Welcome to the May 2020 newsletter for the Waterhouse VC Fund.
The Fund specialises in gambling assets and businesses that are related to the gambling industry. We aim to leverage our unique expertise and existing assets to generate yield and capital growth for investors over the long-term.
Since inception, the unit price of the Waterhouse VC Fund has risen from $1.00 to $2.57, as at 30 April 2020.
The kingmaker of video gaming
China is the largest video gaming market in the world. Of China’s 900 million internet users,[1] over 640 million play video games.[2] Naturally, it’s the biggest esports market, with a third of the world’s audience and revenue. 260 million are even happy to take a back seat and watch the professionals play, via live-streaming services.[3]
At the centre of this huge and bustling metaverse is a company called Tencent.
Tencent has over 1.2bn monthly active users (MAUs) of its messaging and social apps. From its flagship product WeChat, the company earns revenue displaying ads and integrating various offerings like payments and financial services. But its biggest earner is - you guessed it - video games.[4]
Tencent’s in-house titles such as Honour of Kings and League of Legends (acquired in 2015) are globally dominant. Plus, the company has investments in eight of the top 10 gaming companies such as Epic Games (Fortnite), Activision Blizzard (Call of Duty), Ubisoft (Assassin's Creed), Supercell (Clash of Clans) and many more game publishers, developers, esports teams and live-streaming platforms.
Tencent’s ubiquitous WeChat messenger, and the requirement for non-Chinese businesses to have a local distribution partner, allow Tencent to position itself as the ‘king maker’ in Chinese gaming. Tencent often buys a stake in a company and offers their vast distribution, in turn making the investee company worth much more.
The most interesting part of the gaming business is that it’s so lucrative despite some of the biggest hits being free to play. Tencent monetises its games through various micropayments, such as skins, loot boxes, level ups and tournaments.
Skins, virtual goods that change the look of items in the game (like weapon colours and outfits), have long been intertwined with gambling. Skins have no impact on the game itself, but rare items bring prestige. Skins can be bought and traded with real money outside the game, and are even used as chips in online casinos.
Loot boxes are consumable virtual items, like mystery crates and piñatas, that are redeemed for a randomised virtual prize. Loot boxes can be bought with in-game currency, but also real world money. Even the untrained eye can see that loot box animations are strikingly similar to slot machines. They utilise the same psychological tricks, like sounds and variable rewards, to get players having more ‘bets’ and playing the game for longer.[5]
So far, the absence of physical rewards or a direct link to real money payouts have allowed video gaming companies to circumvent traditional gambling classification and therefore avoid the same sort of regulation and taxation experienced by gambling companies.
This all translates into giant and fast-growing revenue streams. Tencent did US$16.2bn in gaming revenue last year, and it’s not slowing down. In the first quarter of 2020, gaming revenue grew 31% compared to the same quarter last year, driven by more active users and a higher proportion of those users engaging in microtransactions during the stay-at-home period. We’re happy holders of Tencent in a post-coronavirus world.
For wholesale investors that want to invest in gaming’s global growth, the Waterhouse VC Fund has reopened to new investors. To invest in the fund, please download the application form and return to info@waterhousevc.com.
[1] https://www.evolutiongaming.com/sites/default/files/1211813.pdf
[2] https://s1.rationalcdn.com/vendors/stars-group/documents/financial-information/financial-results/Q1-2020/TSG-1Q20-Press-Release.pdf
[3] https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=pdf&idsId=02218769
[4] https://esportsobserver.com/nascar-pro-invitational-tv-ratings/