If you're looking for an industry with a ton of rapid growth behind it and plenty of room for more ahead, you could do worse than to consider video games. The amount of time we spend on them is increasing at a ridiculous clip, as is the amount of money, and the global trends appear promising, which adds up to an opportunity for investors. If you don't feel ready to take advantage, Motley Fool Answers co-hosts Robert Brokamp and Alison Southwick want to help.
For this podcast, they've invited senior analyst Jason Moser back into the studio, this time to talk about the current situation in the world of video games and esports from an investor's perspective: Which companies look strongest, how this particular business might move the needle for some more-diversified companies, why esports is the wave of the future, and more. But first, in this week's "What's Up, Bro?" segment, they'll dig into a trio of topics: the rapid growth of free stock trades, why car loans are getting more expensive, and why even long-term buy-and-hold investors are trapped by a certain degree of market timing.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Oct. 8, 2019.
Alison Southwick: This is Motley Fool Answers! I'm Alison Southwick and I'm joined, as always, by Robert Brokamp, personal finance expert here at The Motley Fool.
Robert Brokamp: Well, hi, everybody!
Southwick: Hey, Bro!
Southwick: In this week's episode, Jason Moser is back to help walk us through the fascinating world of esports and gaming, and how you can invest in it if you want. Or how you can just shake your head and be like, "Kids these days."
Brokamp: Kids today!
Southwick: Ugh. I don't know about that. All that and more on this week's episode of Motley Fool Answers.
Southwick: So, Bro, what's up?
Brokamp: Well, guess what? Three things for you today.
Brokamp: No. 1. You get a free trade -- and you get a free trade -- and you get a trade. Hats off to Oprah on that, off course.
Southwick: Everybody gets free trades.
Brokamp: Everybody gets free trades. Almost everybody, at least. Last week, discount broker Charles Schwab made headlines by eliminating commissions on equity and ETF trades. Not to be outdone, within a day, TD Ameritrade cut their commissions to zero and then E*Trade joined in. Even before the Schwab announcement, Interactive Brokers announced a new service, IBKR Lite.
Brokamp: They eliminated trades on stocks. Of course, Robinhood's been doing that for years and every brokerage has been offering free trades, at least on a select number of ETFs. So this is all generally good news. It's sort of like the Latte Factor for investors. You're not spending that $4 to $8. Over the course of the year it leaves more to be invested and compounded over decades. It's nice.
But brokerages are not charities, so they have to be making money somehow. How do they do it?
Several ways, but here are probably three of the biggest. No. 1, "order flow". Essentially brokerages have to go to someone else to complete the trade. They can go to the exchange and pay the exchange or they can go to market makers, and the market makers are willing to pay a little bit to handle that trade. In a blog post at the end of last year, Robinhood's co-CEO said that they make about $2.6 for every $100 that are traded. It's not a lot of money, but it's one way that they do it.
No. 2 is "upselling other products." If could be that these free trades are basically loss leaders in the hope that once you open the account, you do other things. Maybe you buy some of their mutual funds. Maybe you use some of their financial planning services. Maybe you do some trades that have higher commissions, like options. Some of these people are still charging for options trades. Or using margin.
And then No. 3 -- and this is the biggest -- is basically making money on "lending out your cash." According to an excellent article by Josh Barro in New York Magazine, in 2018 Schwab paid 0.27% on cash that you just had in your account. What would they do with that? Well, they would lend it out and make 2.57%, and they actually derived 57% of their revenue just on that 2.5% differential. It's basically like being a bank. That's how they're doing this: by offering the free trades, getting more assets, and that way they can lend out more.
And also, of course, you may use some of their robo-advisors with many of these brokers. Many of these brokers have cash in the allocation, so that's another way that they can accumulate some of that cash. The lesson here is, dear Fool, to enjoy those free trades, but don't end up paying for it in a roundabout way by letting a lot of your cash sit there in these very low-yielding cash accounts. If you don't have a lot cash at your brokerage -- or if you do -- go seek out some of the higher-yielding options like a money market fund.
No. 2 is driving your finances into the ground. Here's a recent headline from The Wall Street Journal: The Seven-Year Auto Loan: America's Middle Class Can't Afford Its Cars. The average length of a new car loan, these days, is 69 months. It's almost six years and it's an all-time record. One-third of new loans are longer than six years, according to Experian, and that's up from just 10% a decade ago. People are taking out longer loans for their cars.
What are the consequences of this? Well, first of all, generally, the longer your loan, the higher the interest rates. You're going to end up paying more for the car. But also a car is a depreciating asset and at some point it has to be replaced. According to car-shopping site Edmunds, one-third of buyers replace their old vehicle before they've paid off the loan. And they roll the old loan into the new loan.
Southwick: That sounds awful!
Brokamp: Yes. the Wall Street Journal article profiled a 22-year-old guy. When he bought his new car, he pulled in the loans of two previous cars that he had already bought and he's only 22.
Southwick: 22-year-olds are so dumb. Speaking as a former 22-year-old.
Brokamp: Exactly. So how are buyers able to get these loans? Well, to quote the Wall Street Journal article: "A lending machine has revved up in response, making it possible for more Americans to procure a vehicle by spreading the debt over longer periods. Wall Street investors snap up these loans, which are bundled into bonds." This I can't believe. "Dealers now make more money on the loans their customers take out than on the cars they sell."
The article provides some numbers from J.D. Power. When a dealership sells a car, they make, on average, just $381, but they make $982 on the loan on the car, which is almost twice as much as a decade ago.
We previously mentioned on this show the 20/40/10 car buying rule of thumb. You put 20% down, you get a loan that's no longer than four years, and that multipayment should not be more than 10% of your gross income.
But this is where it gets challenging for middle income Americans. According to Bankrate, if you follow this rule using the median income of the American household, then folks should be buying a car that costs $18,390. Unfortunately, the average cost of a new car, nowadays, is $32,000.
Southwick: We paid $22,000 for our new car.
Brokamp: And I'm guessing you did not get a SUV or something like that.
Southwick: No, we got a very base model station wagon with a manual transmission.
Brokamp: Right. So part of the reason why the average cost of a new car is going up is because first of all, there's all the fancier things that just come with a car now. The backup rear camera, the display, and all of that. Also, Americans have gone back to buying bigger cars. But you can see why Americans are taking out these longer loans. If the average new-car price is $32,000 and you spread out that loan, it lowers the monthly payment and it gives you the illusion of it being more affordable.
The takeaway, here, is as far as I'm concerned, if your finances are at all stretched, and you cannot afford to pay for your new car either with cash or in a loan that is four years or less, buy used as I almost always have done, buy small, and aim to keep your car for at least a decade. How long did you keep your last car before you bought this one?
Southwick: I think we got it in 2002.
Brokamp: There you go. I think at least a decade if you can.
And No. 3 -- speaking of decades -- what a difference a decade makes. The Bespoke Investment Group, which has this active blog with all kinds of cool, little stats, sent out an email that broke up the trailing returns of the S&P 500 for various time frames as of the end of this September.
How has the index fared over the last decade? Most listeners will know pretty well. In fact, over the last decade it's returned 13.2% a year on average. That's higher than the 10.4% since 1928, and when you place it among all past 10-year holding periods, it ranks in the 61%. In other words, it's better than 61% of all other 10-year periods. Pretty good.
But then they looked at the 20-year annual return for the S&P 500 as of the end of this past September. The average for all 20-year holding periods is actually 11%, so even higher than 10%, but what about the most recent 20-year period? Only 6.3% a year, on average, and that places it in the 5%. The bottom 5% of all 20-year holding periods. The reason, of course, is when you stretch it out over 20 years -- you're starting in 1999 -- you get the dot-com crash and then the Great Recession. So what's the point besides me thinking this is just an interesting stat?
First of all, much of what will determine the value of your portfolio really comes down to luck, to a certain degree, and timing. Like you could take two people who earn the same amount of money -- adjusted for inflation -- contribute the same amount to their 401(k)s, put it in an S&P 500 index fund, and the person who started in 1999 is going to have a lot less than the person who started in 1980, which was the start of the best 20-year period for stocks when it earned 18% a year, on average.
The other point is: You don't want your financial plan riding on a single asset category and hope that your timing works out. The S&P 500 is an index of U.S. large-cap stocks and from 1999 to 2009, they were the worst-performing asset class. If you also held mid caps, small caps, international stocks, real estate investment trusts, and even bonds, you did much better over that decade.
Now all those things have been a drag on your portfolio over this previous decade because once again, U.S. large-cap stocks have outperformed. The truth of the matter is when you have a diversified portfolio, you're never going to be beating everybody, but your portfolio is not going to be tanking at the absolute worst time. You're just going to have a smoother, even ride with a portfolio that's probably going to fare well in all kinds of future scenarios, and for me that's a trade-off that I'm willing to take. And that, Alison, is what's up.
Southwick: Hey, Jason Moser is back!
Jason Moser: Hey, hey!
Southwick: How are you doing?
Moser: I'm well! How about you?
Brokamp: Fan favorite.
Moser: Oh, I can't believe that! I've never seen any emails or tweets to support that kind of nonsense.
Brokamp: That's not true.
Moser: I don't think so. Favorites?
Moser: Definitely not.
Brokamp: Yeah, yeah, yeah.
Moser: No way.
Brokamp: I'll think of some proof afterwards.
Moser: How about, "He'll do."
Southwick: They're like, "Eh, OK." Anyway, the last time you were here, we talked about the battle for our television viewing. Cable and streaming. It was a good chat and it was something that I knew something about. But today we're going to talk about something that I don't know a lot about, and so I'm going to be using a lot of words that I don't know the meaning of.
Brokamp: That's perfectly cromulent.
Southwick: Oh, I've had one of those.
Moser: What he said.
Southwick: Isn't that like a croissant? It's like a big thing in New York.
Moser: Coronas. That's what you're talking about.
Brokamp: Yes, that's a Simpsons thing.
Southwick: So today we're going to talk about gaming and esports. Let's just see how it goes. All of our listeners that know way more about this than I do can go ahead and just email us afterwards and email us their thoughts.
Moser: Well, to be very clear, I'm sure there are a lot of listeners that know a lot more about gaming and esports than probably most of us in this room do, at least from a user's perspective. We look at this market, obviously, from an investor's perspective, and that will be the difference. I'm sure we'll get some terminology wrong or mess something up, but people will email, and tweet, and let us know. And we appreciate that.
Southwick: We do. Thank you!
Moser: Because it means they're listening.
Southwick: Thank you! Keeping us honest. So right now, as we are talking, the League of Legends World Championship is waging in Europe, and Bro, I can tell that this means a lot to you. What does this even mean? Well, League of Legends is a game. I'm not even going to try and describe what type of game it is, but it's a game that people play and it's one of those esports compa-titions that... See, I'm already off to a great start.
Southwick: The point is that supposedly last year's League of Legends finals were watched by 100 million people and while that's still very small compared to the billions of people that watch World Cup soccer or Olympic ceremonies -- keeping it in the area of sports -- that's roughly the same as people who watched the Super Bowl.
Moser: It's a lot.
Southwick: So today we're going to talk about, again, gaming. Esports. Maybe a little gambling.
Southwick: Let's start off with some fun stats. According to research from Limelight [Networks], gamers play on average, in the U.S., seven hours and seven minutes each week, which is up 20% over last year. Do you want to guess the country where gamers play more hours, on average, than the U.S.?
Moser: I think I'm going to go with China.
Southwick: It's Germany.
Moser: Germany? Wow.
Southwick: On average, gamers in Germany play almost eight hours a week. Then comes the U.S. Then after us is Singapore. Most of that time is spent on mobile games, and the average is two hours for gamers. Computers follow that at almost two hours and then console time an hour and a quarter. Most people are playing casual single-player games like Candy Crush or Angry Birds. This probably isn't going to surprise you. Gamers 26 to 35 spend most of the time playing. They're at about 8.21 hours a week, and those over 60 spend about 5.63 hours playing.
Moser: That is fascinating!
Southwick: Yeah. It's easy to think of being a young person's thing. Actually, it's not. Like when we think of games and gamers, we think of like dudes in recliners with their Call of Duty headsets on and they're playing marathons for hours and hours. Eating Frito pies straight out of the bag. I don't know.
Moser: That's a pretty safe stereotype.
Southwick: That's the stereotype, but the truth is a lot of people out there play games.
Moser: Oh, yes. You look at the numbers in gaming. Go back to 1995, you had somewhere in the neighborhood of 100 million gamers in the world. Today it's 2.6 billion, so you can see how big that is today. And also when you consider the global population, it's somewhere in the neighborhood of 7 billion at this point. There's still a lot of room to go.
A lot has happened in a short amount of time to open up that audience. You mentioned mobile and mobile really is the key to it all. When you look at the global games market value, in 2018 mobile was $63.2 billion. That was up 13%. Then you had PC at $33.5 billion. Consoles at $38 billion.
So mobile has really picked up a lot of share in a short period of time, and that makes perfect sense. Now we've got these smartphones in our pockets that do virtually everything and gaming has changed. The nature of these games has really changed. I remember when I was five years old -- and I'm not going to tell you how many years ago that was -- but it was long enough back to where my birthday present when I was five was the Atari. The Atari console that you hooked to your TV...
Southwick: We had a Coleco.
Moser: You'd get...
Brokamp: Space Invaders...
Moser: That was really, to me, the coolest thing that could have ever happened at that time in my life, and it was really just getting started at that point. Video gaming was kind of prohibitive, and today it's [not at all] prohibitive. You can get a game just with a couple of clicks of a button on your phone, and that opens up a lot of opportunities for a lot of different players in that value chain.
Southwick: There's consoles, so you think about a PlayStation.
Moser: And things like that.
Southwick: People playing Nintendo on your computer. I used to love Super Mario Bros.
Moser: I had a Nintendo. I had probably one of every one of them.
Southwick: And when you think of mobile, you also think of the added revenue generator of ads. You don't have ads on a console game. You don't have ads on a computer game, necessarily. Is that much of a game-changer? Like people are moving to mobile because they are also moving to their phones, but there's also the added benefit of ad revenue.
Moser: There's advertising revenue. There's also the in-app purchases, now, to where you can play a game, and in order to reach a certain level or to do something different, you can make a purchase here and there. Those little microtransactions really add up and, obviously, your phone is more or less just a bank, as well, so you can buy virtually anything you want anytime you want.
There are a lot of different opportunities to monetize in gaming, today, beyond just what historically was you sell that physical game to the individual. The consumer goes in and buys the Donkey Kong cartridge and then the money has changed hands. That's it. That purchase doesn't extend into the future. I'm not upgrading that cartridge. It was just that one time.
Now, you've got games that live much longer lives because of new iterations. New stories. New themes. New goals. Think about Activision Blizzard with the games that they're really well-known for, World of Warcraft and Call of Duty. Those are the franchises, but the stories that you can tell within those franchises are virtually endless. They can keep on going as long as they have the creative juices to keep coming up with new stories. And they have. They've done a very good job with that.
Really it is about coming up with a compelling universe and then figuring out ways to tell all sorts of different stories. You also see a lot of these gaming companies partnering with all of these bigger companies out there with all that cool IP. Think about Disney, for example, and Marvel superheroes and whatnot. Just a lot of different ways to do it, and anytime you see big market opportunities out there, you're going to see companies go out and pursue them.
Southwick: There's also the added element of community. Speaking of World of Warcraft -- my husband used to play World of Warcraft -- he was in a guild. These are real people. You are getting together with real people around the world. You are going on raids and you are accomplishing these things together. Having that element of community also makes these games stickier than when your community was just the kid next door who would play Donkey Kong with you.
Moser: No doubt. I think a lot of people really enjoy the fact that they can play games together. We were talking before we started taping about how just 10 years ago or so, FarmVille was on Facebook and Facebook was still a relatively novel concept for a lot of people at that time. The attraction of being able to play FarmVille and then talk with your friends about what you're doing and how that's working had a social dynamic to it.
Zynga is a company that was on the forefront of bringing social and gaming together, and they partnered up with Facebook to be able to get out there in front of the widest audience. I think a lot of producers -- game publishers -- are all using that social aspect, that social dynamic when they consider the games that they're making because it is something that matters to a lot of people.
Southwick: So you talked about Activision Blizzard. Is Zynga still around?
Moser: Zynga is still around. As a matter of fact -- and I guess I can say this -- it's a recent recommendation in Stock Advisor.
Southwick: Oh, really?
Moser: David Gardner picked it out in Stock Advisor several months back. Just saw some good things they were doing. David obviously is a big gamer, so for him it was neat to see that maybe Zynga has a second act.
Southwick: When we're talking about other game makers, a lot of them are going to be small, privately held companies. Are there any, in particular, that you really like? You mentioned Activision Blizzard.
Moser: There are going to be a lot of companies that a lot of our listeners and members are very familiar with. I mean Tencent is one that I think is important simply because it's the biggest gaming company in the world. That's based in China. Tencent is always one to consider. Activision Blizzard, Take-Two [Interactive]. Those are all companies that are available for investors today.
One that I've got my eye on, that's not public yet but I'm excited for it to go public -- I think it will go public at some point -- is a company called Niantic. Niantic is the company behind Pokemon GO. Behind the new Harry Potter: Wizards Unite. Those are games that were very mobile based. Incorporated augmented reality, which you know I love.
Right now, if you want ownership in Niantic, you've got to own shares of Alphabet. Alphabet still owns a little piece of that company, but I think at some point in the near future we'll see Niantic go public. And that, to me, would be really exciting because that's a gaming company that really is focusing a lot of its future technology on AR, VR, mixed reality, and whatnot.
Southwick: It's funny that you mention Niantic. I was talking about the stereotype of a typical gamer -- which is not me. I was not describing myself, but I've played the Harry Potter game. I've played Pokemon. I play several mobile games. Wait a second -- I'm a gamer!
Moser: Can I ask you a question about the Harry Potter game while we're at this, because I'm not the biggest gamer in the world anymore. I like going back a ways and hitting that arcade downstairs where you've got Donkey Kong and Ms. Pac-Man and Galaga.
I downloaded the Harry Potter game and fiddled around with it for a little while just to get familiar with the technology. That [didn't seem to] be the easiest game in the world to play. Like I couldn't figure out, exactly, what the ultimate goal was.
Southwick: It's a bit confusing.
Moser: It was a bit confusing. I never played Pokemon GO, so I couldn't make the comparison, there. I'm assuming you played Pokemon GO.
Southwick: I did play Pokemon GO.
Moser: What was your take on those?
Southwick: I live in Old Town, Alexandria, which is a pretty densely populated place. It really helps when you play these games because there are specific, real-world places that you have to go to, to do things. You have to go to specific places to get more spells if you're playing the game.
Moser: Go to the Washington Monument and get this thing.
Southwick: Right. It's also like the CVS on the corner, but all of these locations are denser, where [there's more people], so it becomes much easier to play when you live where it is densely populated. Basically you just walk around and do stuff. You're walking around and you look on your map, and things will pop up. You tap them and then, "OK, look. It's a dementor [Harry Potter]. I need to cast this spell to catch the dementor. Maybe I do. Maybe I don't." Rick used to play Pokemon GO. He can also describe it.
Rick Engdahl: My kids are big into Harry Potter... What is it? Wizard World?
Southwick: Wizards Unite.
Engdahl: They play that, as well. It's definitely in the tween demographic. Those games are great. And there's not a real objective other than to gain levels, I guess.
Moser: And just keep having fun.
Southwick: To level up is a goal. And there's also a community element to both of them -- definitely with Pokemon GO. You were supposed to come together to take down a really really big Pokemon. And we did. Oh, I'm definitely such a nerd! I love it! We actually made friends, because you have to go to these specific locations at specific times to capture a specific, special Pokemon, and you're like: "Oh, hey, how have you been? I saw you at the last one." Then we became friends with people at the PTO and we would go out together.
Moser: That's funny. Well, you connect the dots. We were talking about Tencent. For people who don't fully know Tencent, they do a number of different things in China. But Tencent owns a controlling stake in Epic Games and Epic Games is the home of Fortnite. And I'd be willing to bet that everybody out there has heard of Fortnite, so if you want to invest in Fortnite, you invest in Tencent. It connects the dots.
Engdahl: Fortnite is everybody's nightmare as a parent, whereas the Pokemon GO and the wizarding thing. My kids will ask me, "Hey, can I go for a walk?" They want to go outside. They want to go out in the neighborhood. They want to go do things. They might walk into the middle of the road in traffic without looking up...
Brokamp: But other than that...
Engdahl: I'll go with them. My son and I will go on a "Poke Walk," we call it. It's much better than Fortnite.
Southwick: Because in Fortnite they're just going around killing other people.
Moser: That's putting the headset on, saddling them up...
Southwick: And then like yelling at people...
Moser: Sitting there for a while from what I've seen.
Southwick: ... and being mean and saying angry things, killing each other and dancing.
Moser: Which is the downside of social. Not all social is good. There are a lot of people out there in the world who just aren't very nice, and unfortunately these social aspects let them all come to the forefront because there really isn't accountability. There's no gaming police that will yank your card if you're being mean. They do suffer from all of the things that these social platforms, today, suffer from. Those are always things to keep in mind. I think Rick's example, there, is an interesting one.
Southwick: Pokemon GO and Wizards Unite -- to make an analogy to a board game -- they're like cooperative games. You can play them on your own, but they are like cooperative, so you don't need to be mean to other people. Whereas games like Fortnite, you're trying to kill other people.
Engdahl: That can be fun. That can be fun and you can kill each other good-naturedly.
Brokamp: And you can join on the team with your friends. My 15-year-old daughter does a lot of Fortnite. She does it with her gymnastics friends. They all form a team and they take on horrible people throughout the world.
Moser: I'm very lucky that neither of my daughters have expressed any interest. They'll fiddle around with some games on their phone here and there, but they never got bitten by the Fortnite bug, and Pokemon GO was just a little bit before they got their phones.
Southwick: They've got to have a phone.
Brokamp: One other thing with my son, who did a lot of the Fortnite. It used to be like you said you'd go to your friend's house and pull out the Atari. You don't go to your friend's house anymore because you can just play online.
Moser: I'll meet you on the TV.
Brokamp: That made me a little sad, like everyone's doing it in the basement and then you get up...
Southwick: Cross-legged on the shag rug...
Brokamp: On the [bean bag] and then watch a movie.
Moser: When I was a kid, you'd get out on your bicycle and you'd ride to wherever you want to go. Now people aren't doing that, as much, because they don't have to go to the physical place to get there. There are virtual ways to get there. Technology giveth and it taketh away, and you've got to deal because there's nothing stopping them.
Southwick: Well, that's maybe enough of a bunch of uninformed, old people talking about a young man's game.
Brokamp: A young woman's game, too.
Southwick: A young woman's game, too. That's true. Let's move on and talk about esports. You know what? Let's check on a battle that is going on right now. [Audio of esports broadcaster]. That sounded intense!
Moser: I know! And that's basically how it is the whole time.
Brokamp: And just so everyone knows, that wasn't humans playing sports. That was a game.
Southwick: That was a game.
Brokamp: And there's an announcer describing the people playing the game.
Southwick: Team Clutch Gaming vs. Unicorns of Love. To imagine it, it's basically a bunch of chaos. Mythical creatures attacking each other, but I have absolutely zero idea what I'm watching. I just know that it's intense.
So we have these intense, epic games where people come together -- Fortnite too -- and then they battle against each other and it's turned into a sport...
Southwick: ... like football.
Brokamp: A spectator sport.
Southwick: A spectator sport.
Moser: It's fascinating, and I know it's difficult for a lot of people to wrap their minds around, but No. 1, esports is a thing. It's growing. It's not going anywhere. Just because you don't get it doesn't mean it doesn't exist. But in its simplest definition, esports is a form of competition with video games.
This is how I try to explain it to people. Think about when you sit down to watch a basketball game, a football game, or a baseball game. You're sitting down watching a sport or a game that you are interested in, and you're watching people who are better than you do it and do it at a high level. That is what esports is. You're watching teams compete and presumably you're watching because you're interested in the actual game that they're playing.
Esports has actually been around for a long time. It's just starting to gain more traction now because of the growth in the number of people who are participating. The market opportunities that exist out there. It's too much for some of these companies to pass up and so [we're now seeing a lot more of esports] than in the recent past.
Brokamp: I'll also add that if I sit down and watch a football game on Sunday, I can't then go out and play football. Whereas if I watch these games and I'm an avid gamer, there's a reason why I might watch one of these. I could learn something and then take what I've learned when I play.
Moser: That's a really good point. A lot of people use things like YouTube and Twitch because they know they can watch people perform at a high level and learn how to get better. Hey, I use YouTube to try to figure out how to get better at painting watercolors.
Brokamp: And you're doing a fine job.
Southwick: You are.
Moser: Thank you. It's one of those things where you constantly want to try to get better. Hopefully I'll do that for the rest of my life. From that perspective, I can understand why e-sports, in theory, should be around for the rest of our lives. And if that's the case, then you have to believe that there are going to be competitive forces at play and market opportunities to capture them.
Southwick: Let's talk a little bit about how esports are set up, and specifically League of Legends. Dota. That's another game.
Southwick: I did some research. So you've got the game makers. League of Legends is owned by Tencent. There's Dota [Defense of the Agents]. Dota2, which is made by Valve Corporation, a privately held company.
Moser: I believe so.
Southwick: Activision Blizzard makes Overwatch and Call of Duty. Then you have franchises. Can you explain how this works? It is very similar to other sports.
Moser: It's easy to draw a parallel between any of these other sports leagues. If you go back to 2016, there was an organization called Major League Gaming, which was building out a league for gaming for esports. Activision Blizzard said they liked the space. They wanted presence in it. They wanted to own it, so Activision Blizzard bought Major League Gaming.
You will see, as time goes on, the game makers are also becoming the companies that are dictating these leagues and the way these leagues shake out. But ultimately, it is just like any other kind of sport. You've got the sporting organization. The governing body. Then you've got franchises as a part of that league.
Then, depending on the demand that's out there, you have any number of ways where people will be able to compete in those leagues, whether it's through a series of competitions to qualify or just money to pay up. The bottom line is you've got the leagues and the gaming companies that participate in those leagues that make the games, help support the leagues, and help monetize it.
Southwick: So we've got the people that make the games. Then there's other smaller companies that build the teams. Then they have to pay franchise fees to the game makers. Then they also have to pay the people playing the sports. Do we call them athletes?
Moser: You probably should -- you're going to offend someone if you don't -- but I'll say this. At some point in the near future, esports is going to be part of the Olympics.
Southwick: Yes. L.A. was saying that if they get the 2024 Olympics, they're thinking about including esports, which I think makes Bro's head want to explode. Yes, he's shaking his head.
Moser: They wanted to bring it to the 2024 games. I think they just don't feel like they're quite there, yet, to be able to fully seal that case. I would bet on esports being in the Olympics sooner rather than later.
Southwick: So we've got the games. We've got the franchises that manage the teams. Then we also have viewing platforms. That's another way companies are making money off of esports: watching streams on YouTube, Twitch -- owned by Amazon -- Facebook, Twitter, Google, or Alphabet. All these sites. These are companies that sound more familiar to us as investors. These are companies I know are making money off of esports.
Moser: The big players in the gaming space that we know ultimately goes back to distribution. You're seeing the physical video game die away and it's really becoming more about the digital content and rights. You just need a way to get that digital content. So companies like Apple, Alphabet, Microsoft, Sony, and EA Sports are building their own streaming services or they already have them, in most cases, so that people are able to stream those games.
Then you look at other companies that are in the space. They may not be gaming companies, but as you mentioned, they're companies like Facebook, Twitter, or Twitch -- which is owned by Amazon. Even ESPN, which is owned by Disney. Any media company -- any entertainment company that can stream this content -- looks at it as an attractive opportunity.
You know the demand is out there for people to watch it, and so if you can work out a deal where you can stream this content on your site, then you're going to be able to monetize it through advertising, just like traditional sports has always been monetized through advertising. It's just a matter of catering to your demographic and getting the economics right.
Southwick: Speaking of economics, there's a really great article by Cecilia D'Anastasio over at Kotaku. She's saying that all of the numbers you see about esports being this amazing thing that's going to generate $1 billion in revenue next year is really a bubble. That esports is really not as big as we think it is. That the companies that are putting out the numbers say that it's competitive with the Super Bowl, [but these numbers] are coming from people who are vested in seeing esports take off. We're talking about venture capitalists. We're talking about people who follow the business and want their research to do well so the industry, itself, does well.
She wrote a really great article which gets back to what I feel has been [a theme this year] -- [that] esports is a bubble. Every time I look into a new industry, it's full of VC money and it's inflating the industry to where it's going to burst.
Moser: Well, VC money is very dangerous. We can look at WeWork as the most recent example that private valuations only mean so much. Just because that's what a company may be valued at in a private setting doesn't mean that's how it will be valued in a public market. The public market is [what we care about] and that, honestly, is going to be the most efficient at the end of the day.
I understand where Cecilia D'Anastasio is coming from. I won't necessarily push back on the bubble part because I tend to agree with it. When you have anything that's really new that's getting a lot of press, that's an easy way to generate interest and get people to invest more money into it.
At this point to call esports overvalued on a dollar perspective is probably spot-on, but I don't think that's a really big problem. I would argue if she's saying she doesn't think esports has a future. If she doesn't think esports is going to grow to be as big as we think it's going to be, I would push back on that. The audience is the audience.
It's easier, now, to capture engagement metrics and user metrics than ever before. In 2012 the esports audience size was around 135 million. Most of those people considered themselves occasional viewers. Fast-forward to 2018 and we're looking at around 400 million. Again, more occasional viewers than habitual viewers.
But the numbers still tell the story there, and the projections are that that is going to continue to grow. When you look at the overall gaming population, out there, and [realize] that esports and gaming are joined at the hip, with 2.6 billion gamers today, that's going to continue to grow as more and more people around the globe come online, get mobile technology, and learn how to use it.
Southwick: She talks through a lot of industry experts, and definitely the article says there's something here, but this is hyped up and unsustainable. For example, none of the companies that are putting together the teams that then pay the franchise costs to have teams playing in these tournaments are making money, and none of them have a path to making money.
Moser: I do agree with that. Most of the pure-play esports companies are not attractive investment opportunities. I wouldn't even consider what is out there in the public market for us because you're right, the economics don't really work yet. There's just not enough there, yet, for it to really make sense from an investor's perspective. This is why we continue to recommend if people want exposure to esports, get it through the traditional gaming companies that are leading the way, because esports is going to be another facet of their business.
But when you consider esports, generally speaking, we live in a country where we have lots of colleges that are building scholarships around esports and building esports facilities. You can actually get a college degree in esports.
Southwick: To be fair, though, it's the industry. Ohio State University has a major, but it's more like if you were to go into sports management.
Moser: It's part of the overall degree.
Southwick: So you suggest investing in the companies that are invested in this but are not pure plays. What are some that you like the most?
Moser: Activision Blizzard is the one that comes to mind first. It is the company that has been on the forefront of the gaming market for so long. We've liked it, here, for a long time at The Motley Fool. It's done very well for us as an investment. Like I mentioned, they bought Major League Gaming, and that was a big deal for them. I definitely think Tencent is a company to consider when you look at this space because, again, when you have that scale and that number of users, and the resources that that company has, there's a lot of different things they can do with it, plus they have that exposure to Fortnite and other gaming properties, as well, that will come down the line.
And you can't talk about investing and not recommend at least taking a look at Amazon. Amazon is big in a number of different ways, but Twitch has turned out to be a really smart acquisition that they made a number of years ago. They paid around $1 billion for it, but it generates a tremendous amount of traffic, a tremendous [number] of minutes viewed, and it just seems to keep on getting better.
I think Microsoft is another good one. Microsoft has a tremendous presence in the gaming world, and I think that's only going to get better as we see more technology in mixed reality coming out. Those are a few that come to mind.
Brokamp: Every day when I go home I play my Xbox. One game. Star Wars Battlefront.
Southwick: That's a fun game.
Moser: No kidding.
Brokamp: Every day with just one game. No more than one. Got to limit it, otherwise...
Southwick: Would you play until morning?
Brokamp: I would play quite awhile.
Moser: You have to have willpower.
Southwick: You mentioned Stock Advisor, and so I want to let our listeners know that if they're looking for stock ideas and recommendations that they can sign up for Stock Advisor. You'll get stock recommendations from Tom and David Gardner every month, Best Buys Now, and a whole lot more. You can go to SAOffer.Fool.com and we've got a special 50% discount for our listeners. So again, check it out at SAOffer.Fool.com.
Moser: I do want to say one more thing, because this is a 50,000-foot view of the gaming industry and esports, and how that all works together. Anybody who's interested in this space -- anybody at all -- you need to check out [our associate], Aaron Bush. You know the name here, I'm sure. You can follow him on Twitter at @AaronBush100. Aaron has a site he's built and is working on called MasterTheMeta. It's a project that is all based around gaming and esports.
Aaron is a big gamer. He's very knowledgeable of the space and I look to him, often, to get ideas and thoughts on it, as well. So if you are interested in this space, at all, follow Aaron on Twitter and check out his site MasterTheMeta. I've looked through it already. It is a lot of very educational stuff coming from someone I consider to be an expert in the field.
Southwick: I considered you an expert in the field. Did I invite the wrong person on the show?
Engdahl: Too bad we couldn't get Aaron on the show.
Moser: You can have two experts, right?
Southwick: Ugh, OK. I guess we need to do a do-over with Aaron sitting there. No, I value your opinion, too!
Moser: Well, thanks!
Southwick: We said we were going to talk about gambling, but we didn't. We'll have to save that for another day.
Moser: Save that for another day.
Southwick: Jason, thank you so much for joining us!
Moser: Thank you!
Southwick: As always, The Motley Fool may have formal recommendations for or against the stocks we talked about on the show. Don't buy and sell stocks based solely on what you heard here. Listen to Aaron Bush, instead. I'm kidding!
Well, that's the show! It's edited LeeroyJenkinsly by Rick Engdahl. Our email is Answers@Fool.com. Don't forget to email us and tell us what we got wrong because I'm sure there was a lot. For Robert Brokamp, I'm Alison Southwick. Stay Foolish everybody!