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, and more. In this segment, they focus specifically on the world of esports. So if you can't quite imagine how watching other people play video games could evolve into the next breakout spectator sport, allow them to walk you through it.
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This video was recorded on Oct. 8, 2019.
Alison Southwick: 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!
Jason Moser: I know! And that's basically how it is the whole time.
Robert 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 esports, 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. LA 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 Superbowl, [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 a while.
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!