Spotlight | Steven Salz, Founder & CEO of PMML Corp.

Spotlight
June 9, 2020

What do you think is the most important thing to understand about the future of esports as an investor?

That it's impossible to predict which games represent the future of esports. As an investor this is the most critical thing to keep in mind at all times. At any given time the predictability of longevity of game titles is impossible. A new game can come out to massive fanfare, huge player counts, and then fall off a cliff seemingly at random a few months later. There are many case studies of this just in the past few years alone. Often games are quickly totted as the 'next big thing' or 'next big esport' and this is the gambler's fallacy. It's also important to know the publisher is more like bumpers on a bowling alley than something that can ensure success. If a publisher could make sure a game were successful then the industry would be moot. Trusting in them to make something successful is an equally dangerous wager as an investor. A game's long-term success mostly relies on the crowd, the community, and tiny nuances therein. It's like building a watch where the parts randomize and jumble themselves every couple days. Looking at ways of building or investing in assets that are agnostic of this uncertainty is the key.

At a more general level the future of esports 5-10 years from now would seem like fiction today. I think the potential exceeds what even some of the more bullish commentators are expecting. Gaming is distributed globally, has no borders or language barriers, and no prerequisites based on physical characteristics (i.e. hard to be 5'2 and make it to the NBA). It's a limitless digital terrain accessible to everyone anywhere, and the power of this has been shown more than ever in the last couple months. We are still just scratching the surface of how it will be woven into the fabric of the entire entertainment industry in the coming years.

What’s the most common misconception you hear about esports?

That it's like traditional sports but video games. The dynamics of the industry are enormously different. The existence of an IP holder first and foremost, and this has ripple effects through the entire value chain. It would be the same as the NHL owning the IP to the game of hockey. This is the case in esports. In general esports is a bit of the sports industry, combined with fashion, music, and film. It has little geographic based player bases or fandom, i.e. fans of the same team or game can be halfway across the world from each other. I'd say a branch of this misconception is also that esports is all the same. Saying 'esports' is the same as saying 'sports,' which of course is made up of hockey, basketball, soccer, and so on. Esports is made up of dozens of games each with a unique structure, player base, and community culture.

So esports must be looked at wholly through its own unique lens that does not apply reasoning by analogy to sports and each game within esports is as distinct from one another as golf is from football.

What would you say to potential investors considering esports as a space to invest?

Since getting started in the space as an operator and investor years ago we have had the same three criteria for business building that have served us well. Businesses that can tick all three boxes have the most potential leverage:

1. Game cycle agnostic (for the reasons mentioned in the first question)
2. API agnostic (i.e. does not require publisher or platform plugin to work)
3. IP agnostic (i.e. does not require permission from a publisher to utilize its IP)

Each of these three can create a ceiling at different heights for a business in the space.

Be rigorous in deeply probing the risk and overall exposure to all three of these as you look at assets and your probability of success will likely improve.


What obstacles do you think esports will need to overcome from an investment perspective?

It needs to show a reliable and predictable revenue profile across a variety of verticals. I think many investors understand the scale of the audience, reach, and long-term potential, but don't see the numbers falling in behind that. COVID-19 has accelerated the sector thesis and brands and consumers are realizing more rapidly the potential of these platforms, but it still has a ways to go. Part of this will simply take time, as in the demographic predominately consuming this content being gen z (late 90's and up) will continue to get older and purchasing power increase. The other piece is industry participants getting better and better as operators at translating the engagement into commercial activations. This is already happening and at an accelerating rate.

We are still in the first inning of this industry, but that's where real returns happen. As investors begin to better understand all the dynamics at play and have a bit of patience I'm confident they will be rewarded.
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