Revenge of the Nerds

Esports are headed to the mainstream

May 8, 2022 Read in Browser TOGETHER WITH Good morning and happy Mother's Day! Before we dive in, let’s discuss one of the most innovative new platforms that’s come across our desk, well, ever.   It’s called Kalshi, and it’s revolutionizing the way investors think about markets. With the stock market, investors are inherently betting on both the financial outlook of specific companies, and variables like interest rates, inflation, and volatility, not to mention the psychology of traders. Using Kalshi, investors can 1) isolate these macro variables that don’t necessarily appear in financial statements and 2) get a crystal clear view into how markets are handicapping probabilities of important scenarios like “will a recession begin by Q2 2022?” Simply put, it’s the most precise way to isolate risk and engineer financial outcomes without camping out on a Wall Street trading floor. But for as sophisticated a platform as it is, Kalshi couldn’t be easier to understand:  Investors can buy shares tied to “Yes” or “No” future outcomes (an extremely transparent way to hedge based on your belief system) As the event becomes more likely to happen, the value of the shares appreciate. Simple as that. If you are concerned about scenarios such as: how inflation might impact the economy, or if the war in Ukraine will continue to ripple through supply chains, Kalshi is a must-have platform.  The first 500 Daily Upside readers get exclusive access. Explore Kalshi now. Okay, let’s get into it. Breaking Down the Emerging World of Esports There was a time when getting paid to play video games was little more than a strange, impossible dream for a few pimply teenagers high on life.  These days, that reality is very material indeed. We are talking, of course, about the breakout world of esports, short for electronic sports. At its core is a ritual very familiar to traditional sports fans: teams of players suit up for battle in a downtown arena while thousands of ecstatic onlookers come out to watch and wave placards in support. Broadcasters beam the spectacle out to millions more fans while commercials hawk all sorts of products, from energy drinks to insurance, during breaks in the action. The only difference between this new kind of sport and the non-electronic kind is that these players aren’t grinding out hockey shifts or performing highly acrobatic dunks. They’re playing League of Legends, Counterstrike, Fortnite, or Super Smash Brothers. It’s gotten so wildly popular that the Olympics are considering adding it as an official event. No — seriously. On the business side, venture capitalists, tech companies, broadcasters, and even the owners of traditional sports teams — all very serious players — have jumped on the bandwagon. That’s what we’re exploring today: how on earth we got from video games as the pastime of couch potatoes to video games as a world-class spectacle. Time to plug in your controller. How It Started: A Magazine Subscription Contest For such a seemingly novel phenomenon, esports goes back surprisingly far. The first known esports competition was held in October 1972 — when most people had no idea that video games were a thing — at Stanford University. At the California school’s Artificial Intelligence Lab a number of students faced off in a sci-fi combat game called Spacewar, developed a decade earlier at MIT. A one-year subscription to Rolling Stone was the top prize. How quaint. Two years later, SEGA sought to spread the gospel of arcade gaming by holding arcade game competitions in Japan, leading to TV and radio segments about Goal Kick, Balloon Gun, and Table Hockey competitors. Yet what transformed esports into a full-blown professional business was an opportunity born of a crisis. After the 1997 Asian Financial Crisis, the South Korean government invested heavily in broadband internet infrastructure. The newly available speeds led to the rise of internet cafes, called “PC Bangs,” which let young people pay hourly fees to rent computer time for facing off in multiplayer games like StarCraft. The wildly popular cultural trend created a pipeline for gaming talent — not unlike the soccer pitches in Brazil or basketball courts in Brooklyn, where kids face off before going on to top sports programs. The South Korean government saw an opportunity and intervened by forming the Korean E-Sports Association in 2000, a public body whose mission is to solidify esports as a commercial activity. With PC Bangs too small for this ambitious goal, the country began organizing competitions among top video gamers in hotel conference rooms and, eventually, stadiums. South Korean TV stations broadcast the events, and lots of people tuned in. “You had a government that gave a thumbs-up to esports — it was professionally organized, and it was on television, so it became a mainstream thing,” esports commentator Jonathan Beales told the New York Times. How It’s Going: A Billion-Dollar Global Explosion These days, esports is not solely a South Korean phenomenon. Last year, gaming analytics firm Newzoo estimated that the esports industry had brought in $1 billion in revenue for the first time. This year, that number is expected to grow to $1.8 billion. With the benefit of an already well established market — the global video game industry was valued at $179 billion last year — esports audiences are exploding:  The global esports audience grew 12% last year, to 489 million. By 2025, 640 million viewers are expected to be looking on as gamers battle it out.  By comparison, the three most popular sports in the world — soccer, cricket, and basketball — annually draw about 3.5 billion, 2.5 billion, and 2.4 billion fans, respectively, while esports is now on par with baseball (500 million) and American football (400 million) in terms of a global audience. With such robust audience growth, capital flows are never far behind. Esports is a diversified sector that brings in revenues from media rights, live ticket sales, and merchandise. Per Newzoo, the mightiest revenue generator, accounting for 69% of the pot, is a mix of sponsorships and advertising. In 2021, North America was on pace to hit $300 million in esports revenue for the first time, while Europe was on track for some $140 million, according to PwC. Seeing the explosive growth, venture capitalists and private equity firms have picked up the joysticks and gotten in on the action. Investments in esports companies in 2021 were $10.2 billion, according to Sports Business Journal. In 2018, that figure was $4.5 billion. How Does It Actually Work? So how on earth does this all work? The answer can be found in the arena of regular professional sports, which aren’t that different from esports (as far as economics are concerned). Esports teams have owners, franchises, and endorsement deals. They sign players to contracts and compete for top talent. Just as soccer teams do, they can compete in multiple leagues or tournaments, domestically and internationally. Take The Overwatch League, for example. As the title suggests, it’s a competition in which teams face off in the first-person shooter game Overwatch. Just as in pro sports leagues, Overwatch teams are based in cities — the Los Angeles Gladiators, the Vancouver Titans, and the defending champion San Francisco Shock among them — and are backed by different ownership groups. The 20 teams in the Overwatch League are spread across six countries, with 11 of them based in the US; they compete in a regular season as well as playoffs — in front of live and broadcast audiences — just like National Basketball Association or Major League Baseball teams. Teams compete for monetary prizes, in addition to the glory of championships (though no esports trophy has yet to take on the symbolic power of Lord Stanley’s Cup). Esports franchises can also take on structures similar to the European clubs that participate in multiple sports. For example, FC Barcelona — best known for being one of the world's top soccer teams — also has basketball, rugby, volleyball, and ice hockey divisions. In fact, FC Barcelona Bàsquet, the organization’s basketball team, has 27 Spanish titles — one more than its iconic soccer team. A comparable esports organization is FaZe Clan, a franchise based in Los Angeles, with multiple teams specializing in different video games, Call of Duty, and soccer simulation FIFA among them. Last year, the five most valuable esports franchises, as per Forbes, were Team SoloMid ($410 million), Cloud9 ($350 million), Team Liquid ($310 million), FaZe Clan ($305 million) and 100 Thieves ($190 million). Dan Gilbert, the billionaire owner of the NBA’s Cleveland Cavaliers, is a co-owner of 100 Thieves. Companies to Watch Given that an April tech rout just dragged the tech-heavy Nasdaq to its worst month since 2008, most of the stocks affiliated with the sector haven’t been putting up high scores. Activision Blizzard, the gaming studio behind popular esports games Call of Duty, Overwatch, and StarCraft, is in the midst of a proposed merger with tech giant Microsoft. The acquisition values Activision Blizzard at $95 a share, versus its current $78 price, with many on Wall Street fearing regulators will block the deal for antitrust reasons. One of the world’s most famous investors, Warren Buffett, is betting otherwise. Buffett recently took a 9.6% stake in Activision. China’s Tencent Holdings, the maker of games League of Legends, Honor of Kings, and Fortnite, is under increasing pressure from Chinese regulators, and is down 16% this year, not unlike other game manufacturers. Electronic Arts is down 10% and Take-Two is down 25% this year. Esports’ unique position as an emerging public pastime means some companies have operations similar to the traditional sports industry. One example is Allied Esports Entertainment, which went public in August 2019, and runs several esports arenas, including the HyperX Esports Arena Las Vegas, Esports Arena Orange County, and Esports Arena Oakland. It’s down 14% for the year. Then there’s gambling. DraftKings will let you bet on esports as well as regular sports; just hope that your wager performs better than the company’s shares, which are down 42% this year. Finally, there are the teams. Like North American sports franchises, esports teams tend to be privately held. There are, however, a few exceptions. Astralis Group, a holding company for teams competing in CS:GO, League of Legends, Rainbow Six Siege, and FIFA is down 17% this year. Enthusiast Gaming, the owner of Call of Duty franchise Seattle Surge and Overwatch franchise Vancouver Titans, is down 28%. Like virtually every high-tech sector with significant growth potential, esports is managing a delicate balancing act: on the one hand are cautious markets, wary of global headwinds like inflation and economic growth, and on the other hand is their fast-growing potential, with bigger audiences creating more revenues to unlock. Then again, it wouldn’t be gaming if it didn’t involve some kind of challenge. ******* A message from our sponsor: You Can Make Money By Betting On Inflation So, how do you do it?  Event Contracts on Kalshi. Put simply, the event contracts market on Kalshi revolves around buying “yes” or “no” shares tied to specific events – for example, “will inflation increase by 0.4% in April ‘22?”.    World’s First: Investors are pouring money into Kalshi because it’s the first legal platform where you can trade directly on your beliefs. Each contract costs less than a dollar and all trades are fully funded at execution, so you never have to worry about needing to add additional capital or margin.  Get started trading on Kalshi right here. (And let us know how you like it – seriously, we’re interested.)  You have 0 referrals. Share The Daily Upside, Earn Rewards Or, simply copy and paste your unique referral link and share it with others: https://sparklp.co/98131d2f Written by Sean Craig. 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