Nikolaj Nyholm on eSports, e is for entertainment.

Great. So I actually got the pleasure then to keep you guys here. So at least Michael and team agreed to bring in the beers so you guys weren't going to rush out. I was standing here at Nordic Next, I think we were at Turning Torso though, three years ago, and it was one of the first times I really started talking about games, game investments. And the title back then was something along the lines of games redefining entertainment. How games first companies would be the next generation of entertainment companies worldwide. I think it was just about that time we hadn't done at Sunstone, we hadn't done any gaming investments ourselves yet. I'd been the advisor for Mojang who does Minecraft, who that was really sort of my fire baptism into gaming. But it really articulated a lot of the thinking that we had around these type of investments. But since then we've now done six or seven, I think soon eight investments in the gaming field. And we're now moving on to sort of what we see as a very, very natural next step, which is e-sports. So when Neil asked me to give this talk, the first title was something along the lines of e-sports as an investable opportunity or something like that. Which to me really, first of all it's not a very sexy title, but the other thing is I really wanted to break down the fact that this is not something new, this is not something particular, this is not something outworldish, even though that's still the reaction I get from most people. So let's just very quickly just go into a little bit of, okay there's no sound here, I'll just do like this. There's no sound there either. This is the first thing that people do, it doesn't matter, that's fine. This is the first thing that people looking at e-sports see, like how the fucking hell does this have anything to do with sports? What's the likelihood that these people have ever done any sports who are sitting behind? What's the general motivation for calling this a sport? And it really, really does throw people off the fact that we call it a sport. On the other hand, this is just a very quick replay, just a highlight reel from a game between Astralis, a team we invested in, and Energy, I think it was this past Tuesday, it was being sent on Twitch as part of the E-League, which TBS, Turner's big sports channel, is actually broadcasting. So one of the other players is this guy. He's not really sporty either. It's pretty immature, it's quite adolescent, especially the comments in the Twitch stream. There are the stereotypes, sweaty hands after each round, and this is about as far away you can get from sports as ever possible. The interesting thing about this guy, Peter, is that he hasn't learned how to shave yet, but he earns more than the median NFL player. And he will be earning in the top 10% within a year or two of NFL players as well. He's a top fragger, but he's NA. NA means North America. North America means you suck. The other week, my 14-year-old son was trying to tell me I was stupid, I was NA. So that's a little aside. But when we get back to the disbelievers, maybe this one's actually a little bit unfortunate that there's no sound here. Let's see if we can get it. I plugged it back in. And when I then start to show people a video like this, I start telling them about the League of Legends finals last year at Madison Square Garden, sold out in 22 seconds, 28,000 people coming in, cheering. Goosebumps come. And then the last thing I do is I stop using the word sports, but start using the word entertainment. And then it clicks. Just removing that one word, sports, even the mother of my 14-year-old, until about a month or two ago, she still did not get it. She did not get what this was about, even though he spends probably more time on Counter-Strike than any other thing. Well, maybe with the exception of Twitch and YouTube, right? So these emotions that these people can play into. My Friday nights these days is start flipping some burgers at about 6 o'clock. It's a tradition for Fridays. 7 o'clock, those of you who are in Denmark will remember the public service, DR has the Disney hour. And then 8 o'clock, we put on a game. So my 14-year-old has dragged me into sort of the appreciation of what this is all about. And this is extremely powerful. And the fact that he can then afterwards go into his room, he can start playing, he can start chatting up these guys, he can see their videos, he can see their stats, he can unfortunately also bet a little bit illegitimately. I'll get into that a little bit later. But just this power is this connection which you don't even have in traditional sports. That's why for me it's actually much, much more valuable as entertainment than it is as a sport. So this click is important for me and it's important for me that you guys get that click as well. This is Fnatic, top Swedish team, top world team. I'm sorry we're here. Astralis will be beating them this season. But let me just very quickly explain a little bit about the ecosystem, right? You know, within the esports we have the players, just a couple of names here. Olaf Meister who's out with a wrist injury is probably the top player in the world. We have the teams, Fnatic as I mentioned before, Energy, Navi, Astralis. Energy has Shaq as their investor. That's what they've really been touting recently. Only just a few of them actually have outside investors, the Immortals as well, a bunch of LA investors. Then there are the leagues. LCS is run by Riot who do League of Legends. League of Legends is by far the biggest of the three to four main sports. You have Counter-Strike, League of Legends, Dota 2, which is especially big in Asia, and then finally Hearthstone. Then of course on top you have the broadcasters, YouTube, Twitch, Hitbox, ESPN. ESPN is getting into it in a very big way. They're signing a 500 million four-year deal with LCS to broadcast League of Legends. Then you have TV3 owned by MTG. They're starting a 24-hour eSports channel to be broadcast across Europe. If this was sort of like a traditional sport, you'd have money trickling in from the top and going down to the leagues, going to the teams, and finally to the players. The players might have a couple of sponsorships on the side, do a little bit of work here and there, but that's basically the structure. Think about this then if sort of the equivalent of the guy who invented the basketball. He actually has something to say in every single place here. The game developers obviously are extremely strong within this sector. Riot basically shut down every other league than their own about a year and a half ago. They now control everything there. We also have an extremely interesting opportunity, which is for the players to go out and also start interfacing on other levels with their fans. On Twitch, they have subscribers, $5 a month. I would guess that my son probably has two or three of those going at any one point. For the majors in Counter-Strike, there are three majors a year. You have what's called sticker, stickers, major stickers, and you have sticker prizes. It's probably a business of about $18 to $20 million per final of stickers being sold as part of the tournament. My 14-year-old son slapping a sticker on his gun or his knife. This money goes back into the prize pool and also to the players and becomes crowd sourcing of the financing. You have the private casting. You have the game servers. Index was here before they had an investment in Faceit, who are running probably one of the biggest worldwide, especially within CS. You have Trading of Skins, Valve, who runs Counter-Strike. With Counter-Strike, you cannot buy, unlike many of the mobile games these days, you cannot buy yourself extra skills. The only thing you can do is you can buy skins. There are skins which are worth tens of thousands. I think the top is around $80,000 right now for a skin which is where the only value is to show off that you have it. The trading there, Valve has been running that marketplace, taking a 15% from buyers and sellers. Of course, marketplaces start immediately appearing outside, also allowing people to cash out from there. Finally, once you have trading, you have betting and fantasy leagues which allow people to start. My 14-year-old son is taking his skins in bets against others on results like the Astralis Fanatic game. There's some guy sitting somewhere in Poland doing probably about $100 million of monthly GMV on betting of skins at the moment. Just one guy with one account. Again, here are the prize pools. Just to show a little bit, the prize pools are growing exponentially. As I mentioned before, they're very often crowd sourced. People buying skins and that money goes back into the prize pool, as well as to the players and the teams. This is for me very much part of the opportunity. You look at a fan today, average eSports fan, they spend about $3, $3.50 per year. You counter that with NFL, about $60. I think NBA is down about $45. There's tremendous opportunity for growth, especially when you also start looking at how the fan base is growing, the core being the blue and the green being the casual, occasional ones who watch at least once a month. Also, when you look at it, what is the reach in comparison to the other so-called sports or the other real sports, whatever we call this so-called E-thing? A tremendous push. This is 2015 numbers. The LCS final was by far outperforming the Super Bowl. We're just talking time before it really will overtake. It's a super, super interesting demographic. These are the people, these are the kids and young adults, the millennials that everybody is chasing right now and having a very hard time at reaching. They're quite wealthy. They're well off. They're in full-time jobs. They have higher than average incomes. Even somebody like my kid who's just using his own spending money, this is a screenshot from Steam Community. 430 euros is the value of his inventory. He's played 34.7 hours in the past two weeks, including four days when we were traveling. It's probably about the same as the amount of time he spends on school. This is a screenshot. It's a little bit hard to see, but he had almost 84 gigs of YouTube videos on mobile network last month. So audience here is also two times more likely to have a Netflix sub than a, and this is country by country. For emerging markets like Brazil, it's more like four to five times. So they're obviously at the end of the year on the edge, and even more so if you look at Spotify, which is less mainstream than the Netflix. It's a type of demographic that advertisers certainly want to be able to access and are having a very, very hard time doing else-wise. So this sort of brings me a little bit back to where I was three years ago when I was standing here. I was very fortunate to be advisor to Marcus, Carl, and Jacob at Mojang and sort of seeing what was happening there at the inside. We always had this very, very strong belief that YouTube made Minecraft. YouTube was driving the growth of Minecraft. And then suddenly it flipped. And it suddenly flipped into that Minecraft was growing YouTube. And Minecraft was, in gains, were driving new stars. PewDiePie, Captain Sparkles, all these guys. And suddenly games became the bigger category than music. The only music that only just exactly topped Minecraft as a category on its own. But games by far outperformed everything there. And I think that was a very, very big revelation for the entire gaming community and it was certainly a very central and core part of our investment thesis around building strong IP, shareable IP, so shareable brands, strong brands. I think this is also maybe a little bit part of the design discussion that was here before. Rather than just machines for, you know, in the early days of the new platform you could create monsters like Clash. Obviously, an amazing game on its own. But, you know, very weak IP. You had this same barbarian walking out 26 times on you. And only because of the volume were they actually able to achieve a strong IP in the long term. They were able to do this land grab. But the ones who came after had to build strong IP and they started building entertainment brands. And I think, you know, sort of what we're seeing now is that we're really just, you know, as investors at Sunstone, we're just really following what's happening. We don't see eSports as something entirely different. We see it as a pretty natural evolution. At least if you look at it from the game developer perspective. So, you know, game developers were always focused on the gamers, right? You know, they were focused on selling to the gamers, connecting with the gamers, distributing to the gamers, marketing to the gamers, right? And they suddenly realized because of stuff like YouTube and Minecraft that, you know, there were creators and casters who could engage and essentially heighten retention and make titles live that could, would otherwise not have lived as long time. But what they're realizing now is that they're the viewers, right? And these viewers are addressable on their own. You know, they might not be, they might be gamers, they might be creators as well. And that certainly feeds into each other. But there's also an entire audience that doesn't do anything but view. I mean, I've played a couple of rounds of Counter-Strike in my life on practice servers, right? And I think this is an extremely, it's an extremely simple equation. It's a very, very linear development that's happened these years. And those of you who are entrepreneurs within the gaming space, those of you who are investors, I mean, you can't ignore entertainment. And I think that's basically where we are. Thank you.