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McMurtry Investment Report Newsletter – February 2020

February 2020 – Video Gaming and Esports Industry

This is a fast- growing global industry with both large and small companies competing against each other. The US and Asia are the two major regions with Europe a distant third.


My newsletter will be talking exclusively about the video gaming and esports industry and will not be referring to the related online betting sector.


Initially this industry was dominated by the console providers – Nintendo and Atari. More recently the console producers – Sony with its Playstation and Microsoft with is Xbox have been the major providers of the hardware.


The software companies making all the new games and esports activities have been US companies like Electronic Arts, Activision Blizzard and Take- Two Interactive. There are also companies like the Chinese Tencent that make games but this is only a portion of their revenues.


The industry has come a long way from consumers only purchasing consoles and video games at retail outlets to online purchases that enable consumers to play digitally with their friends as opposed to only by themselves initially.


The industry has experienced a sharp growth in both revenues and viewership. Growth is coming from 3 sources – viewership, brands spending on marketing and growth in live online gaming tournaments. Major consumer companies are spending heavily on their brand advertising as they are attracted to a large and increasing audience for their products.


Both casual and enthusiasts’ viewers have grown from 335 million in 2017 to 380 million in 2018. Both the size of the audience combined with the growth rates have caught the attention of large brands and their advertising departments. I do not yet have the industry numbers for 2019 but I presume that the growth is continuing at the same trajectory.


Esports awareness has been increasing at a fast clip and for one online event in 2019, the League of Legends World Championship, the audience almost surpassed 100 million people compared to last years’ Super Bowl viewership of 103 million. As new games come on stream, this audience is bound to increase. Online spectators are viewing highly skilled gamers play competitively just like professional athletes do. The major difference between gamers and professional athletes is that gamers do not need to be athletic in any way. Skill is the only factor for online gamers. League of Legends continues to be the most popular viewed esport globally and it is owned by Riot Games who is in turn owned by the Chinese company Tencent.

Industry Risks

This is a highly cyclical industry where its viewers have no customer loyalty towards a specific company or game. The only motive they have is having fun and if they get bored by a game or esport they are more than ready to ditch the old one for a new game.


The industry is also very dependent on the introduction of new consoles. In fact, many game producers frequently defer their introduction of a new game until the newest consoles have come onto the market. Later this year both Sony and Microsoft will be coming up with new models of the playstation and xbox consoles respectively.


A high percentage of the industry growth is coming from Asia, whose region is currently being decimated by the coronavirus.


Many new games are one hit wonders and have a short life. There is no way of knowing in advance the future popularity of a new game. However, there are some games like World of Warcraft that have lasted for fifteen years since their initial release.


Industry innovation can be both a good and a bad thing. If a company with a highly popular game or esport is not continuously spending on research and development, one of their competitors can overtake them very quickly by the introduction of a newer and more exciting game or esport.


The industry sales are gradually focusing away from software that is used on the current console hardware to free software on mobile devices. This is a concern for the three largest US players, Electronic Arts, Activision Blizzard and Take – Two Interactive.


Industry growth cannot be ignored despite the cyclicality of the business. The new console introductions by Sony and Microsoft later this year will help provide a catalyst to overall growth.


My recommendation is to purchase an ETF as opposed to an individual company. In this way you get exposure to the industry in a diversified way without assuming any specific company risk.


The US VanEck Vectors Video Gaming and Esport ETF, ESPO, will offer you exposure to both US and Asian companies like Electronic Arts, Activision Blizzard, Take-Two Interactive, Nvidia, Tencent and Nintendo.


As a result of the industry’s volatility and low dividend yield of 0.21%, I am only including this ETF in the Growth portfolio.


Peter McMurtry, BCom, CFA
Financial Writer
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