Let's start with a bold statement:
Video games are going to revolutionize the traditional sports world.
Yes, video games.
Marc Andreessen famously blogged that: "six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale."
This now includes sports.
Right now, we're sitting at the junction of some major technological and social trends, with eSports (competitive tournaments of video games, especially among professional gamers) poised to become one of the most electrifying markets across the globe.
Process this: despite only penetrating 5% of the total online gaming population, eSports viewership today is larger than Major League Baseball, and by 2022, is projected to be larger than the National Football League.
Although gaming is a universal phenomenon, with a staggering, but still under-penetrated audience, and a colossal $153 billion in global revenues projected in 2019, the structural dynamics for investing are still nascent – which Dick and I think positions Green Bay to capitalize on a massive opportunity with significant upside.
According to Goldman Sachs equity research:
eSports are moving into the mainstream. The immense popularity of survival-based games like Fortnite, growing prize pools for eSports tournaments, the rise of live-streaming, and improving infrastructure for pro leagues have all paved the way for eSports to reach nearly 300 million viewers by 2022. [And] unlike many existing pro sports, the eSports audience is young, digital, and global: more than half of eSports viewers are in Asia, 79% of viewers are under 35 years old, and online video sites like Twitch and YouTube have a larger audience for gaming alone than HBO, Netflix and ESPN combined.
eSports also has enormous infrastructure and technology advantages compared to traditional sports, namely: the physical capital requirements are significantly lower (no permanent stadiums or arenas), accessibility to the product is substantially easier (an Internet connection), product reach is geographically broader (the Internet has no territorial boundary), and distribution is technically simpler (100% digital distribution).
We strongly believe this combination of factors will lead to substantially accelerated growth with superior unit economics, forming one of the most exciting investment categories over the next three to five years.
Gaming & Digital Goods
The financial impact of gaming can be felt beyond eSports. In fact, the data is powerful across all segments of the market.
Perhaps no place is the numbers more eye-popping than "in-game digital goods" (things used in video games, like a digital sword or costume), which are now worth an estimated $80 billion annually, and growing.
Fortnite, a massive free-to-play online game, generated an astonishing $318 million in monthly sales of in-game digital goods – in the month of May alone.
Despite the insane demand for digital goods, we believe there is still tremendous trapped value which can be unlocked by applying blockchain technologies.
The current limitations exist because of what are called "walled gardens". This means the publisher of a game will create and issue goods into a completely centralized ecosystem.
As Tony Sheng wrote in a great post titled Sound Digital Goods: "The 'owner' of a pre-crypto digital good faces massive liquidity and trust risks. Pre-crypto digital goods are issued by central authorities that manage custody of the digital goods...can inflate the supply at will...and often limit the trade-ability of the items. A sound digital collectible should be worth at least an order of magnitude more."
We think blockchain-based technologies provide a valuable and provable solution to many of the problems around scarcity, ownership, provenance, and residual value inherent in the hierarchical relationship with content creators and providers.
Gaming & Blockchain
Dick and I see the surge in demand for in-game digital goods as the beginning of a much larger trend and opportunity for Green Bay to invest at various intersections across gaming, eSports, digital goods, and crypto assets, like non-fungible tokens (NFTs), which are tokens, or protocols, that represent a unique digital asset.
In general, we think gaming will prove the first major mainstream adoption of blockchain-based technologies.
Entertainment, especially games, are an amazing way to teach new behaviors, especially when the underlying technical concepts (like crytpo) are complex.
This is a lot like the Internet, where most of us don't think, day-to-day, about the intricacies of the underlying technical infrastructure. That's because, today, we have a ton of user-friendly applications and services which provide a seamless and frictionless experience.
But in the early days, we needed some way to introduce new concepts and teach emergent behaviors. Crypto is no different, and we think, initially, blockchain-based entertainment will be the gateway to the decentralized world.
I thought Cuy Sheffield, in his post NFTs and the Future of Digital Memorabilia effectively described the future potential intersection of gaming and NFTs, plus the stages of development leading to "a new digital economy of cryptogoods and digital memorabilia that could become one of the first mainstream uses of cryptoassets."
Briefly, Cuy outlines the stages of mainstream NFT adoption which, he says: "we are rapidly progressing through, reaching more consumers and a greater market value at each stage.":
- Digital Collectibles (digital Beanie Babies)
- Digital Sports Collectibles (digital baseball cards)
- eSports Collectibles (digital memorabilia)
The third stage is, for us, the most interesting. We suspect many companies building products in the prior stages will, over time, converge into the "NFTs for eSports collectibles" bucket; namely because the strongest use cases, largest audiences, and greatest opportunity for monetization exist in this category.
There are several great use-cases Cuy covers, many tied to the monetization of in-game-moments similar to catching a baseball in the stands or getting your favorite player's game-worn jersey; but we think one of the first, and most powerful applications of NFTs and blockchain are the economies that can be created around secondary markets for trading in-game goods, which many believe represents a multi-trillion dollar trading opportunity.
As an example, Counter-Strike:Global Offensive, a first-person shooter game, has a secondary market for in-game goods valued at more than $5 billion, a figure that totally eclipses the company's primary market for selling goods, which is estimated at $250 – 300 million. These figures are staggering, and reveal to us a major opportunity.
There are some obvious challenges, which Cuy points out: (1) gaming companies and content creators will see a peer-to-peer market as a threat to their existing business; and, (2) consumers won't understand how to store and protect their valuable digital assets, which could short-circuit, before it even gets lift-off, a thriving ecosystem of tradable and monetizable digital goods.
Custody of valuable digital assets absolutely needs to be addressed. The rapid growth and evolution of this decentralized market will stall if users don't have a safe, secure, and user-friendly way to hold and exchange their personal goods. Let's generally refer to that product as a "digital wallet".
You may need to squint, but imagine a future where the existing "walled gardens" are transformed into a trillion dollar peer-to-peer economy of tradable, sellable, and interoperable digital goods, built on blockchain protocols (NFTs), all requiring blockchain-based digital wallets for storage and transfer.
If you can succeed in the adoption of blockchain-based wallets – which we think in the gaming universe is highly probable – you've now architected one of the first real, and massive, on-ramps to exploring the entirety of the crypto universe.
I think of the digital wallet's potential impact similar to what Netscape accomplished: an amazingly simple, but incredibly useful, browser that helped usher millions of people into a vastly complex but revolutionary place called: the Internet.