I’m about to land at the next Cambridge House extraordinary Future investor conference this week, with more speaking events than I honestly know what to do with. Part of the reason why they’re being tacked on is because we here at Equity.Guru have spent the last year telling you virtual reality/augmented reality is coming to the public markets, and it’ll be big when it happens.
That’s finally happening, but it’s piggybacking on something else: e-Sports.
If you don’t know what e-Sports are, you’d have got a real lesson in the Parry household over the last few weeks, as myself and my kids have spent hours – the time one might have previously spent watching actual live sports – watching professional gamer tournaments online.
And that’s not a rarity. It’s been a reality for my family for more than a year now.
The Rocket League Championship Series was rolling this weekend and if you’re wondering why a guy might watch other people playing soccer with rocket powered cars, spend five minutes of your life watching this:
The current season boasts a $1 million prize pool.
Three weeks ago, it was the Fortnite Summer Skirmish, in which an unknown player romped through a field of stars and walked away with $250,000.
But those all pale in comparison to the $11 million DOTA 2: The International 8 tournament held in Vancouver three weeks back, which packed out Rogers Arena with people who traveled great distances to watch one of the greatest finals of all time, which included a massive turnaround and nailbiting final few minutes.
At that event, alongside the usual millennials and dragged along dads of pre-teens, were some people usually absent at such affairs; lawyers, accountants, dealmakers.
Anyone connected to big money in a real way was at that arena, and was blown away by what they saw. Big money, packed audiences, fat sponsors, and most importantly, a new era of content.
Cinema gave way to radio. Radio gave way to TV. TV gave way to cable, which gave way to Netflix, which is starting to feel the pressure from Youtube and Twitch.
Major League Baseball audience numbers are dwindling, as have been the NFL (pre kneeling). The NBA is keeping up better, because anyone can shoot a hoop in their driveway and the product appeals to a younger audience. But even the UFC, which was once the most likely new sports organization to break into the top four, has slumped having sold itself to California entertainment managers for a few billion dollars, and closed itself off to those who can afford a pay-per-view.
If you talk to kids, they don’t play baseball anymore, because there’s nowhere to play. They don’t play football because, ditto, and ouch.
But they’ll play Madden all day long. And they’ll play FIFA 19, which just came out. And they’ll play Fortnite and Call of Duty and PUBG, and they have not only their favourite players competitively, but their favourite streamers to watch and interact with.
While CBS is trying to figure out what expensive TV show they can produce that might bring in 10m viewers, Twitch streamer and Fortnite player Ninja has 11 million Twitch followers, including around 100k watching him play at any one time, a high enough number of which pay $5 per month to do so without ads, leaving him pulling in half a million bucks per month in revenue.
Here’s Ninja, destroying all comers. This clip has been seen 35 million times.
How big is the potential audience here?
Take this into account: In 2015, 8 million people tuned into the Stanley Cup final game, 17 million tuned into the World Series, 23 million to the NBA finals, and 36 million live-streamed the League of Legends World championship.
While those numbers have created millionaire pro gamers, that’s also led some US colleges to create scholarship programs for e-sports athletes.
And we’re not talking about Schenectady Community College here, the list of schools taking e-Sports seriously is a long one, and includes NCAA Div I schools like Boise State, Georgia State, Miami (Ohio), University of Utah, University of North Texas, and University of California-Irvine. The number is growing every semester, and increasingly being seen as a means of attracting new students.
But while prize pools have hit tens of millions of dollars, some of the biggest earners in this new generation of content creation aren’t tournament winners, but characters that have been created for the new audience.
Here’s Dr Disrespect, the self-proclaimed two-time world video game champion, sponsored by Gillette, a created character with a full studio set-up, production crew, and interstitial side bits between games:
Sponsors of streamers and tourneys include State Farm, Geiko, Gatorade, Anheuser-Busch, Adidas, 7-Eleven, Vodafone, Mountain Dew, Monster, Red Bull, Old Spice, T-Mobile, Intel, Brisk, Alienware, AMD, Snickers, Turtle Wax, HTC, 5 Hour Energy, NBC, ESPN, KFC, New Balance, Betway, Canal+, and K-Swiss earlier this year launched an e-Sports focused sneaker.
Real sports teams aren’t waiting, with football teams Paris St Germain (France) and FC Schalke 04 (Germany) having created e-Sports teams to run alongside their real world hundred million dollar entities, and not just to compete in FIFA19 tourneys, but in other games as well. PSG competes on a high level in Rocket League
The Philadelphia 76ers bought into Team Dignitas for somewhere around $5m-$15m this year, with the e-sports team repped by super agents William Morris-IMG.
NBA legend Rick Fox started his own team – Echo Fox – which recently picked up investment by the New York Yankees. Ownership of the Golden State Warriors, Cleveland Cavaliers, and Milwaukee Bucks all have a stake in pro League of Legends teams. Spanish football side Valencia purchased a Hearthstone team, Turkish club Besiktas bought the League of Legends team Aces High, and even a relatively unknown Spanish basketball side, Bastonia, has reached into e-Sports, having built teams in League of Legends, Call of Duty, CS:GO, Hearthstone, FIFA, and NBA2K.
Former cable TV network TheScore (SCR.V), which dropped out of the cable sports world entirely and decided to stake its future to mobile sports coverage and, down the road, sports gambling, understands full well how the landscape is changing, and has produced a series of documentaries on e-Sports:
So when I say this is the time to take e-sports seriously, understand you won’t be the first one through the wall if you invest in it.
The wall is long ago blasted through.
SO WHAT DOES IT ALL MEAN?
If you were an investor through the rise of cannabis, this is that all over again. A new industry that is only now starting to show how real it is, with big money entering hard and fast without too much understanding of where it’ll all end up..
Cannabis in 2015 is e-Sports in 2018.
Observe: DOTA 2 tournament happens in the home arena of the NHL Vancouver Canucks and, within two weeks, team owner Francesco Aquilini starts an Overwatch League expansion franchise.
— Francesco Aquilini (@fr_aquilini) September 7, 2018
“It’s hard to pack our building for six straight days and generate the noise and the enthusiasm and passion for six straight days,” said Adrian Montgomery, the Aquilini Group’s president of entertainment. “It’s hard for anyone to do that and we saw it firsthand with these folks.”
[..] “The numbers are unbelievable, quite frankly … I’ve rarely seen something this blue-ocean before,” said Montgomery, whose company has been looking for almost a year for the right esports opportunity.
The Overwatch League has teams in the usual US states with big populations, such as Boston, Florida, Houston, New York, Los Angeles, San Francisco, Dallas, and Philadelphia. But it also has teams in London, Seoul, Paris, and Shanghai, Chengdu, Guangzhou, and Hangzhou in China.
Toronto and Vancouver will be joining a mature organization with global reach, where expansion franchises sell for as much as $35 million.
If you think that makes Aquilini a rube, a money mark with a chequebook and no idea how to use it wisely, guess again.
The Toronto group is headed by tech entrepreneur Sheldon Pollack, venture capitalist Adam Adamou and the Kimel family led by Michael Kimel as principal owner. Kimel is a co-founder of the Chase Hospitality Group and an investor in the Pittsburgh Penguins.
Those already holding Overwatch ownership stakes include New England Patriots owner Robert Kraft, New York Mets COO Jeff Wilpon (New York) and Kroenke Sports & Entertainment (L.A. Gladiators), whose sports empire includes Arsenal, the Los Angeles Rams, Denver Nuggets and Colorado Avalanche and Comcast Spectacor which owns the Philadelphia Flyers (Philadelphia Fusion).
These are smart, successful people who do more due diligence than you ever will and understand how to make money by putting asses on seats.
BUT WHERE DOES THE MONEY HAPPEN?
It’s true, nobody makes a return on that sort of investment by winning e-Sports tournaments. The London Spitfire team won $1 million winning the inaugural OWL tournament, with $400k going to second place Philly.
No, the real money comes in getting people to the arena, and getting them to watch on TV.. uh.. I mean their laptops… uh, their phones?
WHEREVER. That last OWL finals series filled the Barclays Centre in Brooklyn. DOTA 2 filled Rogers Arena for SIX DAYS. Blizzard Games, which produces Overwatch, is building its own e-Sports stadium in Burbank, California.
Bums on seats. This is what Aquilini is buying:
People paying to sit in an arena to watch live is a massive potential earner, but so too is the bums on seats that happens online.
The first stage of the first season of the Overwatch League drew 73 million hours of content streamed online over 139 hours of total broadcast time. The second stage drew 80m. The third: 87m. It’s growing every week, and that stage 3 number includes 629,000 viewers watching concurrently.
To that end, the big money will be made on selling ads to be displayed around content, accruing signups to streaming platforms like Twitch and Youtube, picking up sponsorships, and the supplying of the actual physical nuts and bolts (and cables and servers) required to make these tournaments run.
To be sure, the reason the AMD’s and Intel’s of the world are listed as sponsors in big events is because they’re letting the event use their infrastructure for free, but that’s expensive business and not always a successful way to run things.
Player Unknown’s Battlegrounds (AKA: PUBG) has had a long run in the top five most played games online for the last year, only to be surpassed by copycats Fortnite, and just in the last few weeks, a new Call of Duty that borrows from the ‘battle royale’ game format PUBG, Fortnite, and H1Z1 before them made famous.
How did Fortnite manage to quickly surpass the dominant PUBG upon release?
Their servers work.
I watched a PUBG tournament a few months back where one player lined up another in his sights, pulled the trigger, the shot landed where it was supposed to but the shot player didn’t die, or take any damage at all. Another shot, another fail. And another, and another.
Then the tree that player was hiding behind actually rendered and it became clear why the shots missed. This is unacceptable for kids playing at home, but it’s a real drag on a pro tournament. That low level of performance, that comes from PUBG using Azure for their server needs, costs the company millions on players ditching out for competitors that have no similar lag issues.
The current internet, as we have it right now, simply isn’t e-Sports ready. The biggest tournies fly the players in from around the world to Local Area Network (LAN) events, because relying on the internet framework to provide a lag-free competitive experience is fraught with danger.
The reason for this is, most of the internet today is based out of ‘one size fits all’ Amazon Web Services servers, or Microsoft Azure. These systems are great for someone like me to sign up, put my credit card into, and then upload my WordPress site, because they have software-based processes that are built around making sign up easy.
But when you get into high performance computing needs, which is what video game hosting is, you need a lot more heavy lifting than AWS and Azure can happily handle. You need systems designed for the specific needs of the client. You need tools that can help handle latency and streamline processes. None of this exists yet, and it’s the big barrier to what’s possible in e-sports – and artificial intelligence, and video rendering, and machine learning, and virtual reality/augmented reality/mixed reality.
The reason that bums on physical seats is important right now is because the digital world that exists needs people in the same room, even if they’re playing against each other online. A few milliseconds of latency lag can be the difference between a player winning a million dollars, or losing not on their own lack of skill, but on their machine or connection being a little slow.
Imagine if an NFL playoff game was won on the back of one team’s ball being slightly less inflated than another. Remember that? That’s what e-Sports is dealing with every week.
THE SOLUTION: WHAT’S NEXT
If you think the concept of ‘building the next internet’ is bunk, remember this: At one point, Netflix sent you their movies on DVD – THROUGH THE POST OFFICE. That’s because the internet couldn’t handle streaming yet, and in order for that to become a real business, not just for Netflix but for anyone who wants to serve video, the basic framework of the internet needed to be rebuilt.
And that’s what happened. We went from AOL servers to AWS servers. We went from copper running to your house to fibreoptics.
But we’re not done yet. Now we need servers not in one of 12 cities internationally, but servers in your basement. Servers heating your home and office. Servers on every block.
And that’s coming. But it’ll take a while. In the meantime, who has a load of servers lying about, making no money, that could be repurposed for high performance computing needs?
Thankfully, there’s a load of them in the form of Crypto miners, or at least those who use GPUs instead of ASIC Antminers. Those massive data centres have a ton of high performance computing available to them and nothing really profitable to do with it, now that cryptocurrency’s drops have scared everyone out of the market.
The fact is, it’s more profitable to host player-to-player video game hosting on your racks of underperforming crypto GPUs than it is to mine Bitcoin. It’s more profitable to let Pixar render its next movie on your system, or run the next Pokemon Go, or perform petabytes of data crunching, on machines that are geared for heavy duty… specifically the type of heavy duty required for a single task in massive numbers.
But wait – don’t go pumping your last dollars into blockchain deals just yet, thinking they’re all going to go get these new clients and make millions. Having a good video rendering client isn’t as easy as phoning up Pixar and telling them you’re open. Running massive AI programs isn’t as easy as cracking a shipping crate of GPUs taken off the wall in Iceland and setting them up in Gastown and waiting for a call from new clients.
You need tools to help those big clients do what they need to, you need the contacts to actually be able to get into their boardroom, you need the technical people and knowhow necessary to understand what they need and what will work for them.
And you’ll need to be local to them – hosting their stuff half a country away means you’re asking them to spend weeks and months uploading their material to the cloud before they can even work with it. Hell, you need servers parked across the street with a fat cable hooking them up.
Yes, we’re at the level cannabis was at in 2015 alright, where everyone knows they want to be in it, and nobody knows where to go to do so.
You’re about to see a lot of new e-Sports deals show up on the public markets, and when they land, there will be unholy commotion as people jostle for position and hype their deals as the be all/end all.
Running an e-Sports team or building an event, or a platform to view an event on, will be the easy in, just as ‘filing a Health Canada license application’ was the easy in for weedcos in 2015. Back then, there were a load of cannabis plays that were going to ‘start a weed magazine’ or ‘build seed-to-sale software’ for producers, or ‘research’ it, and most of those had to pivot or die over time.
There are several of these level deals in the e-Sports space hitting the public markets right now, with Fandom Sports Media (FDM.C), Millennials Esports (GAME.V), and Victory Square (VST.C) among them.
Hosting an e-Sports team in your building will be the 2016 version of same. Heck, there’s eSports stadiums of various sizes under construction already, including one in the Vancouver suburban city of Richmond. Movie theatres like Cineplex (CGX.T) are already renting out their movie theatres to kids for video game parties, because those are more profitable than showing another screening of generic fake scare horror film #792 to 12 teenagers and their dates.
But the new internet, the one that will be so fast and bespoke for high performance computing needs that you’ll be able to play a video game you don’t already own online, like you watch movies on Netflix (NFLX.Q) today, with speeds so fast that you can play against a guy on the other side of the world and not shoot transparent trees; that’s coming.
Like, it’s coming quicker than you know. It’s being built now, and it’ll be immense when it’s done, and it’ll put everything that came before it in the shade.
High Performance Computing in 2019? That’s basically cannabis in 2018.
— Chris Parry
FULL DISCLOSURE: Equity.Guru is involved in a high performance computing company sorting out the final details on a go-public arrangement currently. We’ll tell you all about it when the time is right.Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.