Trends & Ideas October 16, 2020 Larbi Moumni, CFA $4 bln since it was created in 2017 entirely from Video Gaming, Not so Niche microtransactions as players purchased items like dance The video game industry has come a long way over the past moves, appearance-changing skins or tools to use in the game. few decades. Some may have memories playing Space While distributing a game for free could be thought as a risky Invaders or Pacman at the arcades, Pong on Atari or Duck Hunt venture for game publishers given the uncertainty as to on the Nintendo Entertainment System for the very first time. whether costs would be recouped, the free-to-play (F2P) Today, the industry has become a culture force that boasts model has been the main driver for digital sales. F2P games over 2.6 bln gamers worldwide. Consoles have improved, comprised over 80% of the industry’s revenue in 2019, growing games feel more realistic and esports have become a boon for in the mid-single digits. the next mode of entertainment. The recent stay-at-home Gaming Revenue by Model measures resulting from the coronavirus pandemic drove consumers to find new ways to replace pre-pandemic Pay-to- activities; many people spent more hours playing video games play (P2P) Revenue and/or watching esports, translating positively for some video 18% game companies, which have recently reported quarterly results that exceeded analysts’ estimates by a wide margin. Free-to- While some may think that the video game industry is niche, play (F2P) the market is estimated to have generated anywhere between Revenue US$120 to US$145 bln in gross revenue in 2019, according to 82% various gaming data providers, far larger than other forms of media entertainment. For comparison, the global sports industry was worth US$129 bln last year, movie streaming Source: SuperData, Raymond James Ltd. around US$58 bln, the movie box office around US$42 bln and This is in contrast to the traditional pay-to-play (P2P) model music around US$19 bln. Some sources even peg the industry where consumers would pay for “premium” games, which saw to reach over US$159 bln in 2020 and exceed US$200 bln by revenues decline in the mid-single digits that same year. The 2024. table below shows just how much the top five F2P and P2P games raked in last year. Given the success of F2P models, In this piece, we provide a brief introduction to the industry’s some traditionally P2P franchises have also migrated over to business model, its evolution, touch on esports and discuss the free model. That said, P2P games are still viewed as having some demand drivers for this space. We also provide ways to higher quality for which its users are willing to pay. gain exposure through individual securities as well as a basket approach. F2P Game Revenues Exceed P2P Revenue Top 5 F2P Games Publisher ($ bln) Evolving Business Model Fortnite Epic Games $1.80 From the first computer game in 1940 called Nimatron, to the Dungeon Fighter Online Nexon $1.60 era of arcade games, the introduction of the home gaming Honour of Kings Tencent $1.60 consoles and PC games, online and mobile gaming, and finally League of Legends Riot Games, Tencent $1.50 the surge in esports, video games have morphed over the Candy Crush Saga KING Digital Entertainment $1.50 decades, to say the least. Not only have the platforms Revenue Top 5 P2P Games Publisher changed, but so has the way in which the industry generates ($ mln) revenue. Just like arcades knew how to get our quarters, so do FIFA 19 Electronic Arts, Inc. $786 games today, but in a slightly fashion. Today, most of the Call of Duty: Modern Warfare Activision Blizzard, Inc $645 Grand Theft Auto V Take Two InteracIve Software,$595 Inc. money in the video gaming industry is generated from free FIFA 20 Electronic Arts, Inc $504 games through what is known as the microtransaction model. Call of Duty: Black Ops IIII Activision Blizzard, Inc $487 Here, players spend money in-game after they download the Source: SuperData, Raymond James Ltd. 2019 Revenue. game for free. For instance, the popular shooter game Fortnite, which boasts 250 mln players worldwide, made over Please read domestic and foreign disclosure/risk information beginning on page 6. Raymond James Ltd. 5300-40 King St W. | Toronto ON Canada M5H 3Y2. 2200-925 West Georgia Street | Vancouver BC Canada V6C 3L2. Trends & Ideas October 16, 2020 | Page 2 of 6 Game Streaming deal with China’s League of Legends Pro League to supply teams with clothing and sneakers. Brands such as Anheuser- Esports Busch, Berkshire Hathaway's Geico and Buffalo Wild Wings Esports has become all the rage with reports of teenagers have also placed ads at esports events. Companies in this area making millions from playing video games (shouldn’t they have largely generate revenue through event ticket sales, been off the computer and at school?). Esports are organized sponsorship, advertising or merchandising. The best esports competitions between “professional” players (typically teams or players can also make serious coin, comparable to teenagers / young adults who have spent hundreds of hours traditional sports athletes. For example, 26-year-old Danish practicing) attracting crowds large enough that they have filled gamer Johan Sundstein (a.k.a N0tail) earned over US$3 mln traditional sports arenas (at least up until the pandemic hit). last year for total career earnings of US$6.8 mln. In Just like some may enjoy watching professional darts or comparison, golfer Tiger Woods received US$2 mln for winning billiards players, others enjoy watching professional gamers the Masters and tennis player Novak Djokovic made US$2.8 compete against each other. In fact, the global audience for mln after winning at Wimbledon (although we know they do esports is estimated to have reached over 440 mln in 2019 make more with sponsorships). Tournament prize pools have most of which tune in from China followed by Europe and then surpassed US$34 mln, with individual games like Dota 2 having North America. lifetime prize pools of over US$227 mln throughout all of their tournaments followed by CS:GO at over US$100 mln and Global Esports Audience to reach 495 mln in 2020 Fortnite at over US$97 mln. Top 10 Esports Prize Pools by Tournament Tournament Prize Pool Game The International 2019 $34,330,069 Dota 2 Others China The International 2018 $25,532,177 Dota 2 34% 33% The International 2017 $24,687,919 Dota 2 The International 2016 $20,770,460 Dota 2 The International 2015 $18,429,613 Dota 2 South Fortnite World Cup Finals 2019 - Solo$15,287,500 Fortnite Korea Europe 19% Fortnite World Cup Finals 2019 - Duo$15,100,000 Fortnite 3% North The International 2014 $10,931,103 Dota 2 America LoL 2018 World Championship $6,450,000 League of Legends 11% LoL 2016 World Championship $5,070,000 League of Legends Source: Newzoo, Raymond James Ltd. …and Lifetime Prize Pools by Game Chinese multimedia conglomerate Tencent (TCEHY-US), which holds stakes in/has partnerships with various gaming Game Prize Pool companies, organizes competitions for their popular League of Dota 2 $227,319,908 Legends game; while America's largest video game software Counter-Strike: Global Offensive $102,373,166 company by revenue Activision Blizzard (ATVI-US) has Fortnite $97,508,425 competitive leagues for its Overwatch and Call of Duty titles. League of Legends $79,003,449 Other popular esports games also include private company StarCraft II $33,832,964 Valve’s Counter-Strike: Global Offensive (or CS:GO) and Dota 2 Overwatch $26,049,333 titles and Epic Games’ (of which Tencent owns 40%) Fortnite. PlayerUnknown's Battlegrounds (PUBG)$23,710,379 This area is expected to experience solid growth going forward Hearthstone $22,857,628 as increased interest by media and other companies to Heroes of the Storm $18,176,607 distribute esports content grows. Esports can be broadcast on Arena of Valor $15,228,711 television through channels like Walt Disney’s (DIS-US) ESPN Source: Esports Earnings, Raymond James Ltd. or on the web though platforms such as Amazon.com’s (AMZN-US) Twitch and HUYA (HUYA-US). Take-Two Gaming Video Content Interactive Software (TTWO-US), the company behind the We also make a note of gaming video content (GVC), which is Grand Theft Auto and Red Dead Redemption franchises, different than esports. In this case, recreational or professional launched the NBA 2K League with the NBA in 2017, which was gamers can both create a profile for themselves on one of the the first esports league sanctioned by a professional sports streaming platforms like Alphabet’s (GOOGL-US) YouTube and league. Sports apparel company Nike also signed a four-year broadcast their gaming style all the while providing Trends & Ideas October 16, 2020 | Page 3 of 6 commentary as they play. One of the main differences . Global Exposure. While the top video gaming markets by between GVC creators, or game streamers, and esports revenue are in the US and China, together comprising professionals is that game streamers simply share their almost half of the industry, some of the fastest-growing screens as well as put their personalities on display for viewers. markets are actually outside those countries. Companies Whereas, esports professionals are usually part of a team and with a geographically diversified revenue stream, play purely for competition. The global GVC audience particularly with exposure to emerging markets within surpassed 940 mln in 2019 and can also be a very lucrative Asia-Pacific and Latin America, could experience faster pursuit for some avid gamers.