Wall Street loves nothing more than disruptive technologies and scalable consumer brands. If ever those two collide, money managers rush to close their study doors at night, yelling at their kids to turn off the videogames and finish homework before shuttering themselves away to research those rare stocks in quiet.
As parents, those money managers claim they would never have wasted so much time on videogames. Or, maybe the games themselves just kinda sucked when they were kids, so of course they found other things to do. There was only so time you could spend on Pong and Space Invaders.
Memories of videogames may have conditioned many investors to completely underestimate esports. I know, because I was one of them.
After seeing middle-school, high-school, and college athletes all playing Fortnite this past year, I decided to do a deep dive research project to find out what I was missing as a cord-carrying, digital dinosaur. I have never witnessed so many kids of such different ages drawn to the same thing.
Of all the things I found I most underestimated, the one that stands out most is just how inclusive these games must feel to a young person today. Parents are so busy telling their children that esports are not real sports that they are missing these games’ potential to scale much bigger than any other more traditional pastime.
Kids in my neighborhood in Houston look a lot more like the Houston Outlaws than the Angels’ two-time MVP centerfielder Mike Trout or the King himself, three-time NBA champion LeBron James. The Outlaws play in Activision’s Overwatch League. The Outlaws aren’t athletic giants. They look scrawny and awkward when counter posed against Trout or James.
Be sure to follow the entire Houston Outlaw squad: @BaniOW @SPREEow @Mumanji @Rawkus @Mendokusaii @mattr0d @jake_overwatch @coolmatt69 @LiNkzrOW @clockworkMD @Forceboink @TaiRongOW @MESRAWR #GreenWall #UpTheAnte
pic.twitter.com/LqJ0edZOY2
— Houston Outlaws (@OutlawsOW) November 8, 2017
Millions more people of all ages, shapes and sizes from very different places have no reason to think that they couldn’t rank alongside the Outlaws and their peers. Tyler Belvins, aka Ninja, might be one of the biggest esports stars. Last weekend, Ninja challenged contenders to a Fortnite contest in Chicago, Red Bull Rise Till Dawn. (Fans don’t usually get the chance to play pickup games with traditional sports stars.) Esports is so inclusive that Activision made about half the characters in its Overwatch game female. For the record, of course, not one of the athletes in any of the four biggest traditional U.S. sports leagues is a woman.
In fairness to parents’ concerns, sometimes kids do stop doing their homework. In the 1980s, Bobby Kotick was a student at the University of Michigan. He began developing software in his dorm room. After Steve Jobs suggested he drop out of college, he did.
Now, Kotick heads up Activision. The college dropout is the longest running CEO of any technology stock, at 28 years and counting. I wonder how many parents sifting through technology mutual funds track records know about that? The past decade Kotick has doubled the dividend paid to his shareholders while more than tripling free cash flow to cover that. Activision is the kind of stock that money managers would love to invest in were they not too busy yelling at their kids to turn off the video games.
“I believe esports will rival the biggest traditional sports leagues in terms of future opportunities,” said Steve Bornstein, chairman of Activision’s esports division, and the former CEO of ESPN and the NFL Network, in a statement when he was hired. “Between advertising, ticket sales, licensing, sponsorships and merchandising, there are tremendous growth areas for this nascent industry.”
Activision already owns eight different billion-dollar game franchises. “The approach Kotick is taking leads them down a road similar to the one Disney has been on in the last 15 years,” said Tom Staggs, a former Disney COO, in a 2017 Fortune article on Activision Blizzard’s ambitions.
What should interest investors the very most is how many people watch others play esports. This summer, the Overwatch Finals are being held in the Barclays Center, home of the NBA’s Brooklyn Nets and the NHL’s New York Islanders. In attendance last season the Nets averaged 15,556 and the Islanders 12,002. All 20,000 Overwatch tickets sold out in a few days.
In 2007, Yale grad Justin Kan launched a “lifecasting” streaming idea called Justin.tv. He now describes that as a “terrible idea,” but in 2011 the concept became a video streaming service called Twitch. In 2014, and Amazon bought the platform for $970 million.
The video game streaming audience is more than five times bigger than the total number of Netflix subscribers, and Twitch dominates this market. It already has more viewers than CNN and MSNBC. Twitch has more than 15 million unique daily viewers. It is home to more than two million broadcasts a month. More than 355 billion minutes of video were watched on Twitch last year. More than 150,000 streamers—the people providing the content—are getting paid through the Twitch platform alone. And the total number of streamers more than tripled last year.
Sponsors are lining up for a sport that is not limited to a few games a week at only certain locations. The digital scale of more viewers divided by substantially lower production costs make esports incomparable to other sports.
When I was a kid I would go to my grandparents’ house in San Antonio, Texas, every summer. I vividly recall the short trip around the corner to the video arcade. Slamming a quarter on the thick plastic console of a stand-up arcade machine, you let others know your turn was next.
Every night my grandparents would turn on their favorite TV program: The Tonight Show Starring Johnny Carson. From 1962 to 1992, Carson’s show was a fixture of American popular culture. But no longer, traditions change. Now, Carson’s former Tonight Show studio in Burbank, California is Activision’s Blizzard Arena.
Ryan Krueger is the co-founder and CEO of Krueger & Catalano Capital Partners, a private money management firm in Houston, Texas. Previously he was a Senior Portfolio Manager at Citigroup. His team performs all research, management of assets, and comprehensive income planning in-house for the families who want a trusted advisor.