Welcome to the August 2021 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. The Waterhouse family has been involved in gambling and related industries for over 100 years, and the family’s experience, contacts, and capital provide opportunities that most funds would not appreciate or have access to.
Since inception in August 2019, the Waterhouse VC Fund has achieved a total return of 1,803% (assuming the reinvestment of all distributions). The unit price is $19.02, as at 31 July 2021. See our long-term performance table at the end of this newsletter.
Wagering on where the puck is going
Back in the mid-2010s while working for a major wagering and gaming operator, we spent a lot of time in Asia to learn from some industry insiders. We spoke with bookies operating in Asia with significantly smaller headcount who had 10 times our volume (and we were one of the largest global operators at the time).
Incredibly, their turnover was virtually all in cryptocurrencies like Bitcoin. This experience opened our eyes to the cost advantages, speed of settlement and privacy afforded by these payment methods. These were massive businesses utilising cryptocurrencies well before the majority of people had even heard of them.
It’s not well appreciated that the wagering industry is among the early adopters of major technology trends, such as mobile internet, 'big data' and cryptocurrencies. The next big trend is one where the wagering industry has already been benefiting from, and contributing to, for a long time.
Cyberspace: The final frontier
We first discussed the metaverse in our April newsletter, focusing on Decentraland and its well-developed virtual ‘casino district’. However, it’s also important to understand the broader concept of the “metaverse”.
The metaverse is best understood as the successor to the Internet as we know it. It will consist of countless persistent, synchronous virtual worlds that interoperate with one another, as well as the physical world. More than just websites and social networks, Facebook’s Mark Zuckerberg believes “the defining quality of the metaverse is presence, which is this feeling that you’re really there with another person or in another place.” No doubt he sees Facebook’s Oculus Virtual Reality hardware being a big part of that.
The metaverse can be broken down into seven core layers (see below). The metaverse will be open to unlimited participants with a fully functioning economy, likely to have its own currency (or currencies) and labour market.
While this may sound like a science fiction dream, significant capital is flowing into the development of the metaverse, with ‘big tech’ competing to stay at its forefront. Zuckerberg has said that the company’s divisions focused on products for communities, creators, commerce, and virtual reality would increasingly coalesce to build the metaverse: “Our overarching goal across all of these initiatives is to help bring the metaverse to life.” In fact, the “metaverse” was mentioned 20 times during Facebook’s July 28 earnings call. The Facebook CEO has a clear vision of how he wants people to see the company: “In the coming years, I expect people will transition from seeing us primarily as a social media company to seeing us as a metaverse company”.
The link between wagering and gaming to the metaverse is already well-established. Today’s most popular video games already exhibit qualities that will manifest themselves in the metaverse and effectively serve as a testing ground for the fully-fledged metaverse that we envision. Games such as GTA Online (the multiplayer component of GTA 5) and Fortnite host many players in a virtual ‘world’, delivering in-game experiences and a virtual economy that are often partially created and maintained by the game’s users. These ‘mini-metaverses’ are incredibly cost-effective for game developers, with user content creation driving increased returns to scale and network benefits reminiscent of social media platforms.
With their unparalleled and ever-changing breadth of in-game experiences, games such as GTA 5 and Fortnite are two of the highest-grossing games in history and continue to generate revenue many years after launch. Seven years after its launch, GTA 5 (owned by Take-Two Interactive) is still consistently generating around US$250 million of quarterly revenue.
GTA 5 Quarterly Revenue. Source: Take-Two Interactive. LHS = Revenue (US$ millions)
Those involved in the development of the metaverse advocate for the opposite of the virtual worlds that we currently experience through video games, which are controlled by a single entity domiciled in one jurisdiction. Instead, many are working on the next iteration of the metaverse, one that is decentralised and interoperable with other virtual worlds and experiences. Such a metaverse will allow people to live a virtual life however they want.
The wagering industry is being rebuilt from the ground up
Within the casino district in Decentraland, participants can play blackjack, roulette, slots, backgammon and poker, using a range of cryptocurrencies. Players can earn rewards for gambling, similar to a rebate, in the Decentral Games “DG” token. What really illustrates the potential of wagering in the metaverse, is that holders of the DG token have proportionate governance rights over the casino.
DG token holders own the casino, control the profits, vote on new games and decide on feature proposals. The system fosters a strong sense of community not seen in the traditional gaming industry. Unlike communities and businesses based in the real world, there is not the same outside interference, taxes, product fees, monopolies, or rigged games.
A Scene inside Decentraland’s Tominoya Casino (Source: Decentral Games)
The proliferation of wagering and gaming in the metaverse will allow players to remain detached from geographic impediments, while benefiting from the creativity that flourishes from decentralised development and immutable property rights.
Opportunities for Asian wagering
In the wagering industry, there is a belief that if players cannot access domestically regulated wagering products, they will turn to the black market to find those products. In reality however, products such as social gaming, esports and options trading are becoming more and more fungible, allowing players to sidestep the black market.
The opportunity to attract Asian players to the metaverse has been accelerated by the Chinese government’s recent attitudes towards gaming products, with Chinese state media referring to gaming as ‘opium for the mind’. If stricter controls do eventuate, players will need to look further afield. We believe that not only players in Asia but other jurisdictions will increasingly turn to offerings in the metaverse, transacting through a private, decentralised currency/token. We believe that the metaverse could become the biggest home of gaming and wagering.
For wholesale investors that want to follow gaming’s global growth, please follow us for updates on Twitter @waterhousevc.
Please note the above information in relation to Facebook and Take-Two Interactive is based on publicly available information in relation to each of them and should not be considered nor construed as financial product advice. The Fund currently has a position in Facebook and Take-Two Interactive. The information provided in this document is general information only and does not constitute investment or other advice. Readers should consult and rely on professional investment advice specific to their individual circumstances.
Gambling Fund gross performance as at 31 July 2021