 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17

Source: Company reports

Figure 33: Tencent quarterly gross margin % by segments

80 VAS (online games + social networks) Online advertising Others 70

60

50

40 (%) (%) (%) (%)

30 GrossGross profit profit margin margin GrossGross profit profit margin margin 20

10

0 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17

Source: Company reports

Figure 34: Online games and social networks account for 80% of Tencent’s gross profit

35 VAS (online games + social networks) Online advertising Others

30 8%

8% 13% 25 7% 14% 6% 9% 16% 20 12% 14% 11% 17% 15 GrossGross profit profit GrossGross profit profit (RMB(RMB billions) billions) (RMB(RMB billions) billions) 15% 8% 18% 80% 8% 10% 8% 79% 10 84% 84% 78% 88% 84% 83% 91% 84% 5 94% 91% 85% 87% 82%

0 1Q 14 2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17

Source: Company reports

23 Berenberg Thematics

The ffreemiumreemium business model ––– skin in the game Most of Tencent’s major games are freemium games. A freemium game is where the game is free to play, but players have the option to buy virtual goods within the game. The sale of virtual goods is how the game generates most of its revenue, and has a very low cost to the gaming company as it does not require much resource to create a virtual item. One of the most popular virtual goods is skins, which are cosmetic features that people can buy in order to alter the appearance of the in-game champions that they play. Skins have no practical utility as they do not improve the strength of the weapons or champions. Examples of different skins are shown in Figure 35, where the champion skin on the left- hand side is the original starting skin and the other skins are ones that players can either purchase or earn through gameplay.

Figure 35: League of Legends skins for the champion Jarvan IV – left-hand side is the original skin

Source: https://dejvis96.deviantart.com/art/League -of -Legends -Jarvan -IV -405259335

As its gaming business is very profitable, Tencent is clearly incentivised to increase sales and keep games alive for as long as possible. One of the main ways Tencent does this is through esports, hence why it puts a lot of effort into creating leagues and tournaments. Tencent’s most popular esport, also the world’s most popular esport, is League of Legends .

League of Legends ––– 100m active players In 2006, Brandon Beck and Marc Merrill founded Riot Games (Riot), which later launched League of Legends in 2009. The game is a five versus five fantasy battle game where each player picks a different champion to play – examples are seen in Figure 36. A game usually lasts 30-45 minutes, with the game being won by destroying your opponents’ base. In order to reach the enemy’s base, players need to destroy towers and defeat monsters and opposing players.

Figure 36: League of Legends champions – each player can play one champion per game

Source: League of Legends

24 Berenberg Thematics

In 2011, Tencent acquired a majority stake in Riot, raising its total equity interest to 93%, at a total equity valuation of USD329m. In 2015, Tencent acquired the remaining shares. Over the years, the popularity of League of Legends has surged, reaching 100m active players per month in 2016.

Investing in esports “We believe that by tapping into this cultural phenomenon, we can: a) increase our mine share with game players; but, b) also deepen the engagement with the games and extend the longevity of the games. So that’s really the core reason for being involved in esports, along with the fact that we’re a gaming company and games are fun and esports can be great fun.” James Gordon Mitchell, chief strategy officer, Tencent (Q1 2016 earnings call) League of Legends had its inaugural World Championship event in Sweden in 2011. Over the years, Tencent drastically ramped up its esport investment and now runs esports leagues in multiple regions around the world, such as Europe, North America, South Korea and China. The top-performing teams from each region then compete at the World Championship once a year.

Figure 37: League of Legends ’ growing player base and viewers for the World Championship finals

120 Active players Unique finals viewers 100 100

80 67 60 60 People People People People 43 (millions) (millions) (millions) (millions) 36 40 32 27 32 20 12 8 1.6 0 2011 2012 2013 2014 2015 2016 2017

Source: Riot Games, company reports

25 Berenberg Thematics

2011 versus 2017 League of Legends World Championship ––– a lot can happen in six years “The finale in Beijing in early November attracted over 60m unique viewers, placing it among the most-watched live sports events of any kind this year in China.” James Gordon Mitchell, chief strategy officer, Tencent (Q3 2017 earnings call)

Figure 38: League of Legends World Championships – the first tournament in 2011 compared to the seventh in 2017 a) 2011, Jönköping , Sweden b) 2017, Beijing, China

Source: http://promo.lolesports.com/en_US/worlds/history#!/2011 , http://www.lolesports.com

26 Berenberg Thematics

Figure 39: Seventh League of Legends World Championship – 2017, Beijing, China

Source: https://www.flickr.com/photos/lolesports/

27 Berenberg Thematics

League of Legends franchise model Although League of Legends esports have been very successful, the professional gaming scene has proved to be quite volatile compared to sports. Volatility stems from issues such as relegation, as it means that teams and players can lose their league spots and income source after just one bad season. Entering into esports has therefore been a highly risky endeavour for team owners, sponsors, as well as players committing to an esports career. As a result of volatility issues, Riot is now introducing a franchise model to League of Legends . The aim of this initiative is to transition from the current “Wild Wild West” environment, to a more structured and stable model. The new model will give Riot more control over the teams and will emulate traditional sports structures such as the NBA. For Europe, the franchise model is expected to be implemented in 2019 and for China and North America the model will come into effect in 2018. 14 Although relatively little is known publically about the exact details of the new franchise model, Riot has disclosed some information about the economic structure and regulations for North America. In total, there will be 10 slots, with existing teams having to pay a flat entry fee of USD10m and new teams paying USD13m. Riot stated that the USD10m was a “steep discount” compared to the actual market value of a slot when future revenue streams that the teams will receive is taken into account. According to a press report by theScore esports , Riot had more than 100 applications for its North American league slots, which underlines the significant demand to enter esports. “We’re not looking to do a bidding process. We’re looking to establish a flat fee. That flat fee will be USD10m. The reason that we’re doing this in this way is we’re not optimising for the highest dollar. We’re not looking for mercenaries who can pay the highest price and therefore have the highest ability to extract dollars from our fans or our scene and get a return on that investment. What we want to do is use this process to find the right set of partners who are going to build this league with us.” Jarred Kennedy, co-head of esports, Riot (June 2017) In return for the entry fee, team owners and players will share revenues that the league generates, as shown in Figure 40. This includes revenues from things such as media deals and certain team-branded digital goods such as skins. However, this is a two-way street, as Riot will also want a portion of the revenue that teams generate from sources such as sponsorship or merchandise sales.

Figure 40: League revenue allocation

Riot Players 32.5% 35.0%

Team owners 32.5%

Source: League of Legends

Due to previous issues that made esports a very risky endeavour for team owners and players, Riot has also set up new regulations to ensure protection for teams and players. This should help resolve previous issues and increase the attractiveness of the esport industry. New regulations include the following. ● Relegation: The threshold for relegation will rise significantly, where teams will have to place last or second last in five out of eight seasons before being removed from the league. In the past, it has generally been quite risky to invest in a team due to the

14 https://eu.lolesports.com/en/articles/eu-lcs-in-2018-and-beyond

28 Berenberg Thematics

immediate threat of relegation. With this reduced threat, stakeholders can think more long term and invest for the future. ● Player salary: There will be a minimum salary cap of USD75k for players. This will make esports a less risky career path as the downside risk is minimised. This might in turn incentivise more players to aspire to become esport stars. ● Player support: Riot will ensure that teams give their players sufficient support, and the company is also setting up a players’ association, which is similar to a union, giving players more protection and representation. Additionally, Riot will support players with regards to a future career or higher education opportunities once their gaming career ends. All these changes will make esports a more attractive career opportunity. If the franchise model is successful in achieving its goals, Riot, and ultimately Tencent, can benefit in several ways. A more stable and thriving esports scene will allow pro players and teams to have increased longevity, which can help build up larger fan bases and viewership for the esports scene. A strong esports scene can also attract new players to the games and increase in-game user engagement, consequently boosting in-game revenues. Additionally, a franchise model can provide the stability and strength the esports scene requires for companies to be less sceptical about brand investment, unlocking new revenue streams. Therefore, esports, which has traditionally been a loss-making enterprise for game owners, could become a profitable business operation. Activision Blizzard – changing its esports outlook “Esports has become not only a catalyst for increased reach and engagement, but also a standalone opportunity.” Thomas Tippl, COO, Activision Blizzard (Q4 2016 earnings call) Over the years, Activision Blizzard has created several game franchises that were once prominent esports. 15 For example, the Starcraft franchise, which was initially released in 1998, was for a long time the leading esport. Although Activision Blizzard hosted a few esports tournaments from time to time, it was not very active in this space. Therefore, most of the esports events for its games were hosted by third parties. However, the company’s attitude has drastically changed over the more recent years and the company has become increasingly engaged within the esports scene, especially now that it sees the monetisation opportunity. For instance, in December 2015, it bought Major League Gaming (MLG), a third-party esports content provider which was founded in 2002 and has long been a pillar of the esports community. “Our acquisition of Major League Gaming’s business furthers our plans to create the ESPN of esports. MLG’s ability to create premium content and its proven broadcast technology platform – including its live streaming capabilities – strengthens our strategic position in competitive gaming.” Robert A. Kotick, CEO, Activision Blizzard (4 January 2016)

Overwatch LeagueLeague:: overhyped and underunder----watched?watched? Activision Blizzard’s most significant step into esports is its investment into the Overwatch League, based on Overwatch , a relatively new game that was launched in May 2016. Overwatch has been very successful in terms of sales, with 35m copies sold in just 1.5 years.

15 Even the origins of League of Legends stem from a game created in Activision Blizzard’s map editing software.

29 Berenberg Thematics

Figure 41: Overwatch account growth

40 35 30 25 20 (millions) (millions) (millions) (millions) 15 PlayerPlayer accounts accounts PlayerPlayer accounts accounts 10 5 0

Source: Twitter, c ompany reports

The Overwatch League will also have a franchise model similar to that of League of Legends , although there will be some meaningful differences. 16 One of the main differences is that teams will be city based, which is a deviation from regular esports where teams are formed on a national and continental basis. As each team represents a major global city, Activision Blizzard hopes that this will build local fan support, similar to what is done in sports. “Our ambition is to create nothing less than the esports equivalent of the world’s established major professional leagues. To this end, in 2017 we plan to start the process of selling teams and commercialising media rights for the Overwatch League.” Robert A. Kotick, CEO, Activision Blizzard (Q4 2016 earnings call) On 20 September 2017, the Overwatch League signed up its last three teams, bringing the total to 12 teams. Although not confirmed by the company, it was widely circulated that team slots cost up to USD20m, with the best city locations having the highest price. However, many of the established esports teams have decided not to join the Overwatch League and therefore many of the teams are owned by new esports organisations.

Overwatch viewership ––– the Achilles’ heel? “When it comes to esports, we feel Overwatch has huge potential. We put a lot of focus on the viewing experience and making sure the action is fun to watch. We designed the game with esports in mind and we have big plans in this area.” Michael Morhaime, CEO, Blizzard (Q1 2016 earnings call) “The top thing that we hear on the development team is that sometimes watching Overwatch esports can be very challenging to follow the action and know what’s going on. So, for the past few months, the Overwatch team has been extremely dedicated to working on a number of features to improve the viewing experience for all of us.” 17 Jeff Kaplan, head of development, Blizzard (October 2017) One of the main reasons for established esports teams deciding not to participate in the Overwatch League was due to the low viewership numbers. Although the game has been very popular to play, there has been significant criticism that it is difficult to watch as an esport because the pace is too quick and therefore the audiences are unable to follow the action. Having spoken to industry experts on whether viewership issues can be fixed, opinions have varied greatly. However, the consensus view is sceptical, as experts believe the viewership issues are too fundamental to be changed. If viewing issues are not fixed and viewership remains low, then owning an Overwatch team will unlikely to be profitable,

16 http://investor.activision.com/releasedetail.cfm?releaseid=1032873 17 https://esportsobserver.com/blizzard-overwatch-spectator-changes/

30 Berenberg Thematics

especially given a USD20m buy-in cost. It will also limit the monetisation opportunities for Activision Blizzard. However, Activison Blizzard is aware of the viewership issue and is working on remedies. Some of these fixes were unveiled at the Overwatch World Cup in November 2017, and there was an uptick in viewership numbers. This could have been due the new spectator changes, which have generally been well received. But one would also generally expect larger viewership at the main Overwatch event, especially as it is hosted in conjunction with BlizzCon, one of the biggest gaming conventions in the world. Additionally, fans could have simply been curious to see the new spectator changes. Therefore, it is premature to conclude that this is the beginning of a positive trend and more data is needed.

Figure 42: Overwatch viewers on Twitch – purple: peak viewers, green: average viewers

Source: https://sullygnome.com/game/Overwatch/365

Another potential viewership issue is that the Overwatch League is currently very heavily focused in the US, where nine out of the 12 teams reside. This might alienate global viewership, particularly China, which is one of the most important esports markets. However, in the future the Overwatch League could expand to include a more diversified group of teams.

31 Berenberg Thematics

Figure 43: Overwatch League city-based teams – heavily focused in North America, potentially losing global viewership

Source: The Esports Observer

Franchise exclusive team brands “We’ve seen that best practices in several major traditional sports leagues involve keeping team brands exclusive to the league the teams belong to, and we see the value to the league, teams and fans in following that precedent for this particular aspect of the Overwatch League.”18 Nate Nanzer, Blizzard, league commissioner, Sports Business Daily (August 2017) Another reason that several established esports teams decided not to participate in the Overwatch League is that it requires teams to have exclusive Overwatch team brands. This means that established esports organisations will not be able to use their original team name brands. From a game publisher’s perspective, there are several benefits to having exclusive team brands to the league. One such benefit is that it can reduce financial complications when it comes to league revenue sharing agreements. For instance, if a team-branded jersey is sold, and the team plays in both the League of Legends and Overwatch franchise, it can be difficult to establish which franchise should receive the revenue share. Although there are benefits with having exclusive team brands, it does mean teams will have to build up fan bases from scratch. For several established esports teams, this became the straw that broke the camel’s back.

18 http://www.sportsbusinessdaily.com/Daily/Issues/2017/08/25/Leagues-and-Governing- Bodies/Overwatch-League.aspx?hl=esports&sc=0

32 Berenberg Thematics

The NBA2k league – esports infancy The NBA, in partnership with the game publisher Take Two, is also starting its own esports league in 2018. The esport will be based on the game NBA2k , which is owned by Take Two, with 17 of the NBA’s 30 teams participating with their own esports teams. However, the game’s esports scene is still in its infancy, and whether or not an audience develops remains to be seen.

Figure 44: NBA announces its esports teams

Source: Twitter

33 Berenberg Thematics

Mobile esports: a catalyst for mobile gaming?

● Mobile gaming has had a surge in popularity in recent years, with revenue CAGR of 26% between 2014 and 2016. Due to the increased popularity and sophistication of mobile games, a mobile esports scene is developing for games such as Honor of Kings . ● As mobile esports is a very new trend with little data available, its potential impact is highly uncertain. However, it could potentially provide similar benefits as is seen for PC esports, extending the economics of the games.

In recent times, a mobile esports scene has also begun to emerge. This has been driven in part by the strong growth in mobile gaming, which includes both tablet and smartphone games. Growth in mobile gaming has been especially prominent in China, where research firms such as Newzoo estimated that mobile gaming revenues surpassed traditional gaming revenues in 2017.

Figure 45: Global games market revenue – mobile gaming revenues outgrowing other platforms

140 Boxed/downloaded PC Browser PC Console Tablet Smartphone 129129129 123123123 116116116 120 109109109 101101101 100 40% 35% 38% 32% 29% 80 10% 10% 10% 10% 10% Revenue Revenue (USDbn) (USDbn) Revenue Revenue (USDbn) (USDbn) 60

32% 31% 30% 28% 28% 40

5% 4% 4% 3% 3% 20 25% 23% 21% 20% 19% 0 2016 2017E 2018E 2019E 2020E Source: Newzoo

Figure 46: China’s growing mobile gaming industry

40

Mobile (smartphone + tablet) Other 33.7 35 32.0 29.9 30 27.5 12.4 24.6 25 12.5 21.2 12.7 12.9 20 18.0 Revenue Revenue (USDbn) (USDbn) Revenue Revenue (USDbn) (USDbn) 13.4 13.8 15 14.1 13.5 10 19.5 21.3 17.2 11.5 14.6 5 11.2 7.1 4.5 2.3 0 2013 2014 2015 2016 2017E 2018E 2019E 2020E Source: Newzoo

34 Berenberg Thematics

“Smartphone games grew by 54% year-on-year to approximately RMB14.8bn in revenue (including smartphone games revenue attributable to our social networks business) and exceeded PC client games revenue for the first time. Revenue growth in smartphone games was driven by existing titles such as Honor of Kings .” Tencent (Q2 2017 interim report) As mobile phones have gotten more powerful and internet speeds have improved, this has allowed for more sophisticated mobile games to develop that are capable of being esports. The best example of this is Honor of Kings , which is very similar, but a slightly simplified version of the PC game League of Legends . Honor of Kings now has a developed esports scene and is one of the most-watched games on Chinese streaming websites such as Douyu. Honor of Kings is also in the process of being rolled out internationally under the name Arena of Valor, and the game is already having success in Greater South East Asia (GSEA), where it is operated by the internet company Sea. “More than half of our Q3 gross billings came from mobile games. This is a new milestone. This will continue as smartphone use rises across the region. I’m proud that we co-developed our most important game, Arena of Valor . We did not just license it. Arena of Valor is based on Tencent’s Honor of Kings . We have localised it using our local market knowledge. Arena of Valor is also a big esports game in our region.” Forrest Li, chairman and CEO, Sea (Q3 2017 earnings call) There are several key developments that we think will be interesting to watch in this space. The first is if an esports scene for mobile games will help extend the game’s longevity, which we would presume it would. Another development is if Arena of Valor will be able to have the same success internationally as Honor of Kings did in China. If the game is able to achieve this, then Tencent’s extreme growth will be fuelled even further. Although we do think it is possible that Arena of Valor could become very popular internationally, the game will not enjoy the same ecosystem advantages that Honor of Kings did in China, where the game was merged with Tencent’s social media platforms. However, perhaps the fact that the game is a viable esport will help its popularity spread. The final development that is worth paying attention to is how mobile esports could affect PC esports. For Tencent in general, it has seen that its mobile games cannibalise the demand from its PC games, which could therefore presumably impact the PC esports scene, too. “Taking CrossFire as an example, since we introduced the mobile version of CrossFire in late 2015, we have seen some impact on our PC version daily active users (DAUs), but the total unique CrossFire DAUs combining PC and mobile are substantially higher than what we had for PC alone.” James Gordon Mitchell, chief strategy officer, Tencent (Q4 2016 earnings call) However, League of Legends seemed to be immune to cannibalisation, where Honor of Kings appeared to act rather as a “gateway game” instead. Analyst: “So, just wondering will Honor of Kings have some kind of cannibalisation effect for League of Legends in terms of active user engagement, game revenue, etc?” Chi Ping Lau, Tencent president: “Yeah, I think the two games actually cater to different kind of positioning. If you look at League of Legends , it’s actually catered to core gamers. And if you look at Honor of Kings , it’s actually an experience that’s catered to more casual players, and so far what we have found is the growth in Honor of Kings is accompanied by continued growth in League of Legends . So in some cases, users actually play Honor of Kings. When they get more and more hardcore, they can actually move over to League of Legends . So what we have seen is that they’re not really hurting each other. Tencent (Q4 2016 earnings call) Additionally, the viewership for the League of Legends World Championship final increased in November 2017 by 40% yoy, to a total of 60m unique views. So perhaps games that have a very strong esports ecosystem, such as League of Legends , are more immune to cannibalisation from their mobile games. However, we feel it is bit too early for bold

35 Berenberg Thematics

predictions for how mobile gaming and esports will affect traditional esports due to limited data. However, we do not believe mobile gaming will replace PC gaming completely as PC gaming still offers a more immersive gaming experience, hence PC games will continue to have an esports scene.

36 Berenberg Thematics

Esports economics: a USD20bn market by 2025

“To put the Overwatch League opportunity in context, around 240m people today watch approximately 7bn hours of NFL content annually. This drives USD12bn in revenues including more than USD6bn in media rights revenues. The NBA today has roughly 175m viewers watching around 2bn hours total with more than USD5bn in revenues and USD1.8bn of those from media rights. With hundreds of millions of people already watching esports and playing our games, over the long term our goal is to create opportunities that we believe could be of a similar scale.” Robert Kotick, CEO, Activision Blizzard (Q1 2017 earnings call)

● Esports revenues are currently quite small, with each fan generating USD1.8. This compares to traditional sports where each fan generates USD54. However, esports revenues are growing rapidly, at a 46% CAGR between 2015 and 2017, and we believe this will continue. ● New esports revenues are driven by new media deals as well as a surge in brand investment as waves of companies are entering the esports space, seeking to reach the millennial generation. ● We believe that by 2025, the esports industry could generate USD20bn annually and as much as USD40bn in a bull-case scenario. However, we still think it will take 10 to 20 years before esports reaches the size of traditional sports, as European football alone generated USD30bn in 2016.

Despite esports revenues having grown significantly over the past years, they still severely lag behind sports. Using figures from Newzoo, revenue per esports fan is c30 times lower than in sports. This discrepancy has been due to a number of factors, such as limited esports media content as well as a small amount of platforms that broadcast esports. Additionally, there has also been reluctance among companies to allocate capital towards brand investment in esports. However, this outlook has begun to change in recent years as the esports audience is now becoming too large and attractive to ignore. Esports versus sports – ballpark comparisons Newzoo estimated that global esports revenue was USD0.7bn for 2017 and has had a 46% CAGR. This is a strict definition of esports revenue that focuses on revenue generated directly by the esports leagues, similar to how sports clubs and leagues account for revenue. The majority of esports revenue, 74%, stems from media rights/advertisement and sponsorship, with the remaining revenue generated from merchandise, ticket sales and fees paid by the game publishers to subsidise events.

Figure 47: Global esports revenue growth

800 696 700

600 493 500

400 325 (USDm) (USDm) (USDm) (USDm) Revenue Revenue Revenue Revenue 300

200

100

0 2015 2016 2017E

Source: Newzoo

37 Berenberg Thematics

Figure 48: Esports revenue 2017 – USD696m Figure 49: Manchester United revenue 2016/17 – USD737m

Media Media rights USD116m rights/advertising USD285m USD246m Sponsorship Sponsorship USD64m USD251m Merchandise, Merchandise & tickets & other tickets USD206m USD266m Game publisher fees

Source: Newzoo Source: Company reports

Figure 50: Esports revenue dwarfed by the sports industry

35 30 30

25

20

15

Revenue Revenue 13 (USDbn) (USDbn) Revenue Revenue (USDbn) (USDbn) 9.5 10 4.8 4.8 5 3.7 0.7 0.7 0 European NFL football MLB baseball NBA Fifa World NHL hockey Manchester Esports football 2016 2016 basketball Cup 2016 United 2017 2016 2016 2014 2017 Source: Deloitte, c ompany reports, Berenberg research, Newzoo, howmuch Note: For sports leagues, the given year is for the season end

If we compare total esports revenue to sports revenue, it is currently quite small, c40 times smaller than European football and approximately the size of Manchester United. There are two main reasons for this. First, esports viewership is significantly lower than sports. League of Legends , for instance, had 60m unique viewers for its 2017 World Championship final. If we compare this to one of the most watched sporting events in the world, the football World Cup final, with 1bn unique viewers, it is quite small. 19 And although we appreciate that this is not a completely fair comparison, as the World Cup is held every four years and presumably brings in many non-frequent football viewers, it provides some context for the relative size of esports. If we compare US viewership of the NBA to the international viewership of League of Legends by peak concurrent final viewers in 2016, the NBA was still three times larger, at 44.5m compared to 14.7m for League of Legends .20 So by most metrics, individual esports leagues still have a large gap to close before they can compete in viewership with the major sports leagues. The other reason esports revenue is lower than sports revenue is because esports is significantly under-monetised. If we compare total esports viewership to the NFL US

19 1bn audience reach who watched over 1 minute. 0.7bn audience reach who watched over 20 consecutive minutes - http://www.fifa.com/worldcup/news/y=2015/m=12/news=2014-fifa-world- cuptm-reached-3-2-billion-viewers-one-billion-watched--2745519.html 20 https://www.nytimes.com/2016/06/21/business/media/game-7-of-nba-finals-draws-close-to-31- million-viewers.html?smid=tw-nytimes&smtyp=cur

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viewership, they both have approximately the same amount of hours viewed at c7bn hours. Yet esports revenues are only USD0.7bn where the NFL has USD13bn, 19 times larger. And although this comparison does not include NFL international viewership, it still demonstrates the significant difference in monetisation between sports and esports. Viewership growth We believe that esports revenues will begin to rapidly catch up to sports, and one of the main drivers will be growth in viewership, which will be driven by multiple factors, where each of these factors will also tend to compound one another. This includes: ● growing internet penetration; ● more games being geared towards esports; ● significant growth of companies creating esports leagues eg Time Warner (discussed further in following sections); and ● more companies such as the tech giants and media companies broadcasting esports on internet platforms and on TV eg Disney (discussed further in following sections). The expansion of esports content will not only grow viewership, but we also believe it will increase how much each fan watches esports. This is because esports content will become more accessible, aired more often and be available for games that previously had limited esports content. Although we do not think global viewership will catch up to sports any time soon, there are signs that it will eventually get there. A survey by Limelight Networks, a content delivery network service, found that video game viewing was the second most popular form of online content for males aged between 18 and 25, ahead of sports, as shown in Figure 51.21 The survey was conducted in June 2017 and data was collected from France, Germany, India, Philippines, Singapore, South Korea, the UK and the US.

Figure 51: Male online video viewing 2017– video gaming more watched than sports for ages 18 to 25

6 Age: 18-25 Age: all 5

4

3 ViewingViewing rank rank ViewingViewing rank rank 2 (6(6 = = highest,highest, 1 1 = = lowest) lowest) (6(6 = = highest,highest, 1 1 = = lowest) lowest) 1

0 Movies Video gaming TV Shows Sports User News generated content Source: Statista, Limelight Networks, Berenberg research

Although esports is a subcategory of video gaming content, the survey shows how popular video gaming viewing has become in the younger male generation. For the overall male population, however, video game viewing was the least popular. But if video-game viewing popularity remains strong with the younger male cohort as they age, then at some point overall online video-game viewing could surpass online sports viewership. As people’s time is also limited, they may also watch esports as a substitute for traditional sports, which would therefore disrupt the sports industry. However, we should note that this survey only provides suggestive evidence as it does not take into account TV viewing habits, and therefore may not give a holistic view on the demand for viewing sports compared to video gaming.

21 https://www.limelight.com/resources/white-paper/state-of-online-video-2017/

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Monetisation growth – reaching the millennials The other driver of esports revenues will be that of increased monetisation. Already we are seeing a surge of media deals and brand interest in esports, with more than 600 sponsorship agreements signed since the start of 2016 to mid-2017.22 Companies are interested in the esports market not only because it is growing, but Newzoo also found that esports enthusiasts tend to have relatively high incomes and rates of employment. Additionally, a relatively large portion of esports fans are millennials that are otherwise hard to reach as they consume less traditional media such as TV and radio.

Figure 52: 136m male esports enthusiasts in 2017 – 71% of total Figure 53: 55m female esports enthusiasts in 2017 – 29% of total

Age: 51-65 Age: 51-65 1% 3%

Age: 36-50 Age: 10-20 17% 28% Age: 36-50 Age: 10-20 24% 24%

Age: 21-35 Age: 21-35 48% 54%

Source: Newzoo Source: Newzoo

“The esports audience includes some of the hardest to reach and most sought-after demographics for marketers and advertisers, with the share of millennials two to three times higher than any of the big four US sports.” Robert Kotick, CEO, Activision Blizzard (Q1 2017 earnings call) “Because we are so much driven by investigating into where are the customers, where do they go, where do we meet them, and where can we best interact, we just recently announced two areas in which we will even more focus and enter in the future, [the first] is our newly and announced esports engagement. Why so? Esports is a very interesting area for us. It’s the fastest-growing sports area. It’s a very global setup, with hundreds of millions of people in various areas. Yes it’s in Asia, yes it’s in the US, but as well, there is a very good fan base growing up in the European markets where they interact, and where they engage themselves. They are young, they are 18 to 38 years old and they are very affluent, and they are very much interested in having as well a partner from the OEM side.” Britta Seeger, management board member, Mercedes/Daimler (11 September 2017)

Data catalyst One of the issues in the past that was holding back esports brand investment was that companies did not know their target audience due to a lack of data. Compared to TV where the content is generally more local, esports is generally global, making it harder to know the audience. However, esports teams and organisers have more recently improved their data gathering capabilities so that they can provide sponsors and advertisers with the information they require on which demographics they are potentially reaching. According to industry experts, this has also been one of the drivers for the recent explosion of companies starting to make esports brand investments.

22 https://www.forbes.com/sites/darrenheitner/2017/10/03/more-than-600-esports-sponsorships- secured-since-start-of-2016/#3437765375e5

40 Berenberg Thematics

Figure 54: Timeline of notable esports brand investments by companies

Source: Berenberg research

South Korean brands Among the earliest brands to delve into the industry were the Korean telecos: KT Corporation in 1999 and SK Telecom in 2004. This was a response to the domestic surge in popularity for esports at the time. Each of the major telecoms backed their respective teams, KT Rolster and SK Telecom T1, and there has been a fierce rivalry between the teams ever since. Today, these teams are still among the top esports teams, with SK Telecom T1 winning the 2013, 2015 and 2016 League of Legends World Championships. Another major Korean company, Samsung, also got involved early with esports, and was the main sponsor of the World Cyber Games, known as the “Olympics of esports”, which was active from 2000 to 2013. Samsung also has had its own successful esports team, Samsung Galaxy, which won the League of Legends World Championship in 2014 and 2017.

PC hardware brands On the international stage, the PC hardware brands were some of the earliest to sign major esports sponsorship deals. Notable names are AMD, Nvidia, as well as Asus and Acer, which have their own esports gaming hardware brands. Razer and Logitech have also been very active in the esports scene, sponsoring multiple teams and players in order to market their gaming peripherals such as keyboards and mice. Intel has also been very prominent with its brand investment and since 2006 has sponsored one of the largest esports events, the Intel Extreme Masters. More recently it announced that it is sponsoring the Overwatch League.

41 Berenberg Thematics

“The city-based structure with a franchising model struck our attention. It’s a great partnership with Blizzard that we want to continue for multiple years. 23 “The percentage [of Intel’s marketing budget] that we’re investing into esports is growing as part of our portfolio – it’s becoming a significant item.” John Bonini, vice president of esports and gaming, Intel (5 November 2017)

Beverage brands The beverage brands have traditionally been the most involved non-endemic brands in the esports industry. Coca-Cola was an early entrant, sponsoring the Coca-Cola OSL tournament in Korea in 2001. The company is still active within the space and at the time of writing its esports Twitter account has more than 360k followers. Perhaps the most dominant beverage brands within esports are the energy drink companies, such as Red Bull and Monster, which are considered semi-endemic to the industry. Gaming has long had strong ties to energy drinks as they allow gamers to game for longer and keep their focus, which brands such as Red Bull and Monster have exploited effectively.

Figure 55: Online esports show sponsored by Coca-Cola

Source: Coca -Cola

Mainstream consumer brands In more recent years, nearly every imaginable type of consumer brand has entered the esports industry. This includes Unilever with its brand Axe, Procter & Gamble with Gillette, Comcast with Xfinity, as well as BMW, Snickers, Visa and Betway. A struggle for some of these companies has been to find a natural fit in the industry, as brands such as Exxon and Gillette might seem out of place within esports. However, they are finding creative ways of integrating their brands to gain acceptance with the esports community. “Gamers at all levels recognise the importance of precision. Split seconds and minute movements make big differences. We get that obsession with precision better than anyone.” John Mang, vice president, Gillette (7 February 2017) “Our team is always looking for innovative ways to make our brands more relevant to consumers, and this sponsorship achieves that goal. Offering a hybrid of high- octane motorsport and soccer, with an emphasis on car customisation and performance, Rocket League is a perfect fit for Mobil 1 .” 24 Pablo Conrad, global brand manager, Exxon Mobile (9 May 2017) For many companies, however, esports brand investment is a relatively small portion of their marketing budgets as many still see it as an experiment. But some experts claim that because esports sponsorship deals are currently very lucrative and there is a rush to enter, bidding wars are starting to emerge.

23 https://www.ft.com/content/a8e170c6-c18e-11e7-a1d2-6786f39ef675 24 http://wwg.com/esports/2017/05/09/exxonmobil-renews-sponsorship-deal-with-rocket-league- cs/

42 Berenberg Thematics

“A recent Nielsen valuation conducted for RFRSH Entertainment on behalf of Astralis, a professional Counter-Strike: Global Offensive team, showed high-profile sponsor Audi received more than a 10x return on sponsorship exposure during the Eleague Finals and DreamHack Las Vegas earlier this year.”25 Nielsen (17 August 2017)

Figure 56: Audi’s sponsorship of Danish CS:GO team Astralis

Source: Audi Denmark, Disruptive Insight

Significant upside in esports revenues Because we believe there will be substantial growth in both viewership and monetisation of esports, we forecast the esports industry being fairly sizeable in the future. In our base- case scenario, we forecast that esports will reach USD20bn in annual revenues by 2025. In order to arrive at this figure, we estimated the total amount of esports hours viewed in 2025 and then multiplied the hours viewed by the revenue per hour found in sports. We also accounted for differences in GDP per capita for each major region, in order to control for the fact that some regions have significantly lower incomes than others, and also included GDP per capita growth and inflation. Due to there being fairly limited reliable and comparable data between sports and esports, as well as there being multiple factors that must be forecast, we admit this forecast has a large degree of uncertainty. However, we do not feel our base case has any unreasonable assumptions. With regards to our revenue bull case of USD40bn and base case of USD3bn, we do justify our assumptions, although the numbers are to some extent arbitrary and can to some extent be seen as a sensitivity analysis.

25 http://www.nielsen.com/eu/en/press-room/2017/nielsen-launches-new-esports-business-to- help-define-and-quantify-competitive-gaming.html

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Figure 57: Bear, base and bull-case scenarios for esports revenues in 2025

Source: Deloitte, c ompany reports, Berenberg research, Newzoo, howmuch Note: For sports leagues, the given year is for the season end

Figure 58: Global revenue per fan – large monetisation upside per fan in esports 60 54

50

40 36

30 (USD) (USD) (USD) (USD) 24 RevenueRevenue perper fan fan RevenueRevenue perper fan fan 20

10 6 1.8 0 2017 2017 2025E 2025E 2025E Sports Esports Esports Esports Esports Bear case Base case Bull case Source: Newzoo, Berenberg estimates

Figure 59: Esports economy in 2025 – bear, base and bull case

Revenue Revenue per fan Fans Fans CAGR Hours viewed per Hours viewed per fanfanfan fan CAGR (USDbn) (USD) (millions) (%) (%) Bear case 3 6 500 3 28 3 Base case 20 24 850 10 46 10 Bull case 40 36 1100 14 61 14 Source: Berenberg estimates

44 Berenberg Thematics

BaseBase----casecase scenario ––– USD20bn by 2025 Our base-case scenario of 10% CAGR in esports fans implies c850m viewers by 2025. Half of these viewers are esports enthusiasts and the other half are occasional viewers. In our opinion, this is by no means an unreasonable assumption considering that the current growth over the past years has been 24% globally and 54% in China last year. From this perspective, a 10% CAGR may even be seen as conservative. However, we appreciate that growth rates will likely slow down as certain markets such as China eventually become saturated. We also assumed that the amount of esports watched per fan will have a CAGR of 10%, which puts average viewership per esports fan at 46 hours annually. This is conservative compared to the NFL, which has c58hours viewed per fan, especially when one considers that the NFL is just a single sport that is aired less than half the year, whereas there are multiple esports aired all year round. We also arrive at a revenue per fan of USD24. Compared to sports, which Newzoo estimates at USD54 per fan, this is relatively low. However, this reflects our belief there will be an East Asian bias in the esports market, where this audience has a lower income. Our base case of USD20bn in revenue by 2025 is also conservative when one considers Tencent’s forecast, which believes esports will be at least a USD15bn industry in China alone by 2022. 26 Our base case only assumes USD11bn in China by 2025. However, Tencent might have included a broader scope of esports revenues in its forecast.

Figure 60: USD20bn revenue by sources – 2025 base case Figure 61: USD20bn revenue by region – 2025base case

USD2.6bn Media rights USD6.1bn China US Sponsorship USD3.4bn USD10.6bn USD11.1bn Europe Merchandise, ROW USD3.0bn tickets, other USD3.7bn

Source: Berenberg estimates Source: Berenberg estimates

BearBear----casecase scenario ––– USDUSD3bn3bn by 2025 In our bear case we assume fans only have a CAGR of 3%, reaching 500m esports fans by 2025. This assumes that many of the major new games do not become esports-compatible for reasons such as they are difficult to watch. This is a risk present for games such as Overwatch , for instance. Additionally, we assume TV channels stop broadcasting esports as viewership becomes too low to be economically viable, lowering both total hours viewed and revenues from media deals. Finally, we assume monetisation per fan does not catch up to that of sports, reaching only USD6 per fan. This could be due to viewership becoming too scattered as a result of too many individual esports leagues, making sponsorship impractical and unattractive for brands.

26 http://games.qq.com/a/20170616/042758.htm

45 Berenberg Thematics

Figure 62: USD3bn revenue by sources– 2025 bear case Figure 63: USD3bn revenue by region – 2025 bear case

USD0.3bn Media rights USD0.9bn China USD0.5bn Sponsorship US USD1.6bn USD1.6bn Europe Merchandise, ROW USD0.4bn tickets, other USD0.5bn

Source: Berenberg estimates Source: Berenberg estimates

BullBull----casecase scenario ––– USD40bn by 2025 In our bull-case scenario, we assumed a CAGR of 14% in viewers, implying 1.1bn viewers by 2025. Most of the additional growth in our bull-case scenario compared to our base case stems from the “rest of the world” (RoW), as we think there is significant growth potential in areas such as Greater South East Asia and Brazil. Additionally, with the potential of Japan legalising money prizes in esports, where a significant portion of the population are gamers, this could substantially expand esports viewership. We also increased our CAGR in time spent watching esports by 4% from our base case, to 14%, reaching 61 hours per fan, which is closer to that of the NFL. Additionally, we included a 20% premium for media rights and sponsorship compared to our base case due to esports fans being a high proportion of millennials, which are hard to reach through other media, as well as esports fans tending to be relatively affluent. Finally, we also included a 20% premium in other revenue to capture the fact that esports has additional monetisation opportunities, which are not available in traditional sports. This includes the sale of digital in-game esport goods, which will contribute to esport league revenue pools. Additionally, Tencent has plans for other esports-related activities, such as esports industrial parks, which could bring in additional esports revenue.

Figure 64: USD40bn revenue by sources– 2025 bull case Figure 65: USD40bn revenue by region – 2025 bull case

USD6.8bn Media rights USD12.0bn China

Sponsorship US USD19.8bn USD21.9bn USD6.3bn Europe Merchandise, ROW USD6.0bn tickets, other USD6.9bn

Source: Berenberg estimates Source: Berenberg estimates

46 Berenberg Thematics

10 to 20 years to reach revenue parity with sports Although our base case estimate of 850m esports fans globally by 2025 is sizeable, it is still a lot smaller than several individual sports that have more than a billion fans. When we consider the time horizon for when esports reaches or even overtakes sports globally, we think 10 to 20 years is most likely. We come to this conclusion from considering the question from a range of different perspectives. The first reason it will take a while for esports to catch up to sports is because, in many regions, there is still a significant amount of sports fans from the older generation. As we think it is unlikely that the older generations will become esports fans and will stick with sports, it will take some time before this generation is superseded by a younger esports generation. If we look at some of the different regions individually, we see significantly different trajectories for when esports could overtake sports. Although we do not have a complete data set for esports viewership compared to sports viewership in East Asia, from the fragments of data we do have we believe this region will be the first where esports could catch up to sports, possibly within five years. In other regions around the world, however, we expect this to take significantly longer. In the West, for instance, esports is still stigmatised to some extent and will therefore not benefit to the same extent from word-of-mouth awareness as it does in East Asia. For instance, we think it is less likely that an esports fan in the West will tell his friends or colleagues about the next upcoming esports event that he will attend. This stigma may therefore disallow esports in the West to see the same explosive growth seen in East Asia. Furthermore, due to the strong sports culture in the West, there is also a chance that esports will never catch up to sports in this region. If esports is to overtake sports in the West, however, it would still take a long time. The esport show Eleague , for instance, currently has c250k average TV viewers in the US. If we were to assume its viewership had a CAGR of 20%, which is optimistic, it would take 10 years to reach the average viewership of the NBA at 1.7m average viewers and a lot longer to reach the NFL’s 18.8m average viewers. When we compare major sport leagues to major esport leagues, we also think it will take a long time before they reach parity. First, viewership per esport is still smaller, with the 2016 League of Legends finals having roughly a third of the NBA’s US domestic viewership. And although the major esports could catch up with some of major sport leagues in three to five years’ time in terms of viewers given current growth rates, this does not mean the economics will catch up by then. One has to consider that the majority of viewership for large esports leagues is likely to come from China and other East Asian countries, which have a substantially lower GDP per capita than US viewers for the NBA and the NFL. Chinese GDP per capita, for instance, is about seven times lower than that of the US. Therefore, even if viewership of League of Legends does catch up to the NBA, the audience is likely to be a lot less valuable to sponsors and advertisers. As such, we believe revenues for individual major esports will still lag behind major sports leagues such as the NBA for at least another 10 years.

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Gaming companies: ultimate beneficiaries of esports

● We believe video gaming companies will benefit from esports for two main reasons: 1) the marketing benefits that increase their games’ economic value; and 2) the fact that esports itself could be a large and profitable business in its own right. ● We also believe that video gaming companies will be the greatest beneficiaries of the esports trend. This is due to them owning the game and therefore having the greatest bargaining power in the esports ecosystem. ● With regards to companies, we believe Tencent has the strongest esports position, while Activision Blizzard and Ubisoft have large upside potential. Sea has very good exposure to esports, but has significant risks whereas Keywords only has some esports exposure, but is also less risky.

In the previous two sections, we described the two main commercial features of esports. The first being that esports is an important marketing tool for games, and the second being that esports itself can potentially generate substantial revenues in the future. Although there are numerous companies from different sectors within the esports ecosystem, such as broadcasters, content creators and stadium owners, we think the gaming companies are the ultimate beneficiaries. Marketing benefits – extending game economics If video gaming companies succeed in turning their games into an esport, this can extend the lifespan of their games and increase user engagement, thus increasing the games’ economic value. One of the reasons why esports has this effect is because it can make players become more invested in the game. For example, esports enhances the social aspect of the games, as it is more likely to become the subject of conversations where fans discuss who is the best team or player. Additionally, gamers will go together to events and create and share experiences. Furthermore, after fans see their heroes compete, they can become inspired to play more themselves. The fact that esports can potentially increase the amount of time spent in-game also means there is a higher chance that players will spend more money in-game. Additionally, the social aspect of gaming, which is enhanced by esports, can increase the likelihood that gamers will want to buy “skins”, which allows their in-game avatars to become more distinguished in order to impress peers. Furthermore, the fact esports can cause players to become more invested in the game, both financially and emotionally, raises the barrier for them to leave to another video game. All these benefits are very positive for the gaming companies and highlight one of the primary reasons why they have put a significant focus on making their games into successful esports. Esports revenues – upside for gaming companies Although esports revenues are currently quite small, at an estimated USD0.7bn, we forecast in our base case (in the previous section) that they can reach USD20bn by 2025. We believe the gaming companies will be the primary beneficiaries of this income, as they own the games and therefore have the power to control the economics of the esports ecosystem.

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Figure 66: Esports revenue sources – USD20bn base case 2025 Figure 67: Esports revenue share – USD20bn base case 2025

Game companies + Media rights league owners USD6.1bn USD6.8bn USD6.8bn Players Sponsorship USD11.1bn Merchandise, Teams USD3.0bn tickets, other USD6.8bn

Source: Berenberg estimates Source: Berenberg estimates

Esports revenue will usually be split between three or four parties: the game companies, the league owners, the players and the teams, as shown in Figure 67. The league owners are only relevant when third-party league owners such as ESL, which do not own the game, host the esport event. In order to estimate the proportions of the revenue split, we used Tencent’s disclosures for how it will share the revenues generated by its North American League of Legends league, where the revenues are to be split approximately evenly three ways. As this is the best information available to us for league structure revenue sharing, we assume the revenue share for esports leagues in general will follow a similar structure. However, this a provisional estimate of the esports revenue split and a lot can change as the esports industry is far from mature. Although, the game owners have an incentive to have all stakeholders thrive, they can ultimately redirect any economics back to themselves if they feel stakeholders are benefiting more than their fair share. For instance, if the team owners begin to earn outsized profits, the gaming company might choose to give them a smaller share of the league revenues. If advertisers and sponsors receive media exposure that is triple the value of costs, the game owner can raise those costs. Nonetheless, the gaming companies might be content with other stakeholders taking a larger share of the economics if they feel it helps promote the esport, which ultimately will drive game revenues. Either way, the game owners decide as they have nearly all the bargaining power, and will therefore split the esports revenues between themselves and other stakeholders to maximise their own profits. In terms of how esports will affect global video gaming revenues by 2025, we think it will represent c10%, assuming video gaming revenues hit cUSD200bn by 2025. Although the vast majority of this revenue will land in the top line for the video gaming companies, two- thirds of this will go out again to the teams and players as a cost. In our bull-case scenario, esports revenues will represent c20% of global video gaming revenues. However, the proportion of esports revenues will vary significantly between different companies, depending on if they manage to turn their games into successful esports. For instance, we believe that in a bull-case scenario, esports could make up to 40% of Tencent’s video gaming revenues, due to its dominant esports positioning and its exposure to China. We also expect esports revenue growth to significantly outpace that of video games over the next few decades, therefore becoming an increasingly important portion of revenues for gaming companies. Other gaming companies benefiting from esports Companies with direct business ties to the esports gaming companies will also benefit from esports. This includes Keywords Studios (Keywords), which receives outsourced work for services such as art creation from companies such as Tencent and Activision Blizzard. Keywords therefore benefits from esports because if esports continues to drive user demand, it will incentivise the publishers to create new content (new games, characters or landscapes), which will in turn drive demand for Keywords’ services. Another company that can benefit from the esports trend is Sea, which operates League of Legends and Arena

49 Berenberg Thematics

of Valour in Greater South East Asia. The company will benefit from esports in a similar fashion to Tencent, as it helps drive demand for the games it operates. Gaming company profiles In the following pages, we profile some of the key listed gaming companies that either benefit from esports currently, or have the potential to do so in the future. This includes Tencent, Activision Blizzard, Sea and Keywords. We also include an in-depth dive on Ubisoft, which we currently cover. Additionally, in Figure 68 below, we mention a few other names which have esports exposure.

Figure 68: Gaming companies with esports exposure

Financials Dec 2017 (USDbn) Market cap. Sales, LTM Core business Esports exposure Game Digital 0.13 0.99 Sells video games through retail and online. Its retail stores are opening gaming arenas (UK and Spain) (BELONG) where people can play and compete. This is driving revenue growth. NetEase 46 7.6 Online internet technology services, Owner of the Overwatch Shanghai team slot. focused on online video games. (China) Potential to create esport games. Ourgame 0.31 0.11 PC and mobile games. (China) Global network of esports arenas that host events.

Take-Two 13 1.9 Develops and publishes video games. Setup an esport league for its NBA2k game franchise. Source: Bloomberg, FactSet

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Ubisoft (Buy) – significant upside potential

Media analyst Robert Berg discusses UUbisoftbisoft

Figure 69: Ubisoft overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 8.6 1.8 good immaterial events Source: FactSet, Bloomberg, Berenberg estimates

As we have detailed in this note, we believe video game developers will be key beneficiaries from the growth of esports. Ubisoft, as one of the world’s largest game developers, is no exception. In fact, as we discuss below we believe the company is in great shape to be a material beneficiary from esports over the medium to long term. While most of the opportunity in the near term comes from the “halo” benefit of esports, such as gamers continuing to be engaged and spend within the game, it should be noted that Ubisoft is already seeing direct revenues from ticket sales, sponsorship, merchandising and in-game esports-related skin purchases. A recent focus on releasing multiplayer franchises has meant that Ubisoft now has a whole suite of franchises that lend themselves towards being successful in a competitive environment. These include Rainbow Six , For Honor , Ghost Recon , The Crew and The Division .

Figure 70: Ubisoft now has a whole suite of multiplayer games

Industy's Biggest 2011 5 years later Segments Rainbow Six For Honor Multiplayer Centric Ghost Recon The Crew The Division Assassin's Creed Watch Dogs The Division Open Worlds Assassin's Creed Ghost Recon The Crew Far Cry Assassin's Creed Action Adventure Assassin's Creed Watch Dogs South Park RPG The Division Far Cry Shooter Ghost Recon Rainbow Six

Source: Ubisoft Note: Excluding sports and casual

Below we detail Rainbow Six as a case study as to how Ubisoft is approaching esports in the near term, the success the company has achieved to date, and hypothesise on how a rise in esports could benefit the company in the medium to long term.

Rainbow Six is perfect for esports Rainbow Six: Siege is a brand-new style of gameplay embracing the reality of counter- terrorist operatives across the world: intense and asymmetrical close-quarters combat between attackers and defenders. As a defender, the gamer will have the means to transform their environment into strongholds to prevent the attackers from breaching. As an attacker, you will have many planning options to face this challenge and defuse these situations.

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To us, a game that makes a great esport is one that is tense, cut-throat and competitive. To be a large esport it also needs to be easy to understand. Rainbow Six is a game that has all these attributes, in our view. “I think our game has a direct correlation with the viewing experience. “With any competitive shooter, there’s an easy grammar. You know, cop and robber, it’s simple to understand. There was a good comment on Reddit, which compared Rainbow Six to American football. You sort of understand very, very quickly what the broad rules are. ‘Okay team A has to go that way’, but there are so many tiny rules that make the game more complex and interesting that take years of watching and practising to appreciate.” Alexandre Remy, brand director, Rainbow Six (February 2017) While this may be a bold statement, we even believe that Rainbow Six has potential to be a as good an esport as Counter-Strike , one of the most successful esports in the West, and even has some advantages. This is because, to be a top player in Counter-Strike skill is primarily based on fast reflexes and precise aim. While Rainbow Six’s skill ceiling includes these factors, too, the game is far more strategic, in our view. What makes Rainbow Six a great game to play (and of course to watch) is that it is not just about who can outshoot who, but who can outthink who and execute a plan or, depending on which team you are playing on, counter a well-laid plan and win the round.

Figure 71: Rainbow Six: Siege

Source: Ubisoft

Esports a key contributor to the Rainbow Six’s success Ubisoft has noted a key change to its strategy, as can be summarised in Figure 72 below. It can be seen that games are now developed with the players’ experience as the focus. More data from touch points such as Ubisoft Club (110m users) facilitates increased engagement; it allows Ubisoft to tailor the game and messaging to individual players and also creates a network effect as gamers want to play against their friends. For example, over the past two years, an average of 300m weekly Ubisoft Club challenges have been played by Rainbow Six players.

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Figure 72: Ubisoft has shifted its strategy

Source: Ubisoft

We believe the major change, however, has been the shift in focus away from the number of units sold to the total lifetime value of the game; gone are the days when a game’s success is decided in the first few weeks after release. We have mentioned previously that digital and live services reduce the lumpiness and risk to Ubisoft’s earnings profile, something that had resulted in a lower share price multiple for the company (and its peers) in the past. However, as we briefly detail below with the example of Rainbow Six: Siege , live services are lengthening the lifespan of games and resulting in far higher levels of recurring revenues. We think the growth of Rainbow Six: Siege has been remarkable, with now more than 25m registered players, and we discuss its long-term relevance to monetising the games’ esports in more detail below.

Figure 73: Day-one game – daily active users decline with time Figure 74: Live game (R6) – daily active users grow with time

Source: Ubisoft Source: Ubisoft Note: Day one game: games released from the 1980s until 5-10 years ago Note: Live game: games with “live” services (regular digital updates) where most units sold and revenue are on the first day of release

It can be seen from the figures above the curve of the daily active users (DAUs) is materially different for a day-one game than for a live title, such as Rainbow Six: Siege . One peaks in the first few months, then users simply move on to the next game. The other has seen DAUs reach their highest levels more than 12 months later, and continue to grow. Key to moulding the shape of the curve is player engagement and retention. Two examples of which, one being esport tournaments, can be seen in Figure 75. Regular competitions and updates keep the community engaged, as can be seen in the spikes in activity around the Pro League Finals (partnership with ESL/MTG).

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Figure 75: Live services supported by esports tournaments

Source: Ubisoft

Figure 76: Live services also include new content and promotions

Source: Ubisoft

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Rainbow SixSix:::: Siege has a community of 25m registered players andand growing One clear thing for us is that we believe that to be classified as a successful esports franchise, the game requires a large following. Ubisoft, historically, has suffered versus peers in this regard. The company’s top franchise, Assassin’s Creed , has a community of more than 75m unique players and has been a huge cash generator for Ubisoft. However, until recently, Ubisoft’s large franchises were solo-centric, or casual games such as Just Dance , which do not easily translate into competitive esports. Ubisoft’s shift in focus towards releasing more multi-player games, as shown previously in Figure 72, was just the first step. The main challenge, and where we have been particularly impressed with Ubisoft management over recent months, has been the company’s ability to grow a large, engaged community around its franchises. We have written in depth about the success of Rainbow Six: Siege , yet we still feel that what Ubisoft has achieved with this title is underappreciated by investors. The game now has more than 25m registered players, putting it up there with games such as Destiny and Overwatch , which have reported 30m and 35m registered players, respectively. In fact, after the recent “White Noise” update, the game has reached new highs in terms of engagement. This is summarised well in a recent article in PC Gamer . “White Noise launched on Tuesday and later in the week the shooter hit 100,000 concurrent users on Steam for the first time, as shown by Steamcharts data. That’s impressive given its age and more than double what it was pulling in at this time last year. Right now it has the fourth biggest audience on Steam (and more players accessing it through Uplay).” PC Gamer (December 2017) Ubisoft seems to now have a proven model whereby it can dramatically increase player statistics in terms of both absolute numbers and engagement. This model has not only worked for Rainbow Six , but also for The Crew and Ghost Recon – among others – and, as we discuss below, we are starting to see this work for The Division .

Figure 77: Rainbow Six engagement growing fast

Source: Ubisoft

ESL Pro League remains small, but has huge potential The Rainbow Six Pro League, in partnership with ESL (MTG), has slowly and steadily become one of the most gripping esports globally. It is clear, however, that the game is still far behind franchises such as League of Legends and Dota 2 in terms of both viewership statistics and prize money. While Figure 77 shows that viewership is increasing at a rapid pace (+525% yoy), prize money is still materially behind the game’s more established esports franchises. Rainbow Six Pro League year 2 season 3 had a prize pool of USD270k, with USD167k available at the finals. This is dwarfed by Dota 2 , where the International 2017 tournament had price money of almost USD25m (with USD11m won by Team Liquid for winning the tournament).

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Figure 78: Rainbow Six (and peer) tournament prize money

Tournament Name Prize Money Rainbow Six Pro League Year 2 Season 3: Finals $167,000 Rainbow Six Pro League Year 2 Season 2: Finals $167,000 Rainbow Six Pro League Year 2 Season 1: Finals $167,000 Six Invitational (PC) $100,000 Six Invitational (Xbox One) $100,000

Dota 2 International 2017 $24,687,919 League of Legends 2016 World Championship $5,070,000 Halo World Championship 2016 $2,500,000 Source: Esportsearnings.com

However, Ubisoft is already working to address this prize pool imbalance. In addition to league play and season finales, there will now be two marquee events that will host the biggest Rainbow Six competition of the year. The Six Invitational, held in Montreal in February with a prize pool of USD500,000, will be joined by the Six Paris Major, to be held in Paris in August with a prize pool of USD350,000.

Figure 79: The new Rainbow Six Pro League and tournament structure

Source: Ubisoft

With viewership and the Rainbow Six community growing strongly, we would expect interest in the Pro League to grow accordingly. In fact, on 16 January 2018 it was announced that Team Liquid (one of the most successful esports teams) has entered the Rainbow Six: Siege Pro League. Team Liquid will compete in the Latin America region of the Pro League for 2018, and the organisation states that it is now a “long-term franchise partner of Ubisoft and Rainbow Six Esports”. This tells us two things: first that the game is now big enough and will grow to a size to warrant investment from such a strong team. Second, it implies that viewership should shoot up – Team Liquid has a large following. Both of these points suggest that while small today, the Pro League has huge potential to become a major global esport. The financial importance of esports to Ubisoft

Near term: dddominateddominated by indirect revenues from increased playerplayer engagement As we have detailed above, the largest change for both the industry and Ubisoft in recent years has been the proliferation of digital revenues and its associated benefits. Esports has to date played a part in keeping gamers engaged and ensuring the community grows steadily. With increased engagement comes increased spending within the game. We only expect growth in the Rainbow Six Pro League to further intensify the positive effect that we describe below.

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Figure 80 below shows the real difference between a game released without any follow-on digital content (ie a “day-one” game – similar to games released from the 1980s until five to 10 years ago) and games with “live” services (regular digital updates). The figure shows that if Ubisoft was to receive an arbitrary figure of 100 in year one with a day-one game, then it would receive 13 in year two, a material drop. This figure increases to 52 with a live game.

Figure 80: Revenue breakdown per fiscal year Ubisoft’s revenues are now more recurring

Source: Ubisoft

The benefits of this are obvious. ● The cost of development of the initial game is extremely large at cEUR80m, materially higher than the cost of maintaining live services. This means that the payback on the initial EUR80m investment is now materially higher with a live game. ● Year two revenues need materially lower marketing (and development) costs and are 100% digital. This means that the contribution margin on these revenues is extremely high, which aids group profitability. ● Higher year two (and year three) revenues mean that it is possible to delay the release of the next title in the franchise. This allows developers more time to develop and test, which should result in a higher-quality release. ● Year one revenues (which are generated from selling units of a game in the first few months) are characteristically lumpy and difficult to forecast. Year two revenues (for live games), on the other hand, are more recurring and management commentary suggests that the KPIs for these players and revenues are particularly stable and recurring. This reduces the risk to both the earnings profile and the share price. Rainbow Six: Siege was the first Ubisoft game to have a second and third-year season pass (a whole year of new content for the game payable in one upfront payment). In our view, the company was set to release the new edition in the Rainbow Six series in FY 2018, but given the continued growth trajectory of DAUs for Siege (supported by new content, promotion and esport tournaments), Ubisoft has benefited from high monetisation and has decided to delay its release (we believe to FY 2019). This may result in lower absolute revenues and profits in year one (because a major new release should result in higher revenues), but in terms of return on investment (and multi- year profitability), this is by far the more attractive option. We believe that it is materially value accretive and the correct decision to extend the life of the current version of the game: the delay means Ubisoft will not split the player community between two titles while it is still growing, and monetising adds further support for Ubisoft management’s decision.

Near to medium term: Ubisoft is already monetising esports directldirectlyy today While the “halo” benefit of esports is clear, few followers of Ubisoft will have appreciated that the company is already directly monetising esports. Of course, at this stage the revenues are not material at the group level, but Ubisoft is continuing to add more and more high-margin esports revenue streams every few months.

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Currently, Ubisoft is generating direct esports revenues from: ● selling tickets for the four Pro League finals during the year; ● sponsoring and merchandising; and ● selling digital products linked to esports in the Rainbow Six in-game store. These include: o team-related skins: skins branded with the team’s name – users wanting to show their support for their chosen hero; and o Pro League skins: those gamers who love watching the Pro League” can show their support.

Figure 81: Team-branded skins Figure 82: Pro League-branded skins

Source: Ubisoft Source: Ubisoft

Medium to long term: iiincrementalincremental ddirectirect revenues would be upside to our basebase---- case estimates Given its nascency, we prudently include only the indirect “halo” benefits from esports detailed above in both our base-case estimates and fair value. Direct revenues are high margin and growing, but somewhat immaterial today. However, this report sets out a story that even on conservative assumptions sees an esports market worth some USD20bn by 2025. We believe that the video game developers, such as Ubisoft, are most likely to benefit given that it is these companies that own the core franchises and the IP loved by millions. Our Ubisoft forecasting prudency is therefore inconsistent with what we think is the long- term base case for esports. That said, while from a top-down approach it is easy to hypothesise what percentage of the esports market a top five video game developer should be able to take, it is still unclear exactly how and when Ubisoft will see material revenues from this opportunity. A simple example, however, shows that every 1% of the esports market that goes to Ubisoft is an extra USD200m of revenues or +10% to Ubisoft’s current top line. The effect to EBIT will of course be significantly more material given the majority of the revenue streams are extremely high margin. One possibility is that Ubisoft follows Activision and starts monetising leagues and teams such as the Rainbow Six Pro League directly. Note that with Overwatch we understand Activision has sold the rights to 12 teams at USD15m-20m per team. Rainbow Six has more than 25m registered players and Overwatch more than 35m. While smaller, we could perhaps see Rainbow Six achieve at least USD10m a team, or USD120m in total. Additionally, Activision has sold distribution rights to Twitch, and sponsorship deals to the likes of Intel, HP and Toyota, which could add upwards of another USD200m to Activision’s cash flow over the coming years. This is before a share of the league’s profits, in-game skin purchases and other merchandising. It can quickly be seen how with a free cash flow guidance of EUR300m in FY 2019 the potential upside to Ubisoft from just one esports franchise could be extremely significant. Outside of this example, other ways Ubisoft could further directly monetise the esports opportunity include taking share of tournament proceeds, striking content distribution agreements with companies such as Twitch, YouTube and Sky, as well as growing the current revenue streams (sponsorship, ticket sales, merchandising and in-game skin revenues).

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Figure 83: Ubisoft sales and EBIT margin Figure 84: Ubisoft EV/sales and P/E

1,600 25 5 45 Sales EV/sales P/E ratio EBIT margin 4 36 1,200 15 3 27 800 5 P/E P/E 2 18 P/E P/E EV/sales EV/sales EBITEBIT (%) (%) EV/sales EV/sales EBITEBIT (%) (%) SalesSales (EURm) (EURm) SalesSales (EURm) (EURm) 400 -5 1 9

0 -15 0 0 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

Note: March fiscal year end Source: Bloomberg Source: Bloomberg

Figure 85: Ubisoft’s digital revenue split by segment (2017) Figure 86: Ubisoft market capitalisation

Player 8 recurring 7 investment 6 21% Physical 50% 5 4 3 Digital 2 MarketMarket capcap (EURbn) (EURbn) distrib. MarketMarket capcap (EURbn) (EURbn) 1 29% 0 2011 2012 2013 2014 2015 2016 2017

Note: March fiscal year end Source: Company reports Source: Bloomberg

Figure 87: Ubisoft company information Date 31st Dec 2017 Ticker (Bloomberg) UBI FP

Management CEO Yves Guillemot CFO Alain Martinez Chairman Yves Guillemot

Shares Shares outstanding mil 112 Share price EUR 64.14 Free float % 52.6

Insiders/Stakeholders Vivendi Sa % 27.3 Guillemot Family % 13.3 Ubisoft Ent. Sa Esop % 2.5

Source: FactSet

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Tencent (not covered)

Figure 88: Tencent overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 493 32 dominant small broadcasting, events Source: FactSet, Bloomberg, Berenberg estimates

Exposure to esports Tencent Holdings Limited (Tencent) has significant exposure to esports as two of its largest games, League of Legends and Honor of Kings , are two of the most popular esports in the world. In Q3 2017, Tencent’s gaming business accounted for 41% of revenues and c50% of gross profit. Additionally, Tencent hosts esports leagues and has invested in esports broadcasting. However, we expect direct esports revenues to still be relatively small.

Company description Tencent is a holding company listed on the Hong Kong Stock Exchange with a US ADR. Its primary undertakings lie in the markets for online advertising and value-added services (VAS). In the activities of its VAS division, Tencent stands as the leading publisher of games, which includes titles such as Honor of Kings , League of Legends and Cross Fire . Tencent also holds a 4.9% stake in Activision Blizzard. Tencent, in combination with its subsidiary Riot, which created the PC game League of Legends , has made substantial investments into esports. This was in order to enhance user engagement and extend the longevity of the game, and now League of Legends has the largest esports scene in the world. In addition to creating a strong esports community to protect its player-base, Tencent also has a massive online social network. This includes Weixin and WeChat, which have 980m users. This has allowed Tencent to not only market its games, but to merge its gaming community with its social network control, creating a very powerful ecosystem giving it a substantial competitive advantage.

Growth outlook and opportunities Tencent continues to have strong growth opportunities in China as larger portions of the population comes online and internet speeds improve. This will allow larger potions of the population to access its social networks, games and streaming sites. Tencent has also released an international version of Honor of Kings , known as Arena of Valor . If successful, this game could bring in substantial new revenue streams.

Key risks One of the risks for Tencent is if its games become less popular. This would likely be due to new and more popular games taking market share. The game companies Bluehole and NetEase have both been able to create games that rival Tencent’s games in different regions. However, this risk is mitigated by Tencent being able to quickly replicate competing games and publish its own version through its extensive networks. Alternatively, Tencent can sign strategic deals with the original game developer to publish the game itself, as it plans to do with Bluehole for its game PUBG .27 The other risk Tencent faces is if its mobile games have more of a fad nature compared to PC games, and it will therefore be worth monitoring the staying power of Honor of Kings . However, this risk can potentially be mitigated as Tencent is building up an Honor of Kings esports scene. Whether an esports scene will give Honor of Kings the same longevity as League of Legends , however, remains to be seen. A final risk we see to Tencent is if the Chinese government decides to intervene or pressure Tencent into limiting game time due to worries about gaming addiction. This was seen earlier this year when Tencent limited the gaming time of Honor of Kings for minors.

27 http://game.qq.com/webplat/info/news_version3/128/3294/3321/3322/m2614/201711/660231.sht ml

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Figure 89: Tencent sales and EBIT margin Figure 90: Tencent EV/sales and P/E

180 60 15 60 Sales EBIT % EV/sales P/E 150 50 120 40 10 40 90 30 P/E P/E P/E P/E EV/sales EV/sales EBITEBIT (%) (%) EV/sales EV/sales 60 20 EBITEBIT (%) (%) 5 20 SalesSales (RMBbn) (RMBbn) SalesSales (RMBbn) (RMBbn) 30 10 0 0 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg Source: Bloomberg

Figure 91: Tencent revenue split by segment – 2016 Figure 92: Tencent market capitalisation

Other 5 11% 4 Online games Online 3 advertising 47%47%47% 18% 2

1 MarketMarket capcap (HKDtrn) (HKDtrn) MarketMarket capcap (HKDtrn) (HKDtrn)

Social 0 networks 2011 2012 2013 2014 2015 2016 2017 24%

Source: Company reports Source: Bloomberg

Figure 93: Tencent company information Date 31st Dec 2017 Ticker (Bloomberg) 700 HK Management CEO Pony Ma CFO John Lo Chairman Chi Ping Lau Shares Shares outstanding mil 9,498 Share price HKD 406.00 Free float % 57.9 Insiders/Stakeholders Naspers Ltd. % 33.2 Pony Ma % 8.6 Chi Ping Lau % 0.3

Source: FactSet

61 Berenberg Thematics

Activision Blizzard (not covered)

Figure 94: Activision Blizzard overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 48 7.0 good small events Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Although Activision Blizzard Inc (Activision Blizzard) has a relatively small esports viewership, it is beginning to invest heavily into turning its games into successful esports. The company generates direct esports revenues from hosting esports leagues, selling league slots to teams and selling media rights. However, these revenues are currently a small portion of group revenues.

Company description Activision Blizzard is listed on Nasdaq and has its headquarters in California. The company is a developer and distributor of video games for consoles, mobile devices, PCs and online social platforms, serving near to 500m active monthly users across 196 nations. The company has three main divisions. This includes Activision, which holds the game titles Destiny and Call of Duty , and Blizzard Entertainment, with the titles Overwatch and World of Warcraft . Activision Blizzard’s third division, King Digital Entertainment (King), was incorporated in early 2016 upon the company’s USD5.9bn acquisition of King, with more than 200 franchises including Candy Crush and Bubble Witch . With regard to its esports proposition, Activision Blizzard’s Overwatch League stands as the first international professional esports league modelled on the structure of a traditional professional sports league, with teams being city-based in order to encourage the forming of fanbases inspired by regional loyalties. A number of its competing teams are owned by leaders in the traditional sports sphere, including New England Patriots owner Robert Kraft, co-owner of the NBA’s Sacramento Kings Andy Miller, and Jeff Wilpon, COO of the New York Mets. Given that each of the 12 team slots sold for an estimated USD15m-20m, this should generate cUSD200m in cash for the company.

Growth outlook and opportunities The company aims to monetise its Overwatch League through is esports activities. In terms of structure, revenue streams will be similar to that of traditional sports, and includes media rights, merchandise, ticket sales, advertising and sponsorship. The company has made a big commitment towards making esports successful and has created a solid foundation for it to thrive. The Overwatch League could also expand to other cities, generating additional cash from selling team slots and opening up further monetisation opportunities. If successful, the league could in the future generate revenues of that of a major sports league. However, we believe this would take at least 10 years to achieve. Also, even if the Overwatch League is not successful, the company is well positioned to create new esports for its future games.

Key risks The largest risk to Activision Blizzard’s esports endeavours is that viewership for its Overwatch League remains low, primarily due to it being a difficult esport to watch. If viewership remains low, monetisation opportunities will be limited. Although the company has been working actively to resolve these issues, there is a worry that the problems are too fundamental to change. Also, the Overwatch League is heavily US-focused, meaning it could alienate global viewership. The other issue is that many traditional esports teams have decided not to join the league. This is not only due to low viewership, but the steep entry fee, which was reported to be up to USD20m. This risks alienating the traditional esports community and it could therefore become increasingly difficult for it to acquire a sufficient viewership to make it a profitable venture.

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Figure 95: Activision Blizzard sales and EBIT margin Figure 96: Activision Blizzard EV/sales and P/E

8 35 8 48 Sales EBIT % EV/sales P/E 28 6 6 36 21 4 4 24 P/E P/E 14 P/E P/E EBITEBIT (%) (%) EBITEBIT (%) (%) EV/sales EV/sales EV/sales EV/sales SalesSales (USDbn) (USDbn) SalesSales (USDbn) (USDbn) 2 2 12 7

0 0 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg Source: Bloomberg

Figure 97: Activision Blizzard revenue split by segment – 2016 Figure 98: Activision Blizzard market capitalisation

Other 60 5% Activision 34% 50

King 40 24% 30 20

MarketMarket capcap (USDbn) (USDbn) 10 MarketMarket capcap (USDbn) (USDbn) 0 Blizzard 2011 2012 2013 2014 2015 2016 2017 37%

Source: Company report Source: Bloomberg

Figure 99: Activision Blizzard company information Date 31st Dec 2017 Ticker (Bloomberg) ATVI US Management CEO Robert Kotick CFO Spencer Neumann Chairman Brian Kelly Shares Shares outstanding mil 756 Share price USD 63.32 Free float % 92.7 Insiders/Stakeholders Tencent Holdings Ltd. % 4.9 Asac Ii Lp % 1.1 Robert A Kotick % 0.6

Source: FactSet

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Sea (not covered)

Figure 100: Sea overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 4.4 0.37 good small broadcasting, events Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Sea Ltd (Sea) makes the majority of its revenues from its online games, with its two most important games heavily geared towards esports. The company also broadcasts and hosts its own esports events, although this is a small portion of group revenues.

Company description Sea, previously branded as Garena Interacted Holding Ltd, is an internet company operating in Greater Southeast Asia (GSEA).28 The company has its headquarters in Singapore and had its IPO in October 2017 on the NYSE. Sea operates through three distinct platforms: Garena, its online games division; Shopee, Sea’s e-commerce platform; and AirPay, which delivers digital finance services, predominantly e-wallet services. Garena, leveraging the long-term relationships that it has formed with several of the world’s leading game developers, examples being Tencent and EA, is the exclusive operator of games including League of Legends , Arena of Valor (the non-Chinese Honor of Kings ), FIFA Online 3 and Point Blank in GSEA. Typically, Garena’s licensing contracts with these developers allow it to keep hold of 65-80% of gross billings. Garena also organises esports competitions and leagues for its players – including the Garena Star League. When organising local esports events, Garena leverages the partnerships that it has formed with more than 68,000 independent cybercafés (as of 30 June 2017), which allow it easy and cheap access to venues, hardware and the internet. Garena is the frontrunner by number of esports viewers in the GSEA, according to Newzoo.

Growth outlook and opportunities A key growth prospect for Sea is that its operations are located in GSEA. The region achieved a gross domestic product (GDP) of USD3.0trn last year, and is one of the fastest- growing areas in the world by GDP per capita at 3.4%.29 Further to this, internet penetration is still very much in its infancy in GSEA. As such, in operating here, Sea has the opportunity to grow at a pace that exceeds the growth rate of the region as a whole as internet penetration increases over time. Additionally, the fact that it operates Arena of Valor , which has been extremely popular in China, should provide strong future revenue growth.

Key risks With both Shopee and AirPay in initial stages of monetisation, the vast majority of Sea’s revenue is attributable to Garena (91.6% H1 2017). As such, any risk to Garena is a risk to the corporation as a whole. A key risk to Garena is its dependence on a small selection of games doing well. The business’s five best-performing games comprised 77% of Garena’s revenue in H1 2017 – each of which is licensed from an external game developer. This also highlights a significant risk in its heavy dependence on its business partners whom it licenses its games from. A further risk to the future of Sea’s business is the possibility that it will remain unprofitable. Sea’s significant net losses over the years are largely on account of its substantial sales and marketing spend in order to become the dominant internet platform in the region. Sea plans to continue to employ such marketing practices, but it will be extremely detrimental to the company if it does not succeed.

28 GSEA is defined by the company as spanning Indonesia, Malaysia, the Philippines, Singapore, Taiwan, Thailand and Vietnam 29 Company prospectus (source: IMF Outlook)

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Figure 101: Sea sales and EBIT margin Figure 102: Sea EV/sales and P/E

N/A 400 0 Sales EBIT % 300 -15

200 -30 EBITEBIT (%) (%) EBITEBIT (%) (%) SalesSales (USDm) (USDm) SalesSales (USDm) (USDm) 100 -45

0 -60 2014 2015 2016

Source: Bloomberg Source: N/A

Figure 103: Sea’s revenue split by segment (2016) Figure 104: Sea market capitalisation

All others 3% 6 Digital 5 financial services 4 6% 3 2 1 MarketMarket capcap (USDbn) (USDbn) MarketMarket capcap (USDbn) (USDbn) Gaming (Garena) 0 91%91%91% Oct-17 Nov-17 Dec-17

Source: Company reports Source: Bloomberg

Figure 105: Sea company information Date 31st Dec 2017 Ticker (Bloomberg) SE US Management CEO Forrest Li CFO Tony Hou Chairman Forrest Li Shares Shares outstanding mil 174 Share price USD 13.33 Free float % n/a Insiders/Stakeholders n/a Source: FactSet

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Keywords Studios (Buy)

Figure 106: Keywords overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 1.3 0.13 good small events Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Keywords Studios Plc’s (Keywords) exposure to esports lies in that it receives outsourced work from gaming companies such as Tencent and Activision Blizzard. As esports drives demand for the gaming companies it will increase demand for publishers to create new content, whether new games, characters or landscapes, which in turn directly increase the demand for Keywords’ services. Keywords is already monetising this supply chain effect, most notably with League of Legends . Keywords also generates some revenues from assisting with esports events, but we presume these are currently fairly small.

Company description Keywords is listed on the London Stock Exchange and headquartered in Dublin. The company is a global supplier of specialised services to content designers and distributors in the video game space. Its teams, based in 27 studios across Europe, North and South America and Asia, work across seven service lines to assist clients including Microsoft, Tencent, Sega, Google, Nintendo, Bandai Namco, EA, Activision Blizzard, Take Two and Warner Bros. Keywords has worked on games including League of Legends , Overwatch , NBA 2k , Assassin’s Creed , Star Wars Battlefront , Madden NFL , Clash of Clans and FIFA . The first of its service lines, Art Services, engages in design and creation activities including 2D and 3D concept art, 2D and 3D animation, visual effects and in-game cinematics; its Engineering business enriches both the visual and performance elements of its clients’ products, with its offering including multi-platform gaming development, performance optimisation and virtual and augmented reality development. The Audio Services division of Keywords includes original language audio production, casting and talent management services and voice recording. Keywords’ Localisation division translates game content into more than 50 languages, while the company’s Localisation and Functional quality assurance teams guarantee that products are not impaired by any language-related bugs or inconsistent with product testing requirements. Finally, Keywords’ Player Support division operates across all time zones and in more than 50 languages.

Growth outlook and opportunities A key strength of Keywords is that, whichever way esports develops, it has exposure to nearly all the possible scenarios. For instance, if mobile esports continues to grow or if certain games or regions experience significant esports growth, Keywords stands to benefit from the demand it generates from the gaming companies. Additionally, video game creators are outsourcing an increasing proportion of the development cycle. Therefore, we expect the growth of the market in which Keywords operates to outstrip that of the overall video game market, providing Keywords with substantial organic growth opportunities. Yet with an indicated ambition of Keywords being further consolidation of the fragmented market in which it operates, we expect M&A to continue to contribute to growth. The company has a track record of pursuing targets with the potential to strengthen either Keywords’ operational or geographical scope. For instance, in October 2017, Keywords acquired North America-based VMC, a provider of video game functional testing and customer support in the region, for cUSD66m.

Key risks Keywords is likely to continue to pursue M&A as a growth strategy – and will therefore continue to face the risks that the acquisition process brings with it, such as integration and command and control issues.

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Figure 107: Keywords sales and EBIT margin Figure 108: Keywords EV/sales and P/E (2018 P/E: 34.1)

120 30 5 150 Sales EBIT % EV/sales P/E 100 25 4 120 80 20 3 90 60 15 P/E P/E P/E P/E EBITEBIT (%) (%)

EBITEBIT (%) (%) 2 60 EV/sales EV/sales 40 10 EV/sales EV/sales SalesSales (EURm) (EURm) SalesSales (EURm) (EURm) 20 5 1 30

0 0 0 0 2013 2014 2015 2016 2014 2015 2016 2017

Source: Bloomberg Source: Bloomberg

Figure 109: Keywords’ revenue split by segment (2016) Figure 110: Keywords market capitalisation

Customer Art creation 1,200 support 17% 6% 1,000 Localisation testing 800 17% 600 Audio Functional 18% 400 testing MarketMarket capcap (GBPm) (GBPm) 9% MarketMarket capcap (GBPm) (GBPm) 200 0 Localisation 33% 2014 2015 2016 2017

Source: Company reports Source: Bloomberg

Figure 111: Keywords company information Date 31st Dec 2017 Ticker (Bloomberg) KWS LN Management CEO Andrew Day CFO David Broderick Chairman Ross Graham Shares Shares outstanding mil 62 Share price GBp 1,600 Free float % 88.0 Insiders/Stakeholders Peq Holdings Ltd. % 6.5 Andrew Day % 5.3 Ross Graham % 0.1

Source: FactSet

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Esports team investment: a gamble

● In recent years there has been a significant rise of investments into esports teams. Top non-Asian esports teams are estimated to be worth USD50m-150m. ● This appears to be largely driven by entertainment and sports companies such as Madison Square Garden, which see an opportunity to leverage their entertainment expertise and assets through esports. ● We see investments into esports teams as highly risky. This is because most teams are currently loss-making and also face considerable uncertainty with regards to future income streams. ● However, a few teams could potentially succeed and generate as much revenue as some of the best-known sports teams, although this will probably take more than 10 years.

“In 2015, Madison Square Garden hosted the sold-out North American League of Legends Championship Series Summer Finals – a first for ‘The World’s Most Famous Arena’, and a sign that esports was ready to command sports’ biggest stage. Since then, as we have been actively exploring opportunities to enhance MSG’s portfolio of live experiences, we have been keenly interested in esports as a natural extension of our core business. The sport now stands on the verge of enormous change, which we believe has the potential to generate significant growth.” David O’Connor, CEO, Madison Square Garden (31 July 2017)

Figure 112: Madison Square Garden – League of Legends World Championship semi-final 2016

Source: https://meta.catalystsports.com/2017/10/03/meta -report -10317/

According to industry experts, the vast majority of top western esports teams have revenues in the seven digits and are currently loss-making. However, investors see significant upside in the future, indicated by the recent investment surge in esports teams. There are several factors that have driven this movement, the most obvious one being the growth in the esports audience. Additionally, the new franchise models introduced by Tencent and Activision Blizzard have also served as a catalyst for this process, as the teams need cash to pay the franchise entry fee and the new model provides a more secure investment opportunity for investors.

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Finally, there are potential synergies that can be realised. Many of the investors come from the sports and entertainment industry and hold valuable resources that the esports teams can leverage such as sponsorship contacts, marketing expertise and stadiums. One such investor is the Madison Square Garden (MSG) company, which owns several prominent venues, as well as the NBA New York Knicks and the NHL New York Rangers. On 31 July 2017, MSG announced its acquisition of a controlling interest in the esports team CLG. “We look forward to utilising our experience in sports team business operations, including in marketing partnerships, media rights, event operations, ticketing and merchandise to help CLG build on its tremendous success and to play an active role in the development of this exciting industry.” David O’Connor, CEO, Madison Square Garden (17 August 2017) Another significant investment was on 19 January 2018 when the Russian internet company Mail.Ru Group bought 100% of the esports company ESForce for USD100m, minus any debt. There would also be an additional USD20m payment contingent on performance. ESForce has a variety of esports assets, including two top esports team franchises, Virtus Pro and SK. Revenues for 2017 were estimated to be at USD19m and EBITDA at -USD15m. The company also stated that ESForce had had 120m hours of online content watched and 116m users during 2017. “The very obvious strategic fit with Mail.Ru Group needs little explanation and we will be looking to leverage our unrivalled position inside of the social networks and gaming in order to drive ESForce to even greater success.” Boris Dobrodeev, CEO Mail.Ru Group (22 January 2018) Although other deals have provided much fewer disclosures, industry experts estimate that other high-profile non-Asian teams are being priced at a total valuation of USD50m-150m during recent transactions. Other recent notable team investment include ● Hersh Family Investments, a private equity firm, invested USD35m into Team EnVyUS, according to an ESPN press release. ● Joe Montana, NFL Hall of Famer, invested in the esports team Cloud 9. The team raised a total of USD19.7m in its last funding round, shown in a September 2017 SEC filing. ● Mobile TeleSystems, the Russian telco, bought the esports team Gambit Gaming. ● The Kraft Group, owners of the NFL’s New England Patriots, bought the Overwatch Boston team. ● Philadelphia 76ers, an NBA team, acquired a controlling interest in Team Dignitas. ● Joe Lacob, majority owner of the 2017 NBA champions Golden State Warriors, acquired a slot in the North American League of Legends , according to an ESPN press release. ● European football clubs PSG, Manchester City, West Ham and Ajax have invested in esports teams and players, but generally for less-developed esports such as FIFA . ● NetEase, a Chinese technology company focused on online games, bought the Overwatch Shanghai team slot. ● Comcast, the media giant, bought the Overwatch Philadelphia team through its subsidiary, Comcast Spectacor. High-risk investing In our opinion, most of these team investments are quite risky. Not only are the teams generally loss-making at present, but there are significant risks they will not make any money in the future, too. This is especially true for teams involved in unproven esports such as Overwatch and the NBA2K . We have spoken to several experts about the economic viability of the Overwatch League, and most do not see how teams will recoup the USD20m investment unless viewership suddenly explodes, which they feel is unlikely. However, we do note that it is still early days for the Overwatch League, and financial detail disclosures have been very limited.

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Companies investing in League of Legends teams are probably the least risky as it has the greatest viewership. Additionally, Tencent has a strong motivation to ensure the teams are incentivised to continue to operate in order to sustain fan engagement. But even League of Legends teams have risks as no one really knows how long the game will remain popular. However, some of these teams will be capable of adapting to changes in the esports scene and succeed, and there are already teams that have lasted more than a decade in the industry. If current growth trends continue for the esports industry as a whole, then some of these teams could become as large as Manchester United, which has revenues of USD0.7bn. However, this will likely take more than 10 years and could be competing in an esport that is yet to be born. Profiles of companies with esports team investments In the following pages, we provide a company profile for MSG. Additionally, in Figure 113 below, we highlight two Russian companies that also acquired high-profile esports teams.

Figure 113: Companies invested in esports teams

Financials Dec 2017 (USDbn) Market cap. Sales, LTM Core business Esports exposure Mobile TeleSystems 9.6 7.4 Telco. (Russia, Central and Eastern Europe) Acquired parent company of Gambit Esports, an esports team franchise. Launched esports division within innovation centre. Mail.Ru 6.4 0.75 Internet company: e-mail, social networks, Acquired 100% of global esports company ESForce online games. (Russia) for USD100m. Source: Bloomberg, FactSet

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Madison Square Garden (not covered)

Figure 114: Madison Square Garden overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 5.0 1.4 neutral immaterial events, team Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure MSG has exposure to esports through its recent acquisition of the esports team CLG. High- profile non-Asian teams such as CLG currently only tend to generate seven-digit revenues, but this could grow substantially. MSG also uses its venues for esports events.

Company description MSG is traded on the New York Stock Exchange and is an American holding company active in the sports and entertainment industries, with assets including venues, sports franchises and entertainment productions. The company operates through two distinct business divisions: MSG Sports and MSG Entertainment. MSG Entertainment engages in the organisation and hosting of events, such as concerts, performing arts presentations and family shows, in the company’s venues. These venues, all based in the US, include Madison Square Garden, Radio City Music Hall and the Beacon and Chicago Theatres. MSG Sports, on the other hand, is home to professional sports teams including the New York Knicks (NBA), the New York Rangers (NHL) and the New York Liberty (WNBA). MSG Sports also organises live events across a range of sports, at both professional and college levels, including mixed martial arts, bull riding, tennis, wrestling and hockey, as well as basketball and esports. MSG took its first major step into esports when it hosted the North American League of Legends Championship in 2015. In 2017, MSG Sports deepened its involvement in the esports industry through its acquisition of a controlling interest in CLG, an American esports organisation. CLG currently operates eight teams that compete in a range of games, including League of Legends and Counter-Strike: Global Offensive . In addition to this acquisition, MSG is further strengthening its position in esports using its owned sports franchises, the New York Knicks, to partake in next year’s NBA2K Esports League.

Growth outlook and opportunities MSG is well positioned to benefit from the growing popularity of esports. The company’s portfolio of venues and its experience in organising, hosting and marketing large-scale entertainment events can be leveraged when pursuing projects in the industry, as it has realised.

Key risks While MSG’s acquisition of CLG may prove fruitful for the company, we see it as risky. The majority of esports teams in the West are unprofitable, and even though the new franchise model should improve this situation, there is still a chance that profitability will remain poor. Additionally, CLG has a heavy focus on League of Legends , and even though it has been the most successful esport, there is no guarantee that the game will remain popular among viewers.

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Figure 115: MSG sales and EBIT margin Figure 116: MSG EV/sales

1,800 0 3.5 Sales EBIT margin 1,500 -1 3 2.5 1,200 -2 2 900 -3 1.5 EV/sales EV/sales EV/sales EV/sales EBITEBIT (%) (%) EBITEBIT (%) (%) 600 -4 1 SalesSales (USDm) (USDm) SalesSales (USDm) (USDm) 300 -5 0.5 0 -6 0 2015 2016 2017 Jun-16 Dec-16 Jun-17

Source: Bloomberg Source: Bloomberg

Figure 117: MSG’s revenue split by segment (2017) Figure 118: MSG market capitalisation

6 5 MSG Ent. 38% 4 3 MSG 2 Sports

(including MarketMarket capcap (USDbn) (USDbn) (including MarketMarket capcap (USDbn) (USDbn) 1 esports) 62%62%62% 0 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17

Source: Company reports Source: Bloomberg

Figure 119: MSG company information Date 31st Dec 2017 Ticker (Bloomberg) MSG US Management CEO James Dolan CFO Donna Coleman Chairman James Dolan Shares Shares outstanding mil 19 Share price USD 210.85 Free float % 96.0 Insiders/Stakeholders Charles Dolan % 1.2 JamesDolan % 1.0 David Dolan % 1.0

Source: FactSet

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Tech giants: battling for eyeballs

● Many of the tech giants such as Amazon, Google, Facebook and Tencent have entered the esports broadcasting space in order to strengthen their ecosystems. ● Amazon bought the game streaming website Twitch and has also launched initiatives to turn its 100m-plus user base into Amazon Prime subscribers. ● Tencent has invested in the Chinese game streaming platform Douyu and has its own streaming app, Penguin eSports. Unlike western viewership, which is currently dominated by Twitch, there are numerous Twitch-sized streaming platforms in China competing for the world’s biggest esports audience.

“Broadcasting and watching gameplay is a global phenomenon and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month.” Jeff Bezos, Amazon founder (August 2014) Twitch is currently the most popular esports broadcasting website in the West. It was founded in June 2011 and was acquired by Amazon in 2014 for USD842m. It was reported that Google was also in the bidding.30 At the time of the acquisition Twitch had 55m monthly users, with the site currently claiming more than 100m monthly users and 10m daily users who watch on average 106 minutes of streaming content per day. The site streams 24/7 and has a peak concurrent viewership of 2.3m with an average of c740k viewers over the past year. The site also claims to reach half the millennial males in the US. It should be noted, however, that only c20% of all gaming hours viewed are esports, as esports events are only held a small proportion of the time, but dominate viewership when they are aired. 31

Figure 120: Twitch average daily concurrent viewer growth

Source: https://stats.twitchapps.com/

30 https://www.forbes.com/sites/ryanmac/2014/08/25/amazon-pounces-on-twitch-after-google- balks-due-to-antitrust-concerns/#14f2a0da5ab6 31 https://newzoo.com/insights/articles/esports-drives-21-3-of-twitch-viewership/

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Figure 121: Total hours viewed on Twitch per game for 2017 Q1-Q3

800 Total hours Esports hours 700

600

500

400 (millions) (millions) (millions) (millions) 300 HoursHours viewed viewed HoursHours viewed viewed 200

100

0 League of PUBG Dota 2 Counter- Hearthstone Overwatch StarCraft Legends Strike

Source: Newzoo

The non-esports content generated on Twitch compromises of roughly 2.2m people per month who broadcast their gameplay. These people, known as streamers, include both pro esports players who receive an audience for their skill, as well as amateurs who acquire audiences due to their entertaining personalities, although many are a mix of both. These channels are monetised through advertisement, sale of merchandise and subscription fees. Although viewing is free, paying a USD5 subscription to a streamer’s channel gives the viewers additional perks, such as ad-free viewing. Many people pay the subscription with the intention of supporting their favourite streamers, although Twitch takes approximately a 50% share of this revenue. People can also give donations to streamers, and for many full-time streamers this is the majority of their revenue. For the purposes of this report, individual streams are not considered esports, as the line would get blurred trying to distinguish who is a pro esports player and who is just an entertainer. Rather we define esports as events organised either by the game publishers themselves, or third parties that run esports leagues such as the Electronic Sports League (ESL).

Figure 122: World’s best League of Legends player, Faker, streaming on Twitch – 245k peak viewers

Source: https://twitter.com/slasher/status/828631198624776192

In September 2016, Twitch launched Twitch Prime. This is a membership benefit that people receive if they are an Amazon Prime subscriber, which provides perks on Twitch such as ad-free viewing and in-game loot.

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“Twitch Prime has grown dramatically since it was first introduced in September 2016 in North America and western Europe because it helps broadcasters attract subscribers, game developers reach more customers, and viewers get free digital loot, while helping to support their favourite channels.” Ethan Evans, SVP, Twitch (June 2017) Additionally, in June 2017, Twitch and Blizzard announced a new deal where Twitch Prime users would receive special in-game perks when playing Blizzard games. Also included in the deal was that Twitch will get streaming rights to select Blizzard esports content such as the Overwatch League. “The deal, which reflects Blizzard and Twitch’s long-term investment and ongoing commitment to their passionate communities, supports the world-class competitive ecosystem across all of Blizzard’s esports properties.” Blizzard and Twitch press release (June 2017) Ultimately, we see Twitch Prime as an attempt from Amazon to merge its own consumer ecosystem with the Twitch viewer-base. Twitch users now have an incentive to sign up for Amazon Prime, which not only brings Amazon new subscribers, but opens up a new market for it to sell its goods. However, Amazon is not alone when it comes to entering the esports broadcasting space. YouTube announced its YouTube Gaming channel in 2015 and seems to be cannibalising some Twitch’s viewership. Although there is limited viewership data for YouTube, from personally monitoring the November 2017 League of Legends World Championship, YouTube appeared to have roughly 30% of Twitch’s viewership. YouTube, Twitter and Facebook have also all signed deals with the content provider ESL in order to provide esports content. “We’re all in. We’re putting all of our cards, all of our chips on the table. We fundamentally believe that games are an incredible way to connect people to each other and videos are an incredible way to do that, too. With our understanding of those two concepts, we’re going to invest and invest. Some things will work, some things won’t.” 32 Leo Olebe, director global games partnerships, Facebook, (September 2017) “What we’re trying to accomplish is build the world’s community to play, watch and share games. “There are 800m people connecting to games on Facebook, and we’re constantly thinking of what we can do to engage that community and deliver more meaningful interactions.” 33 Patrick Chapman, gaming and esports partnerships, Facebook (September 2017) Although western companies seem optimistic about the esports broadcasting opportunity, they are unfortunately not in one of the most important markets, China. To put Twitch’s viewership in perspective to Chinese game streaming sites, we can look at the 2016 League of Legends World Championship viewership. Peak viewership for the final was 14.7m, while all the League of Legends channels on Twitch combined had c1m peak viewers. This implies that Twitch only had 7% of the finals viewership, and we estimate that Chinese streaming sites accounted for c80% of the remaining viewership.

32 http://www.gamesindustry.biz/articles/2017-09-07-facebooks-esports-strategy-were-going-all-in 33 https://www.forbes.com/sites/darrenheitner/2017/09/07/facebook-pushes-further-into-esports- with-paladins-partnership/?source=bloomberg#7e27b2342d1b

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Currently there are numerous large game streaming websites in China. According to the CGIGC 2017 China E-Sports Industry Report, the combined value of the top seven Chinese game streaming platforms had a valuation of more than RMB20bn (USD3bn). 34 Douyu is one of these sites and is backed by Tencent in an effort to further cement its dominant position in the esports and gaming market of China. According to an article by SCMP in March 2016, Douyu had 100m registered users and 15m daily active users, although this has likely grown significantly since then. Douyu has been through multiple funding rounds since its 2013 inception and was seeking a USD1.2bn valuation at its last one, according to a February 2017 press release by Bloomberg. 35 Additionally, Tencent’s video streaming app, Penguin esports, now has the same amount of daily active users as Twitch. “Our esports app, Penguin eSports, is also seeing rapid growth in live broadcast views and exceeded 10m daily active users.” James Gordon Mitchell, chief strategy officer, Tencent (Q3 2017 earnings call)

34 www.cgigc.com.cn/ 35 https://www.bloomberg.com/news/articles/2017-02-20/chinese-game-site-said-to-seek-funds- at-1-2-billion-valuation

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Media companies: trying to stay relevant

● Western media companies have started to see esports as a way of reaching a younger TV audience. While many media companies have begun to broadcast esports, others such as Time Warner and MTG have gone a step further and entered the esports content creation business. ● We remain uncertain about the success of esports on TV in the West as audiences might not be large enough to make it economically viable. ● With regards to the esports content creation business, we think there is merit in the economic value it brings. However, we worry about their future margins and sustainability, as the gaming companies will have the majority of the bargaining power in this relationship. ● There are also many new small companies emerging that are also creating esports content, such as Gfinity. Generally we feel these companies will struggle as the esports content creation business is currently not profitable and will struggle from competition from larger companies.

Esports on TV in the West – is it different this time? The concept of esports on linear TV is far from new. South Korea has been actively televising esports successfully for nearly two decades. Even in the UK a show called Gamemaster was aired on television from 1992 to 1998. MTV has also hosted an esports tournament final in 2005. However, in general, televised esports in the West has been limited and not very successful. One of the biggest flops was the Championship Gaming Series (CGS), which began in 2007 and was broadcast on Sky, Direct TV and STAR TV. 36 37 CGS had a significant budget with high production quality and USD2.2m in prize money. Nonetheless, the show ended after two seasons in 2008 as it was not economically viable, likely due to a lack of viewers. 38 After CGS in 2008, there was relatively little esports activity for the western media companies. However, as viewership for traditional TV has continued to decline among younger demographics, and the audience for esports has continued to grow, broadcasters now see an entry into esports as a way of staying relevant.

Figure 123: Traditional TV viewing in US per age group – viewership decline among the young

60 2011 Q1 2017 Q1 48

36 (hours) (hours) (hours) (hours) 24

12 TraditionalTraditionalTV TV viewing viewing per per week week TraditionalTraditionalTV TV viewing viewing per per week week 0 12-17 18-24 25-34 35-49 50-64 65+

Source: Statista

36 http://www.businesswire.com/news/home/20051012005278/en/Cyberathlete-Professional- League-1000000-World-Tour-Finals 37 https://www.esportsearnings.com/leagues/169-championship-gaming-series 38 https://www.theregister.co.uk/2008/11/19/championship_gaming_series_closes/

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“Sky plc today announces that it has invested GBP1.55m in Ginx TV, the owner of the UK and Ireland’s only 24-hour esports TV channel, GINX eSports TV. ITV will invest an equal amount, and both companies will have the option to acquire further holdings. The investment follows the launch of the channel on the Sky platform in June.” Sky (20 September 2016) “We’re really excited to have followed up our commercial partnership with Ginx with this investment, which will help us deepen our understanding of esports and its audience. At Sky we are committed to bringing new programmes and channels such as GINX eSports TV to support and extend our leadership position in content.” Emma Lloyd, group director of business development, Sky (20 September 2016) “Big announcement. We’re going to bring you four hours of live esports coverage every weekend for the next six weeks. In the first deal of its kind for the BBC (we like to be first), we’ve signed up the Gfinity Elite League Series One.” BBC (28 July 2017) “BT Sport is set to further strengthen its commitment to esports TV broadcasting by showing the Gfinity Elite Series throughout August and into September.” BT Sport (1 August 2017) “In 2016, Canal+ took up the challenge of accompanying the booming popularity of esports. In particular, the group launched an esports magazine, the Canal E-sport Club (CES), exhibited at the Paris Games Week show and produced a documentary about esports stars in Asia. Ultimately, Canal+ intends to create its own esports leagues in France and organise its own events.” Vivendi, annual report (2016) “This move will complement Canal Plus Group’s sponsorship of Team Vitality, one of France’s renowned esports teams. “Our esports activities are sending out the message that Canal+ is a brand that can deliver because we’re a part of the esports world. “That is part of our global policy to reach the millennials who are not watching TV.” Christophe Agnus, SVP Head of Esports, Vivendi, Esports Bar (2017) It is not clear whether esports on TV will be a success in the West. Currently, audiences are likely still too small to make it economical. And even though esports viewership will likely grow in the future, a greater portion of these viewers will likely move onto online platforms. However, most broadcasters have kept renewing their esports content, although for many it is still in the experimental stages. Ultimately for esports, TV viewership success will be a catalyst for the industry both in terms of generating revenues as well as generating interest in esports in general. But TV acceptance is not critical to esports’ success, as TV viewership in younger cohorts continues to decline and viewership on digital platforms such as Twitch and YouTube continues to grow. MTG’s esports content creation business – c7% of group revenues In September 2015, MTG acquired 74% of Turtle Entertainment, a holding company for the esports company Electronic Sports League (ESL), for EUR78m. ESL was initially founded in 2000 and has been one of the most prominent esports organisations to date. Additionally, in November 2015, MTG acquired 100% of the esports company DreamHack for SEK244m. DreamHack was founded in 1994, and although smaller than ESL, it has long been a pillar of the esports community. Both organisations have played a central role in developing esports in the West as their events connect all the stakeholders of the esports ecosystem, as seen in Figure 124. This includes: ● inviting pro players to tournaments and selling tickets to fans; ● negotiating with game owners to use their game; ● acquiring sponsorship and advertisement deals; ● renting venues; and

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● producing and distributing esports content to broadcasters

Figure 124: ESL and DreamHack at the heart of the esports ecosystem

Source: MTG

Intel Extreme Masters One of ESL’s most famous events is the Intel Extreme Masters (IEM), which has been running since 2006. Each year, the IEM hosts tournaments in several countries and in 2017 they were held in China, the US, South Korea and Poland. Its largest event for 2017 was Katowice, Poland, which was its fifth year running. The event had 173k attendants and a total of 46m unique views over two weekends. It also offered a virtual reality broadcast, but it only had 340k unique views over the event and 3k peak concurrent viewers, although there was a 161% growth since its previous VR tournament in 2016.

Figure 125: Intel Extreme Masters – Katowice 2017 – distributed to 70 TV and online partners

Source: https://www.redbull.com/my -en/get -all -the -stats -from -the -intel -extreme -masters

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Figure 126: Intel Extreme Masters infographic – Katowice 2017

Source: Intel Extreme Masters

MTG esports ––– 40% organic growth H2 2017 and profitable in 2018 MTG has continued to invest in esports since its acquisitions in order to expand its footprint. In 2016, it had the highest share of hours broadcast (not hours viewed) on Twitch with 34% compared to Riot’s 28%. ESL now also hosts more than 50 events globally. “And we do expect to continue to see the very strong growth, of course, that we’re having particularly in esports. As you can see now, we have signed up a range of new interesting deals, which we have invested in so far, and there is a deal with Facebook, there is a deal with Twitter, there is a deal with YouTube, there is a deal with Sony.” Jørgen Madsen Lindemann, CEO, MTG (Q1 2017 earnings call) “Our esports business delivered 49% organic growth in the quarter, meaning that we’re on track to generate more than 40% organic growth for our esports business during the second half of the year.” Jørgen Madsen Lindemann, CEO, MTG (Q3 2017 earnings call) However, despite MTG’s success in obtaining a large esports reach and growing revenues rapidly, it has not yet managed to make its operations profitable. ESL and DreamHack are both part of MTG’s division, MTGx, which also holds other gaming-related assets. Although MTGx does not break down its costs and revenues for the different elements within the division, we estimate from previous disclosures that about two-thirds of its 2016 revenue, which equates to cSEK900m (cUSD110m), is from ESL. For 2017, this is expected to grow to cSEK1.2bn (cUSD140m), c7% of group revenues. Management has also disclosed that MTGx’s losses have been due to its investment into esports, which is primarily ESL. The company’s ambition, however, is to deliver MTGx’s first quarterly profit in Q4 2017, although the Q4 profit forecast has been revised down slightly and excludes a potential SEK35m non-cash receivable write down.

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“It takes a bit longer time for convincing the big sponsors and so forth that the returns in esports are as good as where they are today. “Mainly it is that it takes longer time than we anticipated to get these higher-margin deals in. And people are or companies are – you can argue – tiptoeing a bit more than we anticipate.” Jørgen Madsen Lindemann, CEO, MTG (Q3 2017 earnings call)

Figure 127: 2016 MTG sales and income – MTGx 8% of sales

12,000 Sales Operating income 10,000

8,000

6,000 SEK SEK SEK SEK 4,000 (millions) (millions) (millions) (millions) 1,326 2,000

- -251 -2,000 Nordic International MTG Studios MTGx Central Entertainment Entertainment operations & eliminations

Avg. exchange rate: 1SEK: 0.12USD Source: Company reports

The company also aims to make 2018 the first full year where MTGx is profitable. This will not just be driven by MTGx’s recent 2017 acquisitions of profitable gaming companies, but management said they believe all the products within MTGx should be profitable for 2018. 39 We do believe ESL can become profitable on the basis of that esport revenues will continue to expand and outpace costs due to economies of scale. However, there are several concerns that could significantly pressure ESL’s profits in the future.

Business model strengths and weaknesses Unlike with sports, where no one owns the intellectual property (IP) of the game, in esports, the IP is owned by the game companies. Therefore, esports companies such as ESL depend on approval from the game companies to use the game for its tournaments. In the case of League of Legends , Tencent has decided that it will host the main esport league itself and that ESL can do separate tournaments. Therefore, ESL’s League of Legends tournaments do not get the same traction as Tencent’s tournaments as they are seen as second tier. Currently, ESL is very dependent on Counter-Strike , which is its main esport event. Counter-Strike is owned by Valve (private company), which has historically had a hands-off approach when it comes to third parties using its games for tournaments and leagues. This is good for ESL, however, if Valve changes its mind at some point and wants to limit ESL’s access to its games, or Valve’s games become less popular, ESL might have a serious problem. An argument could be made that ESL has a competitive advantage for providing esports content over game owners due to economies of scale. This is because it is more efficient for one single company to build up the network and expertise to host events and provide esports content, rather than each individual game company doing it themselves. In theory, therefore, ESL should be able to offer a cheaper esports solution than the game companies can provide themselves. However, game companies might feel that esports is too critical to their game’s success and therefore do not want to outsource it. This is likely why game owners such as Tencent have chosen a middle ground, letting ESL do secondary events while Tencent hosts the main events itself.

39 51% of InnoGames was acquired 30 April 2017 and 100% of Kongregate was acquired 21 July 2017.

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Another strength of ESL’s business model is that it can provide a turnkey solution for new game owners entering the esports scene. An example of this is the new game PlayerUnknown’s Battlegrounds (PUBG), which currently rivals League of Legends on Twitch for viewership. “Publishers and developers are more focused than ever on esports as a means of driving player engagement, which is why we have been working with PUBG at Gamescom and upcoming IEM in Oakland” Jørgen Madsen Lindemann, CEO, MTG (Q3 2017 earnings call)

Figure 128: Key players in ESL’s distribution network

Source: ESL

To some extent, whether a game owner thinks its worth creating its own esports content depends on the game’s lifespan. If a game only lasts a few years, the game owners might not want to invest time and money into content creation and rather outsource it. But if a game lasts as long as League of Legends , which has had a growing player base for seven years, then the game company might want to make an investment into content creation in order to control the marketing process. Another issue ESL faces is that game companies can potentially squeeze ESL’s profit margins in the future. Currently, game companies subsidise esports events that ESL hosts because the events themselves are loss-making. The game companies are incentivised to do this because for them the event is marketing for their games. However, if esports events at some point become profitable, game companies might instead charge a fee to content providers such as ESL to use their game. This therefore sets an upper bound on the margins that ESL can charge in the future. Margins will also come under pressure as competition starts to flood in. Currently, some of this competition is still relatively harmless, such as the esports company Gfinity. Gfinity is a small UK company with GBP1.5m revenue in 2016, which recently broadcast esports on BBC Three and BT Sport in July 2017. However, there are more resourced companies such as Time Warner, which recently launched Eleague – a direct competitor to ESL that can already compete on some viewership metrics. Additionally, Alibaba’s Alisports has also entered the esports content creation scene. Alisports has said it is willing for its esports business to be loss-making for five years until the market matures. 40 This implies that ESL not only faces serious competition ahead, which will put pressure on its margins, but could also find itself in a battle of attrition. “We are prepared to lose money. We can accept the losses now as we hope to promote this sport. “For a sport that has a lot of participation, it must have a bright future. Even if for now you don’t make a lot of money, in the future you’ll definitely be rewarded. This is something we firmly believe in. “We estimate that in five to 10 years the business model will be more complete.”41 Zhang Dazhong, CEO, Alisports (December 2017)

40 https://esportsobserver.com/alisports-accepts-esports-financial-loss/ 41 https://esportsobserver.com/alisports-accepts-esports-financial-loss/

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Time Warner’s Eleague The media conglomerate Turner, whose parent company is Time Warner, has also started creating esports content through Eleague, which was launched in May 2016 and is a professional esports league that hosts esports tournaments. The show is broadcast on its cable channel TBS and in more than 80 countries worldwide. “It’s really not necessarily by design that we’re looking to take digital content and move it to TV. It’s more just really trying to position the company to be where consumers are. And in looking at secular growth areas and in looking at areas where particularly young people are spending tremendous amounts of time, you obviously have to pay attention to the gaming industry. “In some respects, having Eleague be aired on TBS is somewhat of an experiment.” John Martin, chairman and CEO, Turner (Q1 2016) “We are incredibly excited about this opportunity. I mean, frankly, this is new for us. “Early interest from advertisers and sponsors has been better than we expected as well.” John Martin, chairman and CEO, Turner (19 May 2016) In the US, Eleague has had an average TV viewership of 256k for two different esports, as shown in Figure 129. Eleague’s TV viewership is therefore in the upper range when comparing it to average single esports viewership on Twitch, which provides evidence that there is demand for esports on TV. Although Eleague’s TV viewership would be considered a success by western esports standards, it still lags behind traditional sports such as the NBA, which had an average of 1.7m viewers across the three major US networks, and the NFL at 18.8m. 42 Nonetheless, TBS seemed pleased with Eleague’s initial performance. “We also launched our Eleague gaming network in partnership with WME | IMG, and that’s off to a promising start. And it’s already bringing new younger viewers to TBS.” Jeffrey Bewkes, CEO, Time Warner, earnings call (Q4 2016 earnings call)

Figure 129: Turner’s US Eleague TV viewership – 256k average viewers

450,000 Street Fighters Counter Strike 400,000 350,000 300,000 250,000 200,000 150,000 AverageAverage viewers viewers AverageAverage viewers viewers 100,000 50,000 0

Source: Statista

42 http://www.sportsmediawatch.com/2017/04/nba-ratings-down-espn-tnt-viewership-regular- season/

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Disney’s multifaceted esports approach The media and entertainment giant Walt Disney has entered the esports scene in several ways. ESPN, a Disney subsidiary, has already been broadcasting the game Street Fighter for a few years and the ESPN website also has an esports section. Additionally, the Disney XD channel, which is aimed at a younger audience, also began airing the game Super Smash Bros in 2017. Both Street Fighter and Super Smash Bros finals had approximately 180k average viewers. Disney also partnered with ESL in July 2017 to produce two original series for Disney XD, adding to its esports content. Furthermore, Disney announced in 2017 its investment in aXiomatic, an esports company that has a majority stake in the esports franchise Team Liquid, which competes in nine different esports. Disney has also taken a majority stake in the video streaming company BAMTech. Initially, Disney had a 33% stake in the company, and then acquired an additional 42% interest in September 2017 for USD1.58bn, raising its total ownership to 75%. This is relevant to esports because BAMTech has entered into a partnership with Tencent to create and stream esports content for League of Legends until the 2023 season end. BAMTech will be allowed to monetise the esports content, and in return will pay a minimum guarantee of USD50m annually to Tencent, and any profits earned thereafter will be shared between the companies, according to Dot Esports. 43 “I hope we’re going to do a lot more than that. That’s the minimum guarantee, and I hope we’re going to exceed that by a large margin. And I expect that we will.” Bob Bowman, president, BAMTech, Yahoo! Sports (16 December 2016) However, the project appears to have been delayed, as broadcasting was meant to have started for the 2017 League of Legends tournaments, but now 2018 appears more likely. 44 CBS’s Candy Crush One esport that has significantly outperformed other US esports shows was CBS’s Candy Crush , based on the Candy Crush game. This drew in just over 4m average viewers in its debut, but ratings declined rapidly over the season with the last episode only having 1.2m viewers. 45 However, many would argue that Candy Crush was more of a game show rather than an esport, as it was not professional gamers playing the game in its normal form. We also agree that Candy Crush is not representative of what esports typically are and one should rather look at shows such as Eleague to judge the success of esports on TV. Media company profiles In the following pages, we profile MTG, which has an established esports business, and Gfinity, which is a small UK-based esports company. Additionally, in Figure 130 below, we highlight two other names that have esports exposure.

Figure 130: Media companies with esports exposure

Financials Dec 2017 (USDbn) Market cap. Sales, LTM Core business Esports exposure Vivendi 35 12.9 Multinational mass media conglomerate. Broadcasts esports content, sponsors teams and plans to organise esports events. Owns 27.3% of Ubisoft. Millennial Esports 0.075 n/a Provides turnkey esports solutions and Esports solutions include: video production, creates racing games. (Canada) broadcasting, streaming and league management. Source: Bloomberg, FactSet

43 https://dotesports.com/business/riot-signs-350-million-deal-with-mlb-streaming-tech- divisionbut-wont-leave-twitc-4113 44 https://dotesports.com/business/riot-late-implement-bamtech-16590 45 https://tvseriesfinale.com/tv-show/candy-crush-season-one-ratings/

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Modern Times Group (not covered)

Figure 131: MTG overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 2.8 2.0 neutral small broadcasting, events Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure MTG has esports exposure through its content creation business that accounts for c7% of group revenues. It also broadcasts esports on TV.

Company description Based in Sweden and listed on Nasdaq Stockholm, MTG is a global digital entertainment body whose brands range over TV, radio, digital video, online gaming and esports. The company’s operations are spread across four divisions. Nordic Entertainment, which caters to the markets of Sweden, Denmark, Finland and Norway, and International Entertainment, which focuses on the Baltic States, Bulgaria and the Czech Republic, each offer free-TV, pay-TV and radio services. MTG Studios creates TV shows, films, events and other content, which reach an international audience, while MTGx operates the online games business as well as the esports content creation businesses. MTGx’s esports activities are conducted through DreamHack, which hosts digital festivals, and ESL, which runs esports tournaments. ESL is a frontrunner in digital esports broadcasting on a number of online streaming platforms – Twitch, YouTube, Yahoo Esports and Azubu included. In addition to this, MTGx launched eSportsTV in 2015, a channel devoted entirely to the sport and the first of its kind. eSportsTV is enjoyed by viewers in a number of European regions and will shortly be distributed across areas of Africa.

Growth outlook and opportunities MTG’s esports business is currently on track for 40% organic growth in H2 2017. We believe strong growth will persist for many years to come due to an increasing amount of companies that are allocating capital to esports brand investment, as well as esports viewership growing. Additionally, an increasing amount of gaming companies wish to make their games into esports and ESL offers a turnkey solution. ESL will also have the benefit of scale and therefore will be able to provide a cheaper solution than the gaming companies themselves in-housing esports events. However, MTG’s esports business has not yet been profitable, but the company believes it will be for 2018. This is plausible as it benefits from economies of scale and therefore revenues will outpace costs.

Key risks One of the main risks that MTG’s esports business faces is that it is heavily dependent on the game owners. This is because the game owners decide to what extent ESL can use its games for tournaments. Therefore, if game owners decide that esports is too fundamental to their core strategy and decide to in-house tournaments, ESL is left with fewer revenue streams. Additionally, at present game owners subsidise ESL’s esports tournaments because they are loss-making. If at some point esports tournaments do become profitable, game owners might start charging ESL a fee instead to use its games, limiting potential margins ESL could achieve. Furthermore, an increasing amount of esports companies similar to ESL are starting to emerge, such as Time Warner’s Eleague. Therefore competition could also squeeze ESL’s margins in the future. Finally, ESL does still not have a significant foothold in China, which is one of the most important esports markets. We also think it will be difficult for ESL to enter this market as it will face strong competition from companies such as Alibaba.

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Figure 132: MTG sales and EBIT margin Figure 133: MTG EV/sales and P/E

20 20 3 60 Sales EBIT % EV/sales P/E 2.5 50 15 10 2 40 10 0 1.5 30 P/E P/E P/E P/E EBITEBIT (%) (%) EBITEBIT (%) (%) EV/sales EV/sales EV/sales EV/sales 1 20 SalesSales (SEKbn) (SEKbn) SalesSales (SEKbn) (SEKbn) 5 -10 0.5 10 0 -20 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg Source: Bloomberg

Figure 134: MTG revenue split by segment (2016) Figure 135: MTG market capitalisation

MTGx (online 40 games + 35 esports) MTG 30 8%8%8% Studios 10% 25 20 15 10 MarketMarket capcap (SEKbn) (SEKbn) International MarketMarket capcap (SEKbn) (SEKbn) 5 Ent. Nordic Ent. 19% 63% 0 2011 2012 2013 2014 2015 2016 2017

Source: Company information Source: Bloomberg

Figure 136: MTG company information Date 31st Dec 2017 Ticker (Bloomberg) MTGB SS Management CEO Jorgen Lindemann CFO Maria Redin Chairman David Chance Shares Shares outstanding mil 62 Share price SEK 344.80 Free float % 85.2 Insiders/Stakeholders Kinnevik Ab % 14.6 Modern Times Group Ab % 0.2 Source: FactSet

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Gfinity (not covered)

Figure 137: Gfinity overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 0.069 0.0030 weak all events Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Gfinity is a pure-play esports company that creates content. We think it has a weak position due to its heavy exposure to the UK where esports is limited.

Company description Launched in 2013, Gfinity is an AIM-listed UK-based esports content provider. To date, Gfinity is the only UK listed company wholly dedicated to esports. The company uses its online tournament platform as well as the London-based Gfinity Arena to host a number of popular esports tournaments, featuring games such as League of Legends , FIFA and Call of Duty . The business operates a website that enables subscribers to access gaming information as well as tournament highlights and replays of their own gameplay.

Growth outlook and opportunities Being wholly dedicated to esports activities, Gfinity is well positioned to continue to benefit from growth of the industry. In 2017, Gfinity won landmark deals with both the BBC and BT Sport to air the Gfinity Elite Series on weekends throughout the July-September 2017 period. The simultaneous broadcast of the tournament on two of the UK’s most prominent sports TV channels has the potential to dramatically increase brand awareness of Gfinity in the UK. In addition, Gfinity has developed events for major companies in the gaming industry, such as Microsoft and Activision Blizzard, and may be able to capitalise on its relationships with these companies in the future.

Key risks From our perspective there are two key risks. First, viewership figures appear small and may underperform expectations. Although the company claimed 40% viewership growth from its season one to season two, the whole of season one only had 3m cumulative viewers over a two-month period. If we compare this to ESL, which had 46m unique viewers over two weekends, Gfinity is lagging significantly. Therefore, if it cannot continue to grow viewership at a sufficient pace, it may risk media companies cancelling their contracts with the company. However, due to that it is currently mainly exposed to the UK where esports is relatively limited, we struggle to see it developing a large audience in the near future. Additionally, Gfinity faces competition from other esports content providers that have greater resources, which will make survival harder as it remains unprofitable.

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Figure 138: Gfinity sales and EBIT margin Figure 139: Gfinity EV/sales

2.5 0 30 Sales EBIT % 2.0 25 -200 20 1.5 -400 15 1.0 EBITEBIT (%) (%) EBITEBIT (%) (%) EV/sales EV/sales EV/sales EV/sales 10 SalesSales (GBPm) (GBPm) SalesSales (GBPm) (GBPm) -600 0.5 5 0.0 -800 0 2015 2016 2017 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17

Source: Bloomberg Source: Bloomberg

Figure 140: Gfinity revenue split by segment Figure 141: Gfinity market capitalisation

N/A 60 50 40 30 20 MarketMarket capcap (GBPm) (GBPm) MarketMarket capcap (GBPm) (GBPm) 10 0 2015 2016 2017

Source: Source: Bloomberg

Figure 142: Gfinity company information Date 31st Dec 2017 Ticker (Bloomberg) GFIN LN Management CEO Neville Upton CFO Jonathan Hall Chairman Tony Collyer Shares Shares outstanding mil 218 Share price GBp 24 Free float % 40.9 Insiders/Stakeholders Charles Street Int. Holding % 29.0 Nigel Wray % 13.4 Neville Upton % 6.7 Source: FactSet

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PC hardware companies: an esports boost

● Esports can benefit PC hardware companies that have significant exposure to video gaming products. This is because esports can drive demand for their products and provide a strong marketing platform. ● We feel Nvidia is particularly well positioned to benefit from esports due to its dominant market position. Additionally, it has significant esports exposure as 59% of revenues come from gaming hardware, which have had a CAGR of 39% between 2014 to 2017. ● We believe Logitech and Razer will also benefit from the esports trend but face strong competition. Intel has a strong and dominant position in the gaming hardware industry, but due to its size its relative exposure to esports is small. ● The main risk we see to the PC hardware companies is the rise of mobile phone gaming and mobile esports.

“75% of new [GeForce] purchases in emerging markets in China are motivated by esports. In developed markets, it’s about 55%. The combination of new gamers coming into esports, the motivation to buy GPUs is really a key driver of our business.” Jeffrey D. Fisher, senior vice president, GeForce, Nvidia (10 May 2017) “It’s been an explosion of a business for us. We’re getting deeper and deeper into esports with every launch.”46 Bracken Darrell, CEO, Logitech (July 2017) “Now, gaming is a great example of where we see growth. Let’s talk about esports for a minute. Stadium events, like the Intel Extreme Masters, and ground-breaking online platforms like Twitch have driven explosive growth in this area. Esports enthusiasts, when they leave the stadiums, when they leave that online experience, are craving to indulge in the same experience they’ve just witnessed their gaming heroes indulging.” Venkata S. M. Renduchintala, chief engineering officer, Intel (9 February 2017) Esports driving PC hardware demand The esports trend has benefited the PC hardware companies in two ways. First, although hard to prove empirically, we believe esports acts as a general catalyst for the growth of the gaming industry and therefore raises the demand for PC gaming hardware. Second, esports provides a great venue for PC hardware companies to market their goods as esports audiences will generally be consumers of gaming hardware. The PC hardware companies were some of the earliest to actively get involved in sponsoring esports events. At present, most of the well-known hardware companies are involved in marketing their products through esports and see it as an important driver for their businesses. These include Nvidia, Asus, Acer, Dell, Razer and Logitech, with several of these companies selling PC gaming hardware under their gaming brands.

46 https://www.cnbc.com/2017/07/27/top-esports-gamer-talks-explosion-in-gaming-with-logitech- ceo.html

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Figure 143: Logitech gaming revenue progression Figure 144: Nvidia gaming revenue progression

350 21% 5 100% USDm (lhs) % (rhs) USDbn (lhs) % (rhs) 300 18% 4 80% 250 15% 200 12% 3 60% 150 9% 2 40% 100 6% 1 20% 50 3% GamingGaming revenue revenue (USDm) (USDm) GamingGaming revenue revenue (USDm) (USDm) GamingGaming revenue revenue (USDbn) (USDbn) GamingGaming revenue revenue (USDbn) (USDbn) GamingGaming revenue revenue shareshare (%) (%) GamingGaming revenue revenue shareshare (%) (%) GamingGaming revenue revenue shareshare (%) (%) 0 0% 0 0% GamingGaming revenue revenue shareshare (%) (%) 2010 2011 2012 2013 2014 2015 2016 2017 2014 2015 2016 2017

Note: March fiscal year end Note: January fiscal year end Source: Company reports , Factset Source: Company reports

One of the most prominent examples of esports sponsorship has been Intel, which has been the main sponsor for the Intel Extreme Masters (IEM) tournaments since 2006. More recently it, together with Hewlett Packard (HP), announced its sponsorship of the Overwatch League. “For more than 12 years Intel has consistently supported the esports community and we’re always looking for ways to help improve how they play, watch, and compete. We’re proud to sponsor the Overwatch League and equip all competition PCs with Intel® Core™ i7 processors to contribute to a great experience for fans and competitors.” John Bonini, VP gaming and esports group, Intel (2 November 2017) “Working with Blizzard Entertainment as a global technology partner of the Overwatch League is the perfect way to celebrate esports talent and showcase our hardware within the competitive gaming arena.” Alex Craddock, global head of marketing, HP (2 November 2017) “Both of these deals represent, in my experience, the largest consumer brand sponsorship of any esports property. They’re significantly bigger.” 47 Mike Sepso, SVP esports, Activision Blizzard (2 November 2017) Mobile gaming and esports – headwind to PC gaming hardware The main headwind we see for PC gaming hardware sales is the rise in mobile gaming. This is because gamers might use their phones as a substitute for PCs for their gaming needs, which could slow down the demand growth for PC gaming hardware. The trend towards mobile gaming is particularly prominent in China, and during 2017, active user accounts for PC games declined for Tencent due to mobile games, although PC game revenues continued to grow. “Looking at PC client games, revenue grew 27% yoy and grew 7% qoq to RMB14.6bn. Active users declined yoy for our overall PC game portfolio due to users’ increasing time spent on smartphone games. However, ARPU has generally increased yoy and qoq, driven by key titles, including League of Legends , Dungeon & Fighter and CrossFire .” James Gordon Mitchell, chief strategy officer, Tencent (Q3 2017 earnings call) The fact that PC game revenues are growing, despite fewer active PC game users, appears contradictory and does not present an obvious readacross to the demand for PC gaming hardware. But if spend on PC games increases, this might also mean that consumers are willing to spend more on PC gaming hardware, despite less time spent playing PC games. So even though we see mobile gaming as a headwind for PC gaming hardware sales, what

47 https://www.sporttechie.com/intel-hp-record-investment-esports-industry-blizzard-overwatch- league/

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the exact effect will be is uncertain. However, we do not believe that mobile gaming will ever replace PC gaming completely as PC gaming provides a more immersive gaming experience. But we do expect mobile gaming to continue to take a greater share of the gaming market for several years to come. Due to the growth trend of mobile gaming, PC gaming hardware companies are beginning to respond by diversifying their products. Logitech, for instance, is expanding its product category and Nvidia now offers mobile gaming platforms. Razer made a particularly bold move by launching its own gaming smartphone in November 2017, the sales of which will initially be limited to select countries in Europe and North America. It is unclear how successful this phone will be, however, as a gaming phone might carry a stigma in these regions. However, as gaming becomes more socially accepted, demand for gaming smartphones might develop in these markets. This could also be further accelerated as more sophisticated mobile games capable of being esports such as Arena of Valor , the international version of Honor of Kings , are being launched in Europe and North America. “The mobile market is one of those that we’ve taken a long-term view to look at ... We realised that a lot of our gamers are also passionate about the mobile gaming market, so we’ve done a couple of moves.” 48 Min-Liang Tan, CEO and co-founder, Razer (September 2017) PC hardware company profiles In the following pages, we profile four PC hardware companies that we think will continue to benefit from the esports trend. These are Intel, Nvidia, Logitech and Razer. Additionally, in Figure 145 below we highlight two other companies with good esports exposure.

Figure 145: Hardware companies with esports exposure

Financials Dec 2017 (USDbn) Market cap. Sales, LTM Core business Esports exposure Acer 2.5 7.5 Computers and other consumer Gaming hardware provider. electronic products. Asus 7.0 14 Computers and other consumer Gaming hardware provider. electronic products. Source: Bloomberg, FactSet

48 https://www.cnbc.com/2017/09/19/razer-ceo-min-liang-tan-talks-hong-kong-ipo-and-a-razer- mobile-device.html?view=story&%24DEVICE%24=native-android-tablet

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Intel (not covered)

Figure 146: Intel overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 216 62 good none Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Intel Corporation (Intel) has good exposure to esports as PCs are the primary esports platform and the majority of PCs used for gaming will have an Intel chip. Intel is also the main sponsor for two high-profile esports league. However, due to Intel’s size, esports is not a major driver of group revenues.

Company description Intel produces computer, networking and communications architectures for manufacturers including Apple, HP, Lenova and Dell. The company’s microprocessors can be found in most PCs and is one of the largest players in the global semiconductor chip market. Intel is based in the US and is listed on the Nasdaq. Intel operates through six segments. Its largest division by revenue, the Client Computing Group, primarily creates PC processors and mobile modems for use on or with electronic consumer products. Its second-largest business, the Data Centre Group, produces platforms – namely computer processors and connected chipsets and motherboards – for business, communication and cloud infrastructures. The smaller segments comprise of: Internet of Things Group, Non-Volatile Memory Solutions Group, Intel Security Group and Programmable Solutions Group. With regards to esports, Intel was active at an early stage by using this avenue to market its microprocessors. One of its most notable brand investments into esports is the sponsorship of the IEM tournament, which is hosted by ESL and is one of the largest third-party esports events. The IEM has been active since 2006 and is therefore the longest-standing active professional esports tournament.

Growth outlook and opportunities Intel, primarily through the corporate partnerships that it has formed, has positioned itself as a beneficiary of the rise of esports. As an extension to its IEM brand, Intel is introducing the IEM PyeongChang tournament in the run up to the Olympic Winter Games to be held in PyeongChang in February 2018. Additionally, in early November 2017 the company announced its sponsorship of Activision Blizzard’s Overwatch League. If these ventures prove to be successful in attracting audiences, this could provide fruitful marketing avenues for Intel. The company also announced a partnership with Advanced Micro Devices (AMD) under which the two companies will produce a new PC chip, which will consist of an Intel processor combined with an AMD graphics unit. It is intended to be used in lightweight laptops and will be primarily aimed at gamers. 49

Key risks A key risk to Intel’s future performance is a possible platform shift from PC gaming to mobile gaming as Intel’s products are primarily made for use in PCs. Additionally, Intel’s brand investment into the Overwatch League is a potential risk as it is still an unproven esport due to its low viewership. If viewership does not grow, Intel’s brand investment may not pay off.

49 https://seekingalpha.com/news/3308488-wsj-amd-intel-planning-joint-pc-chip-take- nvidia?uprof=

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Figure 147: Intel sales and EBIT margin Figure 148: Intel EV/sales and P/E

70 42 4 20 Sales EBIT margin EV/sales P/E 60 35 50 3 15 28 40 21 2 10 P/E P/E 30 P/E P/E EV/sales EV/sales EBITEBIT (%) (%) EV/sales EV/sales 14 EBITEBIT (%) (%) 20 SalesSales (USDbn) (USDbn) SalesSales (USDbn) (USDbn) 1 5 10 7 0 0 0 0 2011 2012 2013 2014 2015 2016 2011 2012 2013 2014 2015 2016 2017

Source: Bloomberg Source: Bloomberg

Figure 149: Intel’s revenue split by segment (2016) Figure 150: Intel market capitalisation

Intel Programm 250 Non- Security -able Volatile 4% Solutions 200 Memory 3% Solutions 4% Client 150 Internet of Computing Things 55% 100 5% 50 MarketMarket capcap (USDbn) (USDbn) MarketMarket capcap (USDbn) (USDbn) Data 0 Centre 2011 2012 2013 2014 2015 2016 2017 29%

Source: Company reports Source: Bloomberg

Figure 151: Intel company information Date 31st Dec 2017 Ticker (Bloomberg) INTC US Management CEO Brian Krzanich CFO Robert Swan Chairman Andy Bryant Shares Shares outstanding mil 4,680 Share price USD 46.16 Free float % 100.0 Insiders/Stakeholders Andy Bryant % 0.01 Brian Krzanich % 0.01

Source: FactSet

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Nvidia (not covered)

Figure 152: Nvidia overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 117 9.0 strong immaterial events Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Nvidia has a very strong position within esports as the majority of games are played using its graphics processing unit (GPU) chip. Gaming GPUs account for 59% of group revenues.

Company description Nvidia Corporation (Nvidia) is based in the US and traded on the Nasdaq. The company is a visual computing provider, operating through two segments – GPU and Tegra Processor – and serves four key markets: gaming, automotive, datacenter and professional visualisation. Nvidia presented the world with the first-ever GPU in 1999 and today offers its clients a number of platforms through its GPU segment. Its GeForce-branded GPUs are aimed at PC gaming and their function is to enrich a game’s graphics, realism and frame rates to provide a more detailed and smooth gaming experience. Nvidia is the global leader by GPU sales and also provides the majority of its revenues. With regards to esports, Nvidia was an early entrant with event sponsorship, and now the company hosts its own tournaments. Esports provides a strong marketing platform for the company as a large portion of the audience will be potential customers.

Growth outlook and opportunities Over recent years, Nvidia has experienced strong growth in revenues. Although some growth has stemmed from people using its GPUs to mine crypto-currencies, esports has also been a key growth catalyst. As GPUs are one of the most important hardware components for gamers, as well as one of the most expensive components, we believe Nvidia will be one of the PC hardware companies that will benefit the most from the esports trend.

Key risks A key risk for Nvidia is the possibility of a platform shift occurring across the esports world, from PC gaming to mobile gaming, as the company’s exposure to esports is steeped in its provision of PC GPUs. Nvidia may also face some risk from competition. While Nvidia has traditionally dominated the market for GPUs, its rival, AMD, announced a partnership with Intel in November through which the two companies will produce a new PC chip, as described earlier. 50

50 https://seekingalpha.com/news/3308488-wsj-amd-intel-planning-joint-pc-chip-take- nvidia?uprof=

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Figure 153: Nvidia sales and EBIT margin Figure 154: Nvidia EV/sales and P/E

8,000 32 14 60 Sales EBIT margin EV/sales P/E 12 50 6,000 24 10 40 8 4,000 16 30 P/E P/E 6 P/E P/E EV/sales EV/sales EBITEBIT (%) (%) EV/sales EV/sales EBITEBIT (%) (%) 20 SalesSales (USDm) (USDm) SalesSales (USDm) (USDm) 2,000 8 4 2 10 0 0 0 0 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

Note: January fiscal year end Source: Bloomberg Source: Bloomberg

Figure 155: Nvidia revenue split by segment – 2017 Figure 156: Nvidia market capitalisation

OEM & IP 10% 150 120 Auto 7% 90 Data Center 60 12% Gaming 59% 30 MarketMarket capcap (USDbn) (USDbn) Prof. MarketMarket capcap (USDbn) (USDbn) Visual. 0 12% 2011 2012 2013 2014 2015 2016 2017

Note: January fiscal year end Source: Company reports Source: Bloomberg

Figure 157: Nvidia company information Date 31st Dec 2017 Ticker (Bloomberg) NVDA US Management CEO Jen-Hsun Huang CFO Colette Kress Chairman Jen-Hsun Huang Shares Shares outstanding mil 606 Share price USD 193.50 Free float % 95.3 Insiders/Stakeholders Jen-Hsun Huang % 3.7 Mark A Stevens % 0.3 Tench Coxe % 0.2

Source: FactSet

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Logitech (not covered)

Figure 158: Logitech overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 5.8 2.3 good none Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure Logitech has a good exposure to esports through the sale of its gaming peripherals. The company also has multiple esports sponsorships. However, gaming only accounts for 14% of group revenue.

Company description Logitech International S.A. (Logitech) provides PC peripheral devices, including mice, keyboards, webcams, speakers and game controllers. These devices are intended for use across five markets: gaming (with products sold under the Logitech G brand), music, video collaboration, smart home, and creativity and productivity. Logitech is based in Switzerland and is listed on both the SIX Swiss Exchange and the Nasdaq. 51

Growth outlook and opportunities The Logitech G brand is well positioned to be a beneficiary of the growing interest in gaming and esports, with its portfolio offering customers key gaming peripherals. Additionally, the company has good marketing exposure as Logitech G sponsors 25 esports teams.52 Furthermore, Logitech has pursued an expansion in its product offering’s reach, strengthening its presence in the console gaming sphere using strategic acquisitions. 2016 brought with it the integration of Saitek’s simulation controllers into Logitech G’s portfolio, while the business announced its USD85m acquisition of Astro Gaming, a designer and manufacturer of premium performance headsets, in July 2017.

Key risks Logitech primarily produces PC peripheral devices – yet with the company believing that general consumer demand for PCs will continue to wane, particularly across mature economies including western Europe and North America, it expects the demand for PC peripherals to likely slow down and even decline in some markets. The company is therefore attempting to drive growth by building a multi-category and multi-brand company. Any failure to do so could be detrimental to Logitech G’s operational performance. Additionally, unlike other PC hardware providers such as Intel and Nvidia, which have dominant market positions, Logitech faces significant competitive pressure from multiple companies such as Razer, SteelSeries and Corsair.

51 Note: metrics displayed are based on Logitech’s listing on the SIX under the ticker, LOGN. 52 https://www.cnbc.com/2017/07/27/top-esports-gamer-talks-explosion-in-gaming-with-logitech- ceo.html

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Figure 159: Logitech sales and EBIT margin Figure 160: Logitech EV/sales and P/E

3,000 18 3 48 Sales EBIT margin EV/sales P/E 2,500 12 2.5 40 2,000 6 2 32 1,500 0 1.5 24 P/E P/E P/E P/E EBITEBIT (%) (%) EBITEBIT (%) (%) EV/sales EV/sales 1,000 -6 EV/sales EV/sales 1 16 SalesSales (USDm) (USDm) SalesSales (USDm) (USDm) 500 -12 0.5 8 0 -18 0 0 2011 2012 2013 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017

Note: March fiscal year end Source: Bloomberg Source: Bloomberg

Figure 161: Logitech revenue split by segment 2017 Figure 162: Logitech market capitalisation

Pointing Other Devices 9 17% 23% 8 7 6 5 Audio-PC 4 & Keyboards 3 Wearables & Combos 11% 2 MarketMarket capcap (CHFbn) (CHFbn) 22% MarketMarket capcap (CHFbn) (CHFbn) 1 Mobile 0 Speakers Gaming 2011 2012 2013 2014 2015 2016 2017 13% 14%14%14%

Note: March fiscal year end Source: Company reports Source: Bloomberg

Figure 163: Logitech company information Date 31st Dec 2017 Ticker (Bloomberg) LOGN SW Management CEO Bracken Darrell CFO Vincent Pilette Chairman Guerrino De Luca Shares Shares outstanding mil 173 Share price CHF 32.90 Free float % 85.3 Insiders/Stakeholders Logitech International Sa % 5.7 Daniel Borel % 4.9 California Street Ptrs. Pe Lp % 2.9

Source: FactSet

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Razer (not covered)

Figure 164: Razer overview

Financials Dec 2017 (USDbn) Esports exposure Market cap. Group revenue Business Positioning Direct Revenue source(s) LTM importance strength revenues 4.5 0.4 good immaterial team Source: FactSet, Bloomberg, Berenberg estimates

Esports exposure As Razer is a pure-play on video gaming hardware, esports is an important driver for the business. The company also has numerous esports sponsorship deals.

Company description Razer Inc (Razer) is a San Francisco and Singapore-based provider of gaming hardware, software and services. The company’s gaming hardware business accounts for the vast majority of its revenues and is split into two segments: Peripherals Business, which makes PC gaming equipment such as mice and keyboards, and Systems Business, which makes gaming laptops. Razer debuted on the Hong Kong Exchange in mid-November 2017 in an IPO that raised a total of HKD4.1bn (cUSD530m). 53 The company’s management has indicated that a portion of the funds raised will be directed towards the development of new products as Razer continues to expand its offering, having launched its own gaming smartphone at the beginning of November 2017.

Growth outlook and opportunities Razer sponsors a number of professional esports gamers and teams, including its own outfit, Team Razer. Additionally, Razer currently stands as the leading brand for gaming peripherals in the Chinese market, with regard to both consumer preference and brand awareness, according to Newzoo. This leaves the company well positioned to benefit from the esports trend.

Key risks A key risk facing Razer lies in its dependence on its PC hardware peripherals business as a primary source of revenue generation against a backdrop of gamers shifting from PCs to mobile phones as their gaming platform. Additional risks have presented themselves in the company’s recent launch of the Razer gaming smartphone. Not only is Razer entering a market intensely dominated by two large global players, Apple and Samsung, but Razer has chosen to initially introduce sales in selected countries in North America and Europe only. These are markets in which gaming is not as culturally celebrated as it is in certain countries in East Asia. Should these factors result in the Razer phone not creating the meaningful revenue impact that the company expects to materialise in 2018, the financial pay-off of its investment into this product could be negative. Finally, the company has a recent history of experiencing losses – USD20m and USD60m in 2015 and 2016, respectively – and does not anticipate a move into profitability in the near future. These losses, should they exceed Razer’s expectations, may have a material limiting effect on the company’s operations as it moves forward.

53 https://www.bloomberg.com/news/articles/2017-11-13/razer-rises-in-debut-after-raising-530- million-in-hong-kong-ipo

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Figure 165: Razer sales and EBIT margin Figure 166: Razer EV/sales and P/E

N/a 500 15 Sales EBIT margin 10 400 5 300 0 200 -5 EBITEBIT (%) (%) EBITEBIT (%) (%) SalesSales (USDm) (USDm) SalesSales (USDm) (USDm) -10 100 -15 0 -20 2014 2015 2016

Source: Bloomberg Source: n/a

Figure 167: Razer revenue split by segment (2016) Figure 168: Razer market capitalisation

Others 1% 45 Hardware 40 Systems 35 23% 30 25 20 15 10 MarketMarket capcap (HKDbn) (HKDbn) Hardware MarketMarket capcap (HKDbn) (HKDbn) 5 Peripherals 0 76% 13-Nov-17 28-Nov-17 13-Dec-17 28-Dec-17

Source: Company reports Source: Bloomberg

Figure 169: Razer company information Date 31st Dec 2017 Ticker (Bloomberg) 1337 HK Management CEO Min-Liang Tan CFO Edwin Chan Chairman Min-Liang Tan Shares Shares outstanding mil 8,863 Share price HKD 3.86 Free float % n/a Insiders/Stakeholders Min-Liang Tan % 33.0 Kaling Lim % 23.6 Huai Dan Chen % 1.1 Source: FactSet

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Western telcos: marketing through esports

● Reminiscent of the Korean telcos at the turn of the century, western telcos are now starting to market their services through esports in order to reach the younger demographics. ● Telefónica has been particularly active in leveraging the esports phenomenon by investing in an esports centre, building esport teams and investing in esports content.

Telecommunication companies can potentially benefit from esports in two ways. It can drive demand for their internet services as gamers need stable and low latency internet connections. Additionally, esports provides an avenue for the companies to market their services to the younger generation. As early as 1999, the South Korean telecom companies entered the esports space by sponsoring and founding esports teams. Korean telco esports teams have been extremely successful and, to date, have arguably the strongest esports teams in the world, with SKT T1 winning three League of Legends World Championships. In more recent years, western telcos have also begun to enter the esports scene, with moves from notable names such as Vodafone and Orange. T-Mobile had a particularly high-profile sponsorship in 2017 as it became one of the main sponsors for the League of Legends World Championship. Telefónica, however, has gone a step further than other western telcos, by launching multiple esports initiatives in Spain and it appears to be following in the footsteps of the South Koreans.

Figure 170: Telefónica’s Movistar eSports Center – inaugurated May 2017, Madrid, Spain

Source: Movistar esports

In January 2016, Telefónica announced that esports would become a key focus for its commercial brand, Movistar. Plans included creating and airing esports content in partnership with ESL, which would be broadcast on its Movistar+ channel, as well as on other digital channels and social networks. The company also announced the creation of an esports club, Movistar Riders, which would have multiple esports teams as well an esports centre. The club would be structured like a professional sports club and develop talent from a young age. Telefónica also spoke about its broader goal of promoting esports in Spain, stating that it wanted to support the industry at both an amateur and professional level.

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The company’s esports initiative is not only a move to raise interest in its Movistar content, however, but can also be seen as part of its marketing strategy to promote its high-end internet services. “This decision arises from the company’s leadership and cutting-edge technology, and will rely on the best fibre and 4G communications infrastructure to raise the bar for esports in Spain.” Telefónica (10 January 2016) “This will create an electronic gaming ecosystem in the country, which, in addition to the very best telecommunications networks, will position Telefónica and its Movistar brand at the epicentre of this mass phenomenon that young people are joining with unbridled enthusiasm. We want to do our part for esports, which we believe is the ‘sport of the 21st century’.” Luis Miguel Gilpérez, CEO, Telefónica Spain (10 January 2016) In May 2017, Telefónica announced the inauguration of the Movistar eSports Center, shown 2 in Figure 170. The centre is a 1,000m high-performance esports arena and will act as the club’s headquarters in Madrid. The centre will serve as a training ground for the club’s teams and a meeting place for fans, and will offer facilities to broadcast tournaments. Telefónica has also said that the club already had seven esports teams. From an overall business perspective, Telefónica’s esports venture should initially be seen as a marketing expense. If esports becomes a successful method of winning market share with the millennial demographic in Spain, we could potentially see the initiative replicated in Telefónica’s other regions. With regards to the revenue from its esports teams, we expect these will remain insignificant in the short run. However, if esports revenues continue to grow at their current pace and start to approach that of traditional sports, perhaps in 10-20 years’ time, Telefónica’s esports teams could also begin to make a positive contribution to the company’s cash flow.

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Esports betting: bookmakers flooding in

● In the past few years, the esports betting market has witnessed extreme growth, reaching an estimated USD2.8bn in bets for 2016. The majority of esports betting has not been in cash, however, but in skins, which are virtual in-game cosmetic items. ● Due to regulatory issues, there have been significant crackdowns in the skins gambling market. However, there are signs that the market is beginning to revive. ● Although cash betting has been a relatively small portion of esports betting, experts expect this market to experience rapid growth (100% CAGR to 2020), reaching cUSD10bn in bets by 2020. This should unlock new revenue streams for gambling companies. However, we believe it will still take at least five years before esports betting revenues become meaningful for companies.

Just as with traditional sports, where there is demand for betting on the outcome of games, there is also a demand for betting on the outcome of esports games. Consequently, an esports betting market is in the process of developing. The total amount that was bet on esports in 2016 was estimated to be USD2.8bn, according to Narus Advisors, an esports and gambling consultancy. To give some context, this is 0.6% of the global gambling market, which was estimated to be cUSD455bn for 2016, of which c10% was online, according to the market research firm Research and Markets. Although the esports betting market is currently quite small compared to the global market total, Narus Advisors estimates that the amount bet on esports will grow extremely rapidly, reaching USD12.6bn by 2020. If achieved, this should unlock new revenue streams for operators that capitalise on esports betting. However, we do appreciate that these forecasts contains a large amount of uncertainty and should be perceived with caution, but given the strong growth drivers, we believe the forecasts are possible.

Figure 171: Global esports betting

14 12.6 12 Cash Skins Other 1.2 10 8.9 Skins reduction due 8 0.9 to crackdown 6.3 6 (USDbn) (USDbn) (USDbn) (USDbn) 0.7 10.6 TotalTotal amount amount bet bet TotalTotal amount amount bet bet 4 2.8 2.6 7.6 5.4 0.5 2 2.2 2.0 0 0.6 2016E 2017E 2018E 2019E 2020E Source: Narus Advisors, Berenberg estimates

Skins gambling There is an important distinction between sports and esports betting, which is that in esports, the main currency that has generally been used was not cash, but skins. Skins are virtual in-game goods that people acquire to enhance the cosmetic features of their characters or weapons. Their value is derived from their scarcity and aesthetic utility. Just like people value diamond rings and Gucci clothing in real life, people value skins in-game. Although many games have skin features, the gaming company Valve, which owns Counter-Strike and Dota2 , has gone a step further than most other companies, and allows players to trade skins. Valve takes a transaction fee on a skin trade, typically a 10% fee for specific games, as well as a 5% fee through its gaming portal Steam. 54

54 http://store.steampowered.com/news/11265/

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Figure 172: Counter-Strike knife skins – same knife, different look

Source: https://www.lootmarket.com/csgo -betting

Skins trading was initially introduced in August 2013 to Counter-Strike , which consequently spawned an elaborate gambling ecosystem. The reason that skins trading allowed for gambling is that players could now deposit their skins with betting operators through their in-game bots. Players could then either wager on the outcome of a game, bet against other players, gamble on roulette, as well as all the usual forms of gambling, using their skins as a currency to wager with. By 2016, the skins gambling market was estimated to be USD4.9bn, where USD2.2bn was esports betting.

Figure 173: Skins gambling in 2016 – USD4.9bn in total

Other USD0.5bn Coin flip USD0.3bn Esports Roulette USD2.2bn USD0.7bn

Jackpot USD1.3bn

Source: Narus Advisors

Industry experts believe that there were several factors driving the skins gambling boom. One reason was that skins gambling presented as a lower psychological barrier compared to cash gambling, as losing a skin was not perceived to the same extent as a monetary loss. Additionally, skins had a subjective value, which meant that people were happy to gamble away skins that they valued below the market value in order to win skins that they thought were more attractive. These factors helped bridge the video gaming world with the gambling world. Another factor was that skins gambling was unregulated, which meant anyone could gamble, which would be attractive for people wishing to gamble in regions where gambling was restricted or for people who could not gamble as they were underage. However, this unregulated gambling market also produced a series of scandals, which led to a law suit against Valve in June 2016, and cease and desists sent by Valve to 23 skin gambling sites in July 2016. 55 Initially, it was thought that Valve’s crackdown would eliminate the vast majority of skins gambling. However, after speaking to experts more recently, the crackdown appears to have been less effective than initially anticipated as

55 “Esports gambling - where's the action?” Narus Advisors (2016)

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lawmakers have struggled to regulate skins gambling. Some experts also believe that skins gambling will have a large resurgence and will reach cUSD7bn by 2020 as companies are finding clever ways to bypass regulation. “Gambling is taking new forms – from daily fantasy sports, to betting on esports, and even online casino games using virtual skins instead of cash – that attempt to bypass the law. Current federal gambling laws are hopelessly out of date, leaving the American public vulnerable to unscrupulous behaviour. No matter the form of the games, we must ensure integrity, accountability and basic consumer protections, including appropriate age limits, are in place.” 56 Frank Pallone, US Congressman (1 March 2017) Cash betting Even though cash betting has been a relatively small portion of the esports betting market, it is expected to grow at an explosive rate. Narus Advisors estimates it will grow from USD0.6bn in 2016 to USD10.6bn in 2020. Such extreme growth is not simply based on demographic tailwinds of an ageing and growing esports fanbase, but driven by several other factors. One factor is that, because a large portion of skins betting has been shut down, some of this betting demand will likely transfer into cash gambling. Another factor is that gambling operators are moving into the space at a rapid pace, with notable entrants such as William Hill, Paddy Power, Betway, 188bet, Bet365, Pinnacle and Unibet. Generally the public companies such as William Hill and Paddy Power have been laggards in this space, although William Hill has shown some initiative. “Following the news that esports is to be introduced to the 2022 Asian Games, William Hill is offering 4/1 that it is introduced to the roster for the 2024 Olympic Games. “The bookies have certainly seen a growth since they first started betting on the sport, with William Hill reporting that turnover on the sport has grown over 500% since it was first offered in 2015.” William Hill, press release (19 April 2017) “[Esports] is as popular, if not more so, than quite a few sporting events that we offer and it would not be a surprise to see it at least talked about in the same breath as the Olympic Games.” Joe Crilly, spokesman, William Hill (19 April 2017) However, the most aggressive bookmakers within the space have been the private companies such as Betway. Examples of its initiatives include its sponsorship of the esports team Ninjas in Pyjamas in 2016, as well as the sponsorship of events such as the ESL in 2017. There have also been several start-ups emerging to capitalise on the esports betting opportunity. One of the most notable examples is Unikrn, raising USD31m in an initial coin offering in October 2017. The company is backed by Mark Cuban, Elisabeth Murdoch and Ashton Kutcher. 57

56 https://democrats-energycommerce.house.gov/newsroom/press-releases/pallone-voices- concern-over-rise-in-unregulated-online-gambling-and-underage 57 https://www.coindesk.com/celebrity-investor-mark-cuban-participate-first-ico/ https://www.coindesk.com/mark-cuban-backed-unikrn-raises-31-million-e-sports-token-sale/ The company also raised USD7m in equity in June 2015, seen in an SEC filing.

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Figure 174: Betway sponsors esport team Ninjas in Pyjamas in 2016

Source: https://esportsobserver.com/ninjas -in -pyjamas -betway/

According to one expert, the amount of bookmakers that offer esports betting has doubled every year for the past few years, and in 2017 c20% of bookmakers in the world provided esports odds. Experts strongly believe that the operators who will succeed in this market are the ones who have invested in an appealing and customised esports layout, as this is important to esports bettors, where 188bet is a good example. Although we have very limited information about how esports betting has performed for individual companies, Pinnacle provided some data, shown in Figure 175. Although the curve has a slightly misleading slope, the data shows that it took nearly six years to get the first two million bets, which it reached in November 2015. However, it took just under one year to get the next two million bets, which it reached in October 2016. And although the growth in bets did not actually increase by February 2017, experts attribute this to regulatory issues rather than a fall off in demand. Pinnacle also expected significant growth throughout 2017, forecasting a doubling of total lifetime bets.

Figure 175: Pinnacle forecast total bets to double in 2017 Figure 176: Cash gambling 2016 by game – USD598m total

Other 8% Starcraft 2 7% League of Legends 38% Dota 2 18%

Counter- Strike 29%

Source: https://www.legalsportsreport.com/13132/esports -betting -and - Source: Narus Advisors audience-growth-2020/

Finally, the introduction of live game betting, which is betting while the game is active, is believed to be another key driver for esports betting in the future. Experts conjecture that, once live betting is commonplace for esports, this will be a particularly attractive feature, because esports offers rich data that is already digitalised. They also believe this is an area where esports betting will be superior to sports betting, as sports data has to be converted by humans.

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Listed gambling companies – laggards, but there is still time Many publically listed gambling companies now provide esports betting. However, they have been a lot less active in this space compared to the private companies in terms of marketing and creating a good esports online user interfaces. But, because we do not think esports will be a significant driver of revenues until at least five years for the gambling industry, there is still time for the listed companies to capitalise on the opportunity. Below, in Figure 177, we highlighted two companies that we cover that offer esports betting.

Figure 177: Listed gambling companies with esports exposure

Financials Dec 2017 (USDbn) Market cap. Sales, LTM Core business Esports exposure William Hill 3.7 2.1 Gambling company. Provides esports betting. Paddy Power 10 2.1 Gambling company. Provides esports betting. Source: Bloomb erg, FactSet

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Esports risks

Although we do believe esports will continue to grow, we should mention some potential risks that may impair it in the future. Although we do not believe these issues will likely lead to the downfall of esports, this is still a new industry so it is inherently unpredictable. Not every popular video game will be an esport: Game developers are generally investing a lot of resources into their games so that they become esports compatible. However, there is no guarantee that all games will be successful esports. For instance, the games Overwatch and PUBG may continue to rise in popularity, but may not prove to be viable esports. This could be due to the games being unappealing to watch, which is the main risk for Overwatch , or that the game format is not compatible for professional gaming, a potential risk for PUBG . Therefore, if new popular games do not work as esports, there could be a general decline in esport viewership until a new popular esport game comes along. Longevity of games: The great unknown is the longevity of individual games. Although games appear to be lasting longer in general, which many attribute to the rise of esports, there is no guarantee the games will last indefinitely. In recent years, for instance, we have seen the decline of the Starcraft franchise, which was the most popular esport for a long time. Although we believe there are good chances that new esports games will replace the old, replacing one esport with another may have a negative effect on viewership. For example, when esports fans age, they might not have as much time to play as they acquire more obligations such as a job and family. However, they may still want to watch esports when they have time. But if the game they used to play and watch is no longer popular and therefore not broadcast, they may not want to watch an alternative new esport that they are not familiar with. Therefore they might revert to watch other things such as traditional sports, which remain relatively constant over time. East Asia continues to dominate: Another potential risk to esports is that the East Asian countries continue to dominate the esports scene. This might have a negative effect on viewership in regions such as North America and Europe who are consistently being defeated. However, this issue may be remedied by western teams buying East Asian players to level the playing field. A recent example of this is the London Overwatch Spitfire team, which has a South Korean roster.

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Appendix

Appendix one: esports effect on work and leisure in the US A study published in the National Bureau of Economic Research found that, between 2000 and 2015, hours worked for US men aged 21-30 decreased by 203 hours, a 12% decline. 58 This compares to men aged 31-55 who only had an 8% decline in work hours. Additionally, since 2004, young men increased their gaming and computer leisure time by 99 hours per year. The study concludes a significant driving factor for this shift was due to gaming/recreational computing innovations. “Collectively, these findings imply that increased computer and video game technology can explain between 38% and 79% of the differential decline in hours between younger and older men during the 2000s.” Mark Aguiar et. al. (2017) Although people generally spend more time gaming than actually watching esports, esports is also a catalyst to increase engagement with the game. So although we cannot quantify the exact effect esports is having on gaming leisure time, it is likely a driver for increased time spent gaming. Appendix two: esports in Asian Games and possibly Olympics The 2022 Asian Games will now host esports as an official medal event, and there are already discussions about it being an official medal event at the Olympics. “The Olympic Council of Asia and Alisports of China today announced a strategic partnership to bring the electronic sports video game phenomenon to the official sports programme of the 2022 Asian Games in Hangzhou, China. Esports, which is enjoyed by millions of youngsters around Asia and the world, has already been added to the OCA’s 5th Asian Indoor and Martial Arts Games (AIMAG) in Ashgabat, Turkmenistan, this September as a demonstration sport.” Olympic Council of Asia (17 April 2017) “Since Alibaba is sponsoring the Olympics for USD800m until 2028, many surmise the International Olympic Committee, desperate for millennial eyeballs, will soon follow suit.” SCMP (29 April 2017) “The summit discussed the rapid development of what are called ‘esports’, and the current involvement of various Olympic movement stakeholders. The summit agreed that: • esports are showing strong growth, especially within the youth demographic across different countries, and can provide a platform for engagement with the Olympic movement; • competitive esports could be considered as a sporting activity, and the players involved prepare and train with an intensity that may be comparable to athletes in traditional sports; • in order to be recognised by the IOC as a sport, the content of esports must not infringe on the Olympic values; and • a further requirement for recognition by the IOC must be the existence of an organisation guaranteeing compliance with the rules and regulations of the Olympic movement (anti-doping, betting, manipulation, etc). “The summit asked the IOC together with GAISF in a dialogue with the gaming industry and players to explore this area further and to come back to the Olympic

58 Aguiar, M., Bils, M., Charles, K.K. and Hurst, E., 2017. Leisure Luxuries and the Labor Supply of Young Men (No. w23552). National Bureau of Economic Research.

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movement stakeholders in due course.”59 Communique of the Olympic Summit (27 October 2017) Early moves have also already been made to integrate esports into the Olympics. Recently, Intel, in partnership with the IOC and ESL, is to host its IEM esports event ahead of the Olympic Winter Games. “We are proud to have our worldwide TOP partner Intel bring this competition to PyeongChang in the lead up to the 2018 Olympic Winter Games. Following on from the Olympic Summit last week, the IOC will now explore esport’s relationship with the Olympic movement further. This is the start of an exciting future and we’re interested to see how this experience will play out.” Timo Lumme, managing director, Television and Marketing, IOC (3 November 2017) “Intel has been pushing the boundaries of esports for well over a decade and our goal is to bring esports to every global sporting stage. From the qualifying events to the ground-breaking IEM tournament in PyeongChang, we see this as another important step in giving more people around the world a chance to experience the thrill of esports.” Gregory Bryant, senior vice president, Intel (3 November 2017)

Figure 178: Intel Extreme Masters pre-Olympic esports event in PyeongChang 2018

Source: https://www.olympic.org/news/intel -brings -esports -to -pyeongchang -ahead -of -the -olympic -winter -games

We are slightly concerned, however, about the choice of games being played at PyeongChang: Starcraft 2 and Steep . The Starcraft franchise was long considered the ultimate esport, with the original being launched in 1998, but the franchise has in recent years died out as an esport as viewership faded. Steep , on the other hand, is a relatively new game based on winter sports and is the official licensed game of the 2018 Olympics Winter Games. Although its theme is fitting, we are unaware if the game has any substantial viewership, and we are therefore slightly sceptical about its reception. The choice of games for Olympic events is a general concern, as the games have to coincide with Olympic values. If this excludes any form of violence, this could significantly limit the game choice titles, eliminating the most popular esports titles. Therefore, games such as FIFA and NBA2k18 are more likely candidates, but because these games have relatively low viewership, esports might be seen as a “failure” in the Olympics.

59 https://www.olympic.org/news/communique-of-the-olympic-summit

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“We want to promote non-discrimination, non-violence, and peace among people. This doesn’t match with video games, which are about violence, explosions and killing. And there we have to draw a clear line. “So if ever somebody is competing at playing football virtually or playing other sports virtually, this is of high interest. We hope that, then, these players are really delivering sports performance. If [fans] at the end would even play the sports in the real world, we would even be more happy.”60 Thomas Bach, president, IOC, SCMP (28 August 2017) However, seeing as the pre-PyeongChang games allowed Starcraft 2 , a strategy war game, there are signs that the IOC could show some flexibility with game choice, especially if esports viewership becomes large enough.

60 http://www.scmp.com/news/china/society/article/2108501/violent-video-games-have-no-place- olympics-e-sports-are-still

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Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investmentinve stmentstment----relatedrelated disclosures” and the “Legal disclaimer” at the end ofo f this document. For analyst certification and remarks regarding foreign investors and countrycountry----specificspecific disclosures, please refer to the respectivrespectivee paragraph at the end of this document.

Disclosures in respect of Article 20 of Regulation (EU) No. 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation ––– MAR)

Company Disclosures Ubisoft Entertainment SA no disclosures Keywords Studios plc 3, 6 Telefónica SA no disclosures William Hill plc no disclosures

(1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead Manager or Co- Lead Manager over the previous 12 months of a public offering of this company. (2) The Bank acts as Designated Sponsor/Market Maker for this company. (3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. (4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. (5) The Bank holds a long position in shares of this company. (6) The Bank holds a short position in shares of this company.

Production of the recommendation completed: 31.01.2018, 18:51

Historical price target and rating changes for UbisoftUbisoft Entertainment SA in the last 12 months

Date Price target --- EUR Rating First dissemination GMT Initiation of coverage 12 July 17 55.50 Buy 2017-07-13 06:58 13 October 14 29 September 17 65.60 Buy 2017-10-02 07:02 05 October 17 66.00 Buy 2017-10-05 11:09 10 January 18 80.00 Buy 2018-01-11 07:10

Historical price target and rating changes for KeywordsKeywords Studios plc in the last 12 months

Date Price target --- GBp Rating First dissemination GMT Initiation of coverage 02 February 17 760 Buy 2017-02-03 06:57 02 February 17 09 February 17 780 Buy 2017-02-09 07:43 04 April 17 850 Buy 2017-04-05 07:13 17 May 17 970 Buy 2017-05-18 07:01 22 May 17 980 Buy 2017-05-22 08:21 27 July 17 1,150 Buy 2017-07-27 08:15 07 August 17 1,350 Buy 2017-08-08 07:01 27 October 17 2,000 Buy 2017-10-30 07:00 13 December 17 2,020 Buy 2017-12-14 07:05 01 February 18 2,040 Buy 2018-02-01 08:17

Historical price target and rating changes for TelefónicaTelefónica SA in the last 12 months

Date Price target --- EUR Rating First dissemination GMT Initiation of coverage 23 March 17 10.70 Hold 2017-03-24 07:08 25 January 10 27 June 17 10.10 Hold 2017-06-28 07:11 26 September 17 11.70 Buy 2017-09-27 07:15 23 October 17 11.50 Buy 2017-10-24 08:11 18 December 17 11.30 Buy 2017-12-19 07:08 29 January 18 11.00 Buy 2018-01-30 07:14

Historical price target and rating changes for WilliamWilliam Hill plc in the last 12 months

Date Price target --- GBp Rating First dissemination GMT Initiation of coverage 03 October 17 260 Hold 2017-10-04 06:58 21 July 16 10 January 18 280 Hold 2018-01-11 14:45

111 Berenberg Thematics

Click here for a list of all recommendations on any financial instrument or issuer that were disseminated during the preceding 12-month period. BerBerenbergenberg Equity Research ratings distribution and in proportion to investment banking services on a quarquarterlyterly basis, as of 1 January 2018

Buy 49.53 % 78.87 % Sell 13.65 % 0.00 % Hold 36.81 % 21.13 %

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112 Berenberg Thematics

The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services.

Analyst certification I, Oyvind Bjerke, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

I, Robert Berg, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

I, Saliha Shariff, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

I, Nick Anderson, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

I, Asad Farid, CFA, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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ThirdThird----partyparty research disclosures

Company Disclosures Ubisoft Entertainment SA no disclosures Keywords Studios plc no disclosures Telefónica SA no disclosures William Hill plc no disclosures

113 Berenberg Thematics

(1) BCM or its affiliates owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month. (2) The subject company is or was, during the 12-month period preceding the date of distribution of this report, a client of BCM or its affiliates. BCM or its affiliates provided the subject company non-investment banking, securities-related services. (3) BCM or its affiliates received compensation from the subject company during the past 12 months for products or services other than investment banking services. (4) During the previous 12 months, BCM or its affiliates has managed or co-managed any public offering for the subject company. (5) BCM is making a market in the subject securities at the time of the report. (6) BCM or its affiliates received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months. (7) There is another potential conflict of interest of the analyst(s), BCM, of which the analyst knows or has reason to know at the time of publication of this research report. (8) The research analyst or a member of the research analyst's household serves as an officer, director, or advisory board member of the subject company (9) The research analyst or a member of the research analyst’s household has a financial interest in the equity or debt securities of the subject company (including options, rights, warrants, or futures). (10) The research analyst has received compensation from the subject company in the previous 12 months. * For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.

Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent.

© 2018 Joh. Berenberg, Gossler & Co. KG

114 Contacts

JOH. BERENBERG, GOSSLER & CO. KG Internet www.berenberg.com E-mail: [email protected]

EQUITY RESEARCH CHEMICALS GENERAL MID CAP - UK (cont'd) METALS & MINING AEROSPACE & DEFENCE Sebastian Bray +44 20 3753 3011 Ned Hammond +44 20 3753 3017 Charlie Clark +44 20 3207 3133 Ryan Booker +44 20 3753 3074 Anthony Manning +44 20 3753 3092 Omar Ismail +44 20 3753 3102 Fawzi Hanano +44 20 3207 7910 Andrew Gollan +44 20 3207 7891 Rikin Patel +44 20 3753 3080 Ian Osburn +44 20 3207 7814 Laurent Kimman +44 20 3465 2675 Charlotte Keyworth +44 20 3753 3013 Antony Plom +44 20 3207 7908 Michael Stoner +44 20 3465 2643 Ross Law +44 20 3465 2692 CONSTRUCTION Edward James +44 20 3207 7811 Saravana Bala +44 20 3753 3043 Benjamin May +44 20 3465 2667 TECHNOLOGY AUTOMOTIVES Zaim Beekawa +44 20 3207 7855 Owen Shirley +44 20 3465 2731 Josep Bori +44 20 3753 3058 Cristian Dirpes +44 20 3465 2721 Lush Mahendrarajah +44 20 3207 7896 Donald Tait +44 20 3753 3031 Georgios Kertsos +44 20 3465 2715 Alexander Haissl +44 20 3465 2749 Robert Muir +44 20 3207 7860 Tej Sthankiya +44 20 3753 3099 Fei Teng +44 20 3753 3049 GENERAL RETAIL Gordon Tveito-Duncan +44 20 3753 3100 DIVERSIFIED FINANCIALS Thomas Davies +44 20 3753 3104 Tammy Qiu +44 20 3465 2673 BANKS Charles Bendit +44 20 3465 2729 Michelle Wilson +44 20 3465 2663 Adam Barrass +44 20 3207 7923 Philip Ross +44 20 3465 2726 TELECOMMUNICATIONS Stephanie Carter +44 20 3207 3106 Chris Turner +44 20 3753 3019 HEALTHCARE David Burns +44 20 3753 3059 Michael Christodoulou +44 20 3207 7920 Scott Bardo +44 20 3207 7869 Ondrej Cabejsek +44 20 3753 3071 Andrew Lowe +44 20 3465 2743 FOOD MANUFACTURING AND H&PC Alistair Campbell +44 20 3207 7876 Nicolas Didio +44 20 3753 3091 Andreas Markou +44 20 3753 3022 Rosie Edwards +44 20 3207 7880 Klara Fernandes +44 20 3465 2718 Usman Ghazi +44 20 3207 7824 Alex Medhurst +44 20 3753 3047 Philip Patricha +44 20 3753 3039 Tom Jones +44 20 3207 7877 Laura Janssens +44 20 3465 2639 Eoin Mullany +44 20 3207 7854 Fintan Ryan +44 20 3465 2748 Joseph Lockey +44 20 3465 2730 Peter Richardson +44 20 3465 2681 James Targett +44 20 3207 7873 Samantha Osborne +44 20 3207 7882 THEMATIC RESEARCH Michael Ruzic-Gauthier +44 20 3753 3128 Nick Anderson +44 20 3207 7838 BEVERAGES FOOD RETAIL Laura Sutcliffe +44 20 3465 2669 Oyvind Bjerke +44 20 3753 3082 Javier Gonzalez Lastra +44 20 3465 2719 Dusan Milosavljevic +44 20 3753 3123 Charles Weston +44 20 3465 2746 Steven Bowen +44 20 3753 3057 Matt Reid +44 20 3753 3075 Asad Farid +44 20 3207 7932 GENERAL MID CAP - DACH INSURANCE Robert Lamb +44 20 3465 2623 BUSINESS SERVICES, LEISURE & TRANSPORT Martin Comtesse +44 20 3207 7878 Trevor Moss +44 20 3207 7893 Paul Marsch +44 20 3207 7857 Roberta Ciaccia +44 20 3207 7805 Charlotte Friedrichs +44 20 3753 3077 Emanuele Musio +44 20 3207 7916 Saliha Shariff +44 20 3753 3097 Najet El Kassir +44 20 3207 7836 Gustav Fröberg +44 20 3465 2655 Iain Pearce +44 20 3465 2665 James Sherborne +44 20 3753 3073 William Fitzalan Howard +44 20 3465 2640 Julia Kochendörfer +44 20 3753 3052 Stuart Gordon +44 20 3207 7858 Alexander O'Donoghue +44 20 3207 7804 LUXURY GOODS TOBACCO Annabel Hay-Jahans +44 20 3465 2720 Gerhard Orgonas +44 20 3465 2635 Mariana Horn +44 20 3753 3044 Jonathan Leinster +44 20 3465 2645 Josh Puddle +44 20 3207 7881 Henrik Paganetty +44 20 3453 3140 Lauren Molyneux +44 20 3207 7892 Kate Somerville +44 20 3753 3081 Benjamin Pfannes-Varrow +44 20 3465 2620 Zuzanna Pusz +44 20 3207 7812 UTILITIES Joel Spungin +44 20 3207 7867 Oliver Brown +44 20 3207 7922 GENERAL MID CAP - EU core MEDIA Andrew Fisher +44 20 3207 7937 CAPITAL GOODS Christoph Gruelich +44 20 3753 3119 Robert Berg +44 20 3465 2680 Neha Saxena +44 20 3753 3048 Nicholas Housden +44 20 3753 3050 Anna Patrice +44 20 3207 7863 Laura Janssens +44 20 3465 2639 Lawson Steele +44 20 3207 7887 Sebastian Kuenne +44 20 3207 7856 Trion Reid +44 20 3753 3113 Alastair Reid +44 20 3207 7841 Philippe Lorrain +44 20 3207 7823 Sarah Simon +44 20 3207 7830 ECONOMICS Rizk Maidi +44 20 3207 7806 GENERAL MID CAP - UK Florian Hense +44 20 3207 7859 Jaroslaw Pominkiewicz +44 20 3753 3035 Joseph Barron +44 20 3207 7828 REAL ESTATE Carsten Hesse +44 20 3753 3001 Simon Toennessen +44 20 3207 7819 Calum Battersby +44 20 3753 3118 Kai Klose +44 20 3207 7888 Kallum Pickering +44 20 3465 2672 Ethan Zhang +44 20 3465 2634 Robert Chantry +44 20 3207 7861 Tina Munda +44 20 3465 2716 Holger Schmieding +44 20 3207 7889 Sam England +44 20 3465 2687 EQUITY SALES SPECIALIST SALES UK CRM AEROSPACE & CAPITAL GOODS James Burt +44 20 3207 7807 Laura Cooper +44 20 3753 3065 LONDON (con'td) Cara Luciano +44 20 3753 3146 Fabian De Smet +44 20 3207 7810 Jessica Jarmyn +44 20 3465 2696 Mike Berry +44 20 3465 2755 AUTOS & TECHNOLOGY Marta De-Sousa Fialho +44 20 3753 3098 Madeleine Lockwood +44 20 3753 3110 Joseph Chappell +44 20 3207 7885 Edward Wales +44 20 3207 7815 Jules Emmet +44 20 3753 3260 Rita Pilar +44 20 3753 3066 Stewart Cook +44 20 3465 2752 BANKS, DIVERSIFIED FINANCIALS & INSURANCE Robert Floyd +44 20 3753 3018 Mark Edwards +44 20 3753 3004 Iro Papadopoulou +44 20 3207 7924 David Franklin +44 20 3465 2747 COO Office Tom Floyd +44 20 3753 3136 Calum Marris +44 20 3753 3040 Karl Hancock +44 20 3207 7803 Greg Swallow +44 20 3207 7833 Tristan Hedley +44 20 3753 3006 BUSINESS SERVICES, LEISURE & TRANSPORT Sean Heath +44 20 3465 2742 Fenella Neill +44 20 3207 7868 Peter King +44 20 3753 3139 Rebecca Langley +44 20 3207 7930 James Hunt +44 20 3753 3007 Simon Messman +44 20 3465 2754 CONSTRUCTION,CHEMICALS, METALS & MINING Gursumeet Jhaj +44 20 3753 3041 CORPORATE ACCESS AJ Pulleyn +44 20 3465 2756 James Williamson +44 20 3207 7842 James McRae +44 20 3753 3036 Lindsay Arnold +44 20 3207 7821 Matthew Regan +44 20 3465 2750 CONSUMER DISCRETIONARY David Mortlock +44 20 3207 7850 Robyn Gowers +44 20 3753 3109 Michael Schumacher +44 20 3753 3006 Victoria Maigrot +44 20 3753 3010 Eleni Papoula +44 20 3465 2741 Jennie Jiricny +44 20 3207 7886 Paul Somers +44 20 3465 2753 CONSUMER STAPLES Bhavin Patel +44 20 3207 7926 Ross Mackay +44 20 3207 7866 Molly Wylenzek +44 20 3753 3064 Kushal Patel +44 20 3753 3038 Stella Siggins +44 20 3465 2630 EQUITY TRADING HEALTHCARE Richard Payman +44 20 3207 7825 Lucy Stevens +44 20 3753 3068 HAMBURG David Hogg +44 20 3465 2628 Christopher Pyle +44 20 3753 3076 Abbie Stewart +44 20 3753 3054 David Hohn +49 40 350 60 761 MEDIA & TELECOMMUNICATIONS Adam Robertson +44 20 3753 3095 Gregor Labahn +49 40 350 60 571 Julia Thannheiser +44 20 3465 2676 Joanna Sanders +44 20 3207 7925 EVENTS Lennart Pleus +49 40 350 60 596 THEMATICS Mark Sheridan +44 20 3207 7802 Charlotte David +44 20 3207 7832 Marvin Schweden +49 40 350 60 576 Chris Armstrong +44 20 3207 7809 George Smibert +44 20 3207 7911 Suzy Khan +44 20 3207 7915 Omar Sharif +49 40 350 60 563 Alexander Wace +44 20 3465 2670 Natalie Meech +44 20 3207 7831 Philipp Wiechmann +49 40 350 60 346 SALES Paul Walker +44 20 3465 2632 Eleanor Metcalfe +44 20 3207 7834 Christoffer Winter +49 40 350 60 559 BENELUX Rebecca Mikowski +44 20 3207 7822 Miel Bakker +44 20 3207 7808 GERMANY Ellen Parker +44 20 3465 2684 LONDON Bram van Hijfte +44 20 3753 3000 Michael Brauburger +49 69 91 30 90 741 Sarah Weyman +44 20 3207 7801 Edward Burlison-Rush +44 20 3753 3005 Nina Buechs +49 69 91 30 90 735 Richard Kenny +44 20 3753 3083 FRANCE André Grosskurth +49 69 91 30 90 734 SALES TRADING Chris McKeand +44 20 3207 7938 Alexandre Chevassus +33 1 5844 9512 Florian Peter +49 69 91 30 90 740 PARIS Ross Tobias +44 20 3753 3137 Dalila Farigoule +33 1 5844 9510 Joerg Wenzel +49 69 91 30 90 743 Vincent Klein +33 1 58 44 95 09 Manon Petit +33 1 5844 9507 Antonio Scuotto +33 1 58 44 95 03 ELECTRONIC TRADING SWITZERLAND, AUSTRIA & ITALY Jonas Doehler +44 40 350 60 391 SCANDINAVIA Andrea Ferrari +41 44 283 2020 LONDON Matthias Führer +49 40 350 60 597 Mikko Vanhala +44 20 3207 7818 Gianni Lavigna +41 44 283 2038 Assia Adanouj +44 20 3753 3087 Sven Kramer +49 40 350 60 347 Marco Weiss +49 40 350 60 719 Jamie Nettleton +41 44 283 2026 Charles Beddow +44 20 3465 2691 Matthias Schuster +44 40 350 60 463 Yeannie Rath +41 44 283 2029

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EQUITY RESEARCH SALES (cont'd) CRM SALES TRADING Andrew Fung +1 646 445 5577 Zubin Hubner +1 646 445 5572 LaJada Gonzales +1 646 445 7206 Ronald Cestra +1 646 445 4839 Donald McLee +1 646 445 4857 Michael Lesser +1 646 445 5575 Monika Kwok +1 646 445 4863 Michael Haughey +1 646 445 4821 Adam Mizrahi +1 646 445 4878 Jessica London +1 646 445 7218 Christopher Kanian +1 646 445 5576 Gal Munda +1 646 445 4846 Anthony Masucci +1 617 292 8282 CORPORATE ACCESS Lars Schwartau +1 646 445 5571 Ryan McDonnell +1 646 445 7214 Olivia Lee +1 646 445 7212 Brett Smith +1 646 445 4873 EQUITY SALES Emily Mouret +1 415 802 2525 Tiffany Smith +1 646 445 4874 Bob Spillane +1 646 445 5574 SALES Peter Nichols +1 646 445 7204 Jordan White +1 646 445 4858 Enrico DeMatt +1 646 445 4845 Kieran O'Sullivan +1 617 292 8292 EVENTS Kelleigh Faldi +1 617 292 8288 Rodrigo Ortigao +1 646 445 7202 Laura Hawes +1 646 445 4849 ECONOMICS Ted Franchetti +1 646 445 4864 Ramnique Sroa +1 415 802 2523 Mickey Levy +1 646 445 4842 Shawna Giust +1 646 445 7216 Matt Waddell +1 646 445 5562 Roiana Reid +1 646 445 4865 Rich Harb +1 617 292 8228

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