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The Esports ETF Continues To Benefit From Shifting Video Game Industry

March 8, 2019 1:00 pm
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There are examples of the word “disruptive” carrying negative connotations, but in financial markets, companies, ideas and industries viewed as disruptive are often viewed in a positive light.

As it should be, that is the case with the booming esports industry and the related investments, such as the VanEck Vectors Video Gaming and eSports ETF (NYSE:ESPO).

What Happened

ESPO debuted last October, marking the launch of the second exchange traded fund with significant video game industry exposure. The VanEck fund follows the MVIS Global Video Gaming and eSports Index (MVESPOTR), “which is intended to track the overall performance of companies involved in video game development, esports, and related hardware and software,” according to the issuer.

A slew of data points and trends support the long-term thesis offered by ESPO, including increased television viewership of esports and surging revenue. In terms of viewership, esports is already a credible threat to major sports leagues, such as Major League Baseball and the National Hockey League.

Why It's Important

“Esports continue to drive headlines around the world, as revenues and prize pools grow to new heights,” said VanEck in a recent research note. “According to Newzoo’s recently released 2019 Global Esports Market Report, esports revenues exceeded $860 million in 2018 and is expected to grow to $1.7 billion by 2022. Newzoo also reports that the total prize pool for esports matches exceeded $150 million in 2018.”

One of the major shifts that speaks to the viability of ESPO's long-term thesis is a video game industry shift that has been in the works for years. Gone are the days are where software makers rely solely on gamers walking into a store and buying games. Today, video game publishers are as much service providers as they are product makers.

“In the mid-2000s, video game publishers began testing the 'game as a service' model,” said VanEck. “In this model, the consumer bypasses the initial cost of purchasing the game, and then pays ongoing fees to continue playing the game and accessing content. There are a number of different ways the video game publisher can generate revenues under this model, including game subscriptions, micro-transactions, and season passes.  While the transaction fees in the service model may be smaller, the publisher opens the door to an indefinite purchasing lifespan from each consumer, which can increase the total revenues generated from a single game.”

"Fortnite" is the prime example of the “game as a service” model. The game is free, but generated $2.4 billion in revenue last year.

What's Next

Another boon for the video game industry is shift of gamers to purveyors of content, using mediums such as Amazon.com Inc.'s (NASDAQ:AMZN) Twitch to share their game prowess and make money. Amazon is not one of ESPO's 25 holdings.

“Online streaming has a low cost of entry, and social media streaming websites allow anyone to create a username and post videos,” said VanEck. “Twitch currently generates 140 million unique viewers per month. On average, there are 15 million people who are considered daily active users (DAU). There are also 2.2 million monthly broadcasters. These are people who are posting their own videos to the website (as opposed to just watching and commenting).”

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