Echelon Wealth Partners On the E-Sports Industry and How To Get Involved

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Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.

Head of research and Managing Director at Echelon Wealth Partners, Rob Goff, joins Midas Letter to dive into the world of e-sports, how investors can get involved, and the state of the industry today. Rob explains making money in e-sports, the move towards digital and programmatic advertising, and gambling as a whole other dimension of the industry, with associated opportunities for incremental revenues. Echelon Wealth Partners runs a Top Pick portfolio with approximately 12 names selected by analysts. Rob shares the company’s financial results in the third quarter, including a 10 percent return and 28 percent year-to-date.

Transcript

James West: I’m joined now by Rob Goff. He’s the head of research and a managing director at Echelon Wealth Partners. Rob, welcome.

Rob Goff: Thank you very much for having me on.

James West: You bet! Rob, the e-sports phenomenon is descending upon us. Tell me about how investors can involve themselves in it, and what’s the state of the industry right now.

Rob Goff: Sure. At this point, it’s to the extent an education process, in that in terms of direct plays on the space in Canada, it is limited. There’s Enthusiast Gaming, and there’s also theScore, and then the majority of the companies are private.

So what we have done with Echelon is to launch a whitepaper. If you have hours to kill, we have 82 pages for you.

James West: Great.

Rob Goff: In that, we try to take what’s really, really complex and distill it down into the basic food chain. At the top of the food chain, you have the publishers: the Tencents, the Riot Games, these are the manufacturers, per se, of the games that your kids are playing. So they then are now trying to build up league structures and teams within the leagues, as a way of increasing their audience.

The audiences to date, for some of the games, the championship series, actually rival the Super Bowl.

James West: Really?

Rob Goff: So the viewership is out there, and just growing. In terms of the actual size of the marketplace, you know, you’ve got the legacy sports is roughly a $500 billion marketplace. Video gaming is a $150 billion market. E-sports specifically, 1.1 billion, with a very quick kegger on that.

Now, when we look at the space, we think it’s really important for investors to go through the food chain, right? And what’s critical here is that the interests are aligned in that the publishers make money off of expanding the audience, right? So they are giving out free games.

James West: Sure.

Rob Goff: So they make their money off of in-game purchases. So clearly, price and volume. So they want to get more people, engaged people, in their respective games, in order to drive their own revenues. So to do that, to build the audience, they are working to build out league structures and teams within that, in an effort to build out that audience.

Now, you probably watch your e-sports through Twitch.

James West: Yeah, right, yes.

Rob Goff: Twitch, it’s interesting: it has roughly 76 percent of the market in terms of providing that platform for gaming enthusiasts to watch their favourite streamer. One of our core calls here, with respect to the space, is that Amazon, who owns Twitch, at 76 percent, they dominate; YouTube is there with 16.6 percent, and then you have Microsoft with Mixer, and you have Facebook, and they’re both down around 3 and 4 percent. And this point here is really the battleground for the titans, right?

So you’ve got Amazon, who no one likes to fight with, but, if you’re Microsoft, you can’t stay below 5 percent. If you’re Facebook, you don’t want to stay below 5 percent. So we see increased competition to get the streamers onto the different streaming platforms. The highest profile one, someone Ninja; you know, the rumours are that he was offered between $50 million and $100 million to move over to the Mixer platform, the theory being he would pull his audience, his streaming, onto that platform, and they would see a return on that money.

James West: And how has that worked out for them so far?

Rob Goff: Initially, he had over 2 million people move over. So that is the start of more to come, and you know, we are certain that there will be more competition; the question is, to what extent is it the upfront, we’ll pay you X, or to what extent is it, we will pay you a payout ratio of 60 percent on advertising or merchandising, as opposed to a lower rate.

So if you’re right here, as a platform, distributing, you want traffic. To get traffic, you will entice the streamers to come onto your platform, which brings the audience. This is ultimately a new form of media, and as such, it’s a media where advertising is key, so you want to get the audiences up, and you also want to monetize on those audiences.

Fortunately, it’s very much an over-the-top or a digital transmission, or an IP transmission, and this development of the marketplace is coinciding with advertising going to digital distribution. So 2019 was the first year that we’ll see over half of advertising placed digitally. And with that, the fastest-growing segment would be that which is programmatic digital advertising. So basically, when you go onto a website, information about you is put into an exchange, and people will bid on you.

That’s why, that’s how you are getting relevant advertising, and that’s how you also bring value to the advertiser.

James West: Sure.

Rob Goff: So this move towards digital and programmatic advertising coincides with the buildout of e-sports on a platform that happens to be digital, that facilitates in with the programmatic purchasing.

James West: So playing digital programmatic advertisers is a way to play e-sports?

Rob Goff: It would be.

James West: Fantastic.

Rob Goff: One of those names would be Acuity Ads, which would be under our coverage.

James West: Sure, we’ve interviewed Acuity. Okay, and so has that actually materialized as revenue for Acuity Ads at this point?

Rob Goff: It is materializing. 

James West: I see.

Rob Goff: This is still very much early days, but what we’re trying to do is to identify the players who are best positioned to leverage on the growth of the audience. Because the product here is really the audience, and the means by which you monetize would be advertising, merchandising, promotion, events.

James West: Wow, so it’s a whole new ecosystem that seems to exist in parallel to the real world. 

Rob Goff: It was interesting – I remember going back probably six years ago, where there was a survey taken of youth, and they asked the youth to assess a value to their virtual friends and their, you know, live friends. And the value attributed to virtual friends was staggering, and this was six years ago. So when you, you know, fast-forward to e-sports, where youth, or Millennials, are playing as part of game teams, it really takes it one step further.

James West: Sure, interesting.

Rob Goff: And also the technology there, too. The technology is a powerful wave behind this; we were talking earlier about that, and basically there, the games themselves that are in the marketplace today versus, you know, three years ago or 13 years ago, are night and day different, very much more immersive, much more dynamic, entertaining for the user of those games. Technology has both enabled greater data throughput, but also broader reach. 

And when we’re looking at the cusp of 5G being introduced, right, that’s where everything will go mobile, full coverage, full bandwidth capabilities. There are just a lot of tailwinds or waves behind the growth here in the e-sports. That’s why we’re excited.

James West: Wow. So 5G adds to the e-sports equation; e-sports fuels the 5G argument as well, I’m assuming. The whole programmatic advertising thing and the individual as nothing more or less than a commodity to be marketed to, is intriguing. So essentially, it sounds like the way to play e-sports is to look at all of the sectors upon which our technological universe is now built, and you’re going to play it as a subset of those.

If an investors wanted to play something that would be more of a pure play on e-sports itself, I guess then it’s limited to, like, how far down into the ecosystem can you go as an investor to direct investment directly into the e-sports gaming itself? 

Rob Goff: Enthusiast Gaming would be the one direct play on e-sports on the marketplace today. It is the primary one; they also have their summit coming up this weekend – sorry, this is a tape, so we’ll dump this anyways. So, Enthusiast Gaming. Then we also have theScore, where they’re involved in e-sports; they’re also very much involved in gambling.

James West: That’s right.

Rob Goff: And gambling is a whole other dimension, where, you know, it’s put forward that if the e-sports today is a $1.1 billion marketplace, that gambling itself could be another $1 billion within three years, associated with e-sports.

James West: Sure. Right. And – 

Rob Goff: And sorry, the benefit there, sorry, of the gambling is both in terms of the incremental revenues associated with gambling, but we started off talking about the audience and engagement. You know, you put money on the line, you are engaged.

James West: That’s right. That’s probably the most profound engagement there is.

Rob, let’s finish off because we’ve run out of time, but Echelon has a great track record of identifying early-stage opportunities, and your most recent publication demonstrates some wins. What are the top picks that you’ve got in this universe or others, at this point?

Rob Goff: Sure, and just to the numbers, there, our firm runs a Top Pick portfolio which is, give or take, 12 names, selected by the analysts. We’re very fortunate in the third quarter to return 10 percent; our year-to-date is 28 percent. And just to show that we’re not all one-hit or one-year wonder, if you go back to 2017, we were actually at 82 percent cumulative returns.

James West: Wow, great.

Rob Goff: In terms of the names that are relevant to this space, as it happens, we have both Acuity Ads and theScore within the portfolio.

James West: Great. Thanks very much for joining me. I can’t wait to have you back. We’ll talk to you soon.

Rob Goff: Very good, James. Thank you. Cheers!

Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.

Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.

Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.