Investment Case for VIDG: Video Gaming & eSports ETF
“Interactive Entertainment” describes the ecosystem of products and services associated with consumer enjoyment of technologically-produced and facilitated content. This can range from software designers of traditional console-dependent video games to the producers of wearable devices enabling augmented or virtual reality interaction in a leisure environment. It extends from gaming-focused cloud services and social media gaming apps, to the manufacturers of electronics and semi-conductors essential to development in this sphere. The VIDG ETF will be exposed to the full spectrum of actors in this market sector, which is already showing signs of evolution in the context of broader trends in disruptive technologies. We believe that deep changes brought about by mobile technology advances encompassed in 5G, developments in machine learning and cross-industry partnerships by alert first-movers, could propel expansion in this field far beyond the traditional kid-in-his-bedroom model of gaming. Recent changes have brought global networked play, full-game downloads and in-game content, all of which indicate how the next generation of gaming could propel this innovating sector even further.
Gaming Then and Now
As early as the 1950s and 1960s computer scientists began to experiment with designing games and simulations to support their research, or merely for fun. Video games have since become a $100bn global industry, encompassing online casinos, mobile gaming and eSports (or professional gaming). Their success has traditionally been concentrated among young men, drawn into pleasurable fantasy worlds and fueled by the thrill of amusement as well as the games’ intentionally addictive features. However, advances in digital technology are propelling deep changes in this sector that seem likely to impact its entire structure, from design and scope to hardware development and monetization. The retail-centric game release model, in which games are usually console-specific and dependent, is on the wane. Following the music and video industries, we are seeing a move towards downloadable or streamed content delivery,1 which entail subscription payment models, in-game purchases and franchises. Consumers are becoming more empowered and freer to choose their entertainment options.
*Due to rounding, browser PC games ($4.3Bn) and boxed/downloaded PC games ($29.2Bn) add up to $33.4Bn. Source: ©Newzoo | October 2018 Quarterly Update | Global Games Market Report newzoo.com/globalgamesreport
Innovation across the spectrum of disruptive technologies, from machine learning to augmented reality, is driving deep changes in interactive entertainment. Perhaps the most dramatic effect will be felt by the impact of the 5G rollout, which has the potential to free gaming from console-dependency and make it dramatically more accessible and mobile. 5G’s extensive network of small antennae are set to reduce latency (the delay experienced in sending or receiving data packets) from 4G’s 50 milliseconds to as little as 1 millisecond, meaning that the lags that ruin gaming can be all but eliminated.2 5G could also mean massively increased network capability. The very concept of gaming could potentially be reconfigured when a 5G network has the capacity to effectively unify and coordinate the experiences of a large number of people. ESports, involving many people connected to the same game and location-based gaming, based on 5G’s heightened accuracy at physically positioning its users (from 10-500 meters on 4G to within 1 meter on 5G3), could be prime first beneficiaries. Finally, 5G will facilitate unprecedented use of the cloud, enabling more efficient, effective streaming of data to the user wherever they might be and whatever device they may have. A laptop or smartphone will be as good as an Xbox for accessing sophisticated gaming experiences via the 5G network and cloud. Companies are already investing in huge cloud facilities, as they identify the potential of future audiences. Niantic for example, is building the core of an AR Cloud ecosystem to challenge Google, Apple and Facebook.
Let’s take a look a how all these technological changes could impact the various elements of the gaming ecosystem:
Who is Playing?
Deloitte’s “Digital media trends survey” shows that half of Gen X (ages 35–51) respondents say they play video games at least once a week, which is only slightly less than millennials (ages 21–34) and Gen Z (ages 14–20) respondents. Gen X led all generations in the amount of time they spend playing games on mobile. However, an important outcome of the survey was to show that all Xs, Zs and millennials are converging towards similar entertainment consumption preferences. Older generations might dismiss video games, but their children grew up with them and continue to play on consoles, smartphones, and PCs.4 Indeed technology consulting firm Activate have estimated that in the eSports field alone, more than 250 million people are regular participants, either as players or spectators.5
What/How are They Playing?
Digital games are evolving from long-form, narrative-based, single-player experiences to wider-functioning, social platforms with integrated sales points and real-time communication.6 Consumers are buying or subscribing to fewer titles but increasing their play-time.7 These changes are linked to wider developments in interactive leisure habits, which reinforce indications of the future of streaming access and the importance of social networks (In 2017 3.6 million customers ceased paying TV subscriptions in preference to these other options).8 Augmented/Virtual Reality playing elements are also growing, with games and hardware attracting substantial investment from many major industry actors.9 The successful launch of Fortnite is a case in point. The biggest new mobile game of 2018 with over 40 million players monthly,10 it made a significant contribution to Epic Games’ reported $3 billion profit that year.11 It has also become the most-viewed title on Twitch - the Amazon-owned streaming service that calls itself “the world’s leading social video platform and community for gamers,” with more than 4,500 user channels streaming the games—and an average of over 140,000 viewers at any given time watching players and their commentary.12 In one week in June 2018, Twitch viewers spent 17.7 million hours watching players compete in League of Legends matches. We see such “eSports” as a potential prime area for expansion and monetization in the gaming sector.
Newzoo’s esports revenue figures always exclude revenues from betting, fantasy leagues, and similar cash-payout concepts, as well as revenues generated within games. ©Newzoo | 2019 Global Esports Market Report
Single-player games or challenging a friend in your living room to a round of MarioKart has been transformed via improved connectivity, the spread of online social networks and the cloud, to the possibility to play on a global online platform versus seasoned opponents whose skills are recognized and valued by the international gaming community. In February 2019 Fortnite hosted a Marshmello concert with 10.7 million concurrent attendees.13 This “game” has demonstrated what can be achieved with technology that can support a simultaneous, interactive experience for millions of online users. In our view online gaming is not culturally or regionally linked, so its potential appeal is on a global scale.
Where and When?
Much improved connectivity, which will soon be upgraded further if 5G’s rollout meets its goal of ubiquitous, speedy internet service, at least in metropolitan areas, could bring gaming into the daily routines of millions of users. As smart phones become sufficient to access the cloud-based gaming platforms, we may expect to see players further released from their consoles and able to access their favorite games whenever and wherever they choose. The centrality of gaming in the mobile social network landscape was evident in the 2018 total global mobile app store revenues, which surpassed $100bn for the first time, with mobile games responsible for around 75% of that revenue.14
Sector companies have already begun exploring how gaming platforms have the potential to widen their use of other disruptive technologies to improve the gaming experience. Niantic’s highly successful Pokemon Go has incorporated augmented reality to propel its mobile game to 800 million downloads, over $2.5 billion lifetime revenue, 144 billion steps taken by users and supporting a company valuation of nearly $4 billion.15 That’s not to mention its 500 million visits to sponsored locations (more on in-game monetization strategies follows) and its Niantic Real World Platform, another early entry move towards cloud provision as the future of gaming.
Source: ©Newzoo | April 2018 Quarterly Update | Global Games Market Report newzoo.com/globalgamesreport
Monetization of Interactive Leisure
If the past model for gaming was industry competition for console supremacy and game innovation and marketing, with some scope for product placement, the future may see a fundamental shift to gaming as a service. This could transform publishers into a position of sustained engagement with players through continually refreshed (streamed) content, personalization and customization of the experience and in-game sales of downloadable content. If players choose to stream their personal gaming sessions, this brings further marketing and advertising opportunities to the wider audience community of social spectators. Income can be generated through brand sponsorships, betting, ticket sales and merchandise. Electronic Arts reported 18 million players engaged in competitive gaming on its FIFA 18 and Madden NFL 18 titles in the fourth quarter or 2017, up 75 percent over the previous year.16 Ubisoft followed suit in its 2017 earnings report, citing record eSports viewership with Rainbow Six Siege.17 ESports are one of the clearest expressions of the changes taking place, with the application of franchise models as critical to transforming this sector of interactive entertainment into its own independent industry. Indeed revenues and engagement from eSports are increasingly driving top gaming publishers’ valuation and sales. In 2017, Tencent announced a plan to spend $15 billion developing the Chinese eSports market. And 2018 saw the launch of three new North American franchise leagues: the NBA 2K League, the North American League of Legends Championship Series, and the Blizzard-owned Overwatch League. The franchise model allows investors to buy team slots according to certain geographical areas, share revenue, and monetize events, merchandising, and players. NBA is the first professional sports league to form such a franchise league, leading the market and paving the way for other sports to follow. Media companies are catching on to the potential audiences - In July, ESPN reported that Disney signed a deal with Blizzard to bring the Overwatch league to ESPN and ABC.18
Foreign exchange rate on December 31st, 2017 used for USD amounts *Estimates of game revenues using quarterly earning reports in which these are not specifically segmented out ** Includes King revenues as of 23 February 2016, the day that King officially became an Activision/Blizzard subsidiary Source: ©Newzoo 2018 | Global Games Market Report | newzoo.com/companyrankings
ETFs and Interactive Leisure
It is not yet clear exactly how the various elements of the evolving ecosystem of interactive leisure will align and which companies will be most successful. We see greater content-streaming supported by 5G and other technologies, subscriptions, cloud-based services, social networking and the integration of augmented or virtual reality features, as all set to contribute, but in what configuration we do not know. Indeed there is a foreseeable clash and potential competition between hardware producers seeking to maintain player loyalty through cloud provision, and publishers who may seek to exploit public cloud facilities while bypassing the consoles. By tracking the BVIDG Video Game Index, the Defiance VIDG ETF seeks to capitalize on a wide range of possible outcomes. Its portfolio reflects the full range of potential winners, from eSports and video games specialists, to media companies and hardware producers.
Potential Benefits of ETF Investing:
Defiance Next Gen Video Gaming ETF:
• Invests in the rules-based BVIDG Video Game Index comprised of equity securities of leading global companies whose products or services are used by consumers for “interactive entertainment,” such as video games, interactive media and eSports streaming, video game consoles or gaming-specific personal computers, gaming-focused cloud services, social media applications featuring augmented or virtual reality features, mobile or wearable devices enabling virtual or augmented reality, video processing semiconductors and other semiconductors used in electronics for gaming or augmented and virtual reality, and online casinos.
• Is a diversified basket of stocks that can potentially benefit from growth in the gaming market. Rather than buy one or two individual equities focused on this sector, investors can invest in a way that provides diversification while maintaining a targeted view for their portfolio. Its diversity is reflected in the global geographic coverage of its constituent companies as well as their business emphases, including major sector leaders such as Nintendo, Activision Blizzard, Tencent Holdings and Electronic Arts, as well as smaller players such as LiveXliveMedia inc.
• Is a cost-effective way to access this market at 0.30% gross expense ratio.
1The Downloadable Content (DLC) market value increased by 121% in 7 years. (Capcom Annual Report, page 44, 2017)
2 “Gaming with 5G,” Viraj Wickramasinghe, Dec 9, 2018. Available at https://hackernoon.com/gaming-with-5g-75efa6ac1c70
4 “Digital media trends survey,” Kevin Westcott, Jeff Loucks, Kevin Downs, and Jeanette Watson, Deloitte Insights, March 19, 2018.
5 “Tech and Media Outlook 2017,” activate.com, October 25, 2016. Available at https://www.slideshare.net/ActivateInc/think-again-techmedia-outlook-2017-67604099
6 “ESports graduates to the big leagues,” Chris Arkenberg, Doug Van Dyke, JD Tengberg, Nathan Baltuskonis, July 23, 2018. Available at https://www2.deloitte.com/insights/us/en/industry/telecommunications/capitalizing-on-growth-of-esports-industry.html
7 “Video Game Publishers Flip the Switch on Business Model,” Brian Nowak, February 26, 2018. Available at https://www.morganstanley. com/ideas/video-gaming-publishers-2018
8 “As streaming video grows, TV networks fight to keep their share of upfront ad dollars,” Stephen Battaglio and Meg James, Los Angeles Times, May 13, 2018
10 “‘Fortnite’ more important than cryptocurrency to large companies during earnings season,” Max A. Cherney MarketWatch, June 6, 2018. Available at https://www.marketwatch.com/story/fortnite-more-important-than-cryptocurrency-to-large-companies-during-earnings-season-2018-06-05
11 “Epic Games, the creator of Fortnite, banked a$3 billion profit in 2018”, Jon Russel, January 2019. Available at https://techcrunch. com/2018/12/27/epic-fortnite-3-billion-profit/
12 “ESports graduates to the big leagues,” Chris Arkenberg, Doug Van Dyke, JD Tengberg, Nathan Baltuskonis, July 23, 2018. Available at https://www2.deloitte.com/insights/us/en/industry/telecommunications/capitalizing-on-growth-of-esports-industry.html
13 “The Marshmello Concert On ‘Fortnite’ May Show The Next Realm For Artists,” Bobby Owsinski, Forbes, February 9 2019. Available at https://www.forbes.com/sites/bobbyowsinski/2019/02/09/marshmello-fortnite/#1c6931571e03
14 “The State of Mobile in 2019 – The Most Important Trends to Know,” Lexi Sydow, App Annie, January 16, 2019. Available at https:// www.appannie.com/en/insights/market-data/the-state-of-mobile-2019/
15 “‘Pokémon Go’ Global Revenue Grew 37% in 2018 (Analyst),” Stephanie Fogel, Variety, January 3, 2019. Available at https://variety. com/2019/gaming/news/pokemon-go-global-revenue-2018-1203098512/
16 “FIFA 18 and Madden esports hits 18 million players, up 75%,” Dean Takahashi, VentureBeat, May 8, 2018. Available at https://venturebeat.com/2018/05/08/fifa-18-and-madden-competitive-gaming-hits-18-million-players-up-75/
17 “Ubisoft reports full-year 2017–18 sales and earnings figures,” Ubisoft Entertainment, May 17, 2018. Available at http://www.4-traders.com/UBISOFT-ENTERTAINMENT-4719/news/Ubisoft-Entertainment-REPORTS-FULL-YEAR-2017-18-SALES-AND-EARNINGS-FIGURES-26606205/
18 “Overwatch League comes to ESPN, Disney and ABC,” ESPN, July 12, 2018. Available at http://www.espn.com/esports/story/_/ id/24062274/overwatch-league-comes-espn-disney-abc
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