When I was a kid, I used to love to play Monopoly.
I played for hours. My preferred method of playing the game was to buy aspects of the game that weren’t actually for sale in order to gain an advantage over my opponent – typically my brother. I changed the rules.
My favorite transaction was to offer nearly all the cash I had at the beginning of the game for the ability to buy one of the die. The theme was that as its owner I could change the number of one of the die every roll to my liking, but the other die had to stay the same.
Turns out, if you can change one of the die to whatever your heart desires, your statistical probability of landing on a spot that you want goes up exponentially. So does your ability to win the game. (How did my brother continue to allow me to do this?).
In the old days, no one usually did this of course unless they were playing against my brother. Pieces of the game were not for sale in typical gameplay in my Monopoly games or other forms of physical or digital games. Nowadays, within the new generation of gaming that we are seeing, specifically relating to video games, this kind of behavior is commonplace. Owning assets that shape how the game is played for yourself and others can have tremendous value. Buy the right virtual land in a popular video game, and you might just be the one collecting $200 everyone who plays wants to pass Go.
A market taking shape
As metaverses are being created, the world is abuzz with Nostradamus-esque prophecies of the future of the digital world. Investors want in on the action. They realize that the world is being changed by video games and they see the amount of capital thrown at the industry. They see that new heroes seem to be created daily in the Esports world.
The value of the intellectual property being created today in these digital worlds will have immense value tomorrow. No one is sure which metaverse or which company will be successful within their endeavours to create a holistic digital human experience, but investors today do see that if someone does, owning pieces of land within those games and universes will be very valuable. As such, investors are placing their bets as these games and metaverses are created.
What we are seeing everyday
At our own portfolio company, Polygonus, we are involved in the creation of a metaverse video game production where land plots that will exist in the game are already up for sale with well into six-figures of presales. It is truly a new world.
If you came to our Polygonus offices in Medellin, Colombia, you’d note that the team is still creating this very land that has already been claimed by investors. The land doesn’t even exist yet, but it is bought and paid for. Virtual land acquisition interest, largely fueled by the same investor class that supports cryptocurrencies, is an asset class that is only growing by the day.
Today, we will describe the value and growth of the video game market, largely as it relates to the metaverse and its development. Specifically, we want the reader to relate the digital real estate market to that of the physical world and understand how the two investment worlds are alike and differ. In conclusion, we will provide a few real-world points of advice to our investment audience.
How big is the video game market?
For investors looking to buy virtual land, one has to understand the impressive growth of the video game industry to truly be able to make any reasonable forecast about a future valuation of this digital asset. Further, to want to participate, investors need to be wagering that humans will spend a significant portion of their time in a digital world (i.e., video games) and of course that they will be willing to spend money within this digital world.
The video game industry has grown fast since the time when I saved my childhood allowance to buy Nintendo Power magazines to learn cheat codes and strategies for the newest Super Mario game. The global video game market will generate estimated revenues of $175.8 billion within 2021 alone and is set to reach $256.97 billion by 2025. By the end of this year, there will be more than 2.9 billion players worldwide (almost 9 times the population of the United States of America). Those who own the cheat codes going forward stand to make a lot of money.
Of additional specific interest is the theme of Esports within the gaming industry itself. For our readers who are not familiar, Esports is essentially competitive video gaming. Teams are created to be the best at a particular video game. These teams compete to earn prize money – a lot of prize money – and sponsorships as a result of their victories.
Esports have grown so much in popularity that they are now competing with real-world sports for attention and dollars. Today, the Esports industry enjoys an audience of around 456 million people and has an expectation of reaching 646 million by 2023. For reference, the National Football League currently has a viewership of 17.3 million per game.
Several records have been broken in recent years in Esports as compared to traditional sports. One such record was that of The League of Legends World Championship in 2019, a large Esports event that attracted over 100 million viewers. In comparison, the Super Bowl that same year had 100.7 million viewers. The 2019 League of Legends World Championship cemented the game as the most viewed Esport of all-time, and our readers should remember that this is just one game of many. There are numerous other video games that individuals are competing in everyday. This is just one example of the Esports industry’s growth – growth that we expect to surpass that of the physical sports industry here in the near-term.
In 2021 alone, more than $144 million has been awarded in prize money across more than 2,900 Esports tournaments. That’s compared to just $14 million recorded by tracking website Esports Earnings in 2012, which shows the gigantic growth of the industry in just a decade. The top Esports players compete on salaries with those of professional sports stars worldwide. One of the top Esports gamers these days is Johan Sundstein, who is a highly popular and successful “Defence of Ancients 2” player. Johan is 26-years old and has earned about $7 million playing in 128 tournaments to date. He ranks #1 in the world and #1 in his home country, Denmark.
Esports and video games are seen as top contenders for mankind’s attention-grabbing entertainment industries. Video games are no longer just for middle-school kids who are avoiding their homework while their parents are still at work.
In reality, the average gaming consumer is older than you would expect. The average age of a U.S.-based gamer is 33 years old and these individuals are likely highly-educated. Statistics show that they are more likely to engage in STEM-related careers (fields of science, technology, engineering and math), which often leads to more disposable income. Netflix’s chief executive Reed Hastings even admitted that he sees Fortnite as bigger competition than HBO. Specifically he states that “it seems like the new generation prefers actually partaking in the action, not just watching it on the screen.” Fortnite, for example, is an enterprise in and of itself. It has over 350 million registered players and recorded more than $9 billion of revenues within two years after its release. The game itself is basically a going concern, financial ecosystem – a billion dollar business. All of this is amazing even as we write.
Should I buy virtual land in these new games and metaverses?
The purchase of virtual land, similar to the growth of the NFT market we have seen, really has just become prevalent in the past year. This growth is largely spurred by the same audience: a group of individuals who are already highly-connected to the digital world today and see that future progressively more prevalent in the lives of the humans of tomorrow.
For the time being, we would categorize virtual land purchases as largely speculative. Almost none of these virtual assets have a current cash flow yield to be able to measure their profitability or value accurately today. Nearly all investors are taking the approach of a small initial investment now, with the possibility of a giant exit in the future should their chosen video game, and therefore their purchased virtual land asset, explode in value as more players play and transact within the ecosystem. Think of this strategy as the same theme as investing in Bitcoin a decade ago in terms of total investment risk profiling.
The lack of a cash flow hasn’t stopped investors from spending big bucks on virtual land, however, including entrepreneurs wanting to get in on the action. According to the Financial Post, in October of 2021 an investor spent almost $1 million on a virtual plot of land on Decentraland, which is a popular marketplace for digital land assets.
The Financial Post goes on to state that monetization capabilities in virtual land is starting to give rise to metaverse real estate companies, the first example being Metaverse Property. Metaverse Property works to secure a wealth of land assets in the virtual real estate space. It focuses on buying and selling virtual land, managing business properties, offering rentals in the metaverse, virtual land development and consultation and marketing. Although a first-of-its-kind, there are sure to be numerous competitors soon to follow if the capital keeps rolling into these new asset classes.
Financial innovation and human capital talent are also being brought to the virtual land asset class. Metaverse Property has stated that it is creating what it’s calling the first metaverse real estate investment trust (REIT), which will trade through a non-fungible token (NFT) that is backed by the company’s virtual land portfolio. According to Frederic Chesnais, head of Atari’s blockchain division and the company’s former CEO, he believes that online environments are going to be huge. As reported in the Wall Street Journal, Republic Realm, a firm that develops real estate in the metaverse, said it paid $4.3 million for land from Atari in the world Sandbox, the biggest virtual real-estate sale publicized to-date. That acquisition broke a record set the week prior where a buyer paid around $2.5 million for land in the world’s Decentraland’s Fashion District.
Conclusion and Author’s Final Words:
Within our own operations in our portfolio company, Polygonus, we are seeing this market for virtual land develop before our very eyes. If you were to come to the office in Medellin, Colombia, you would actually be able to see this land being “constructed” in real-time as they create a unique universe around the framework of their video games in-development.
This industry is in its absolute infancy. The investment theme is an interesting financial concept as investors are essentially buying small pieces of intellectual property of the entire business ecosystem (i.e. the video game itself) that the game developer traditionally holds. Typically, investors would need to buy shares in a publicly traded video game development company to get access to the financial benefits of its IP portfolio.
While we agree that it is possible that certain investors today come out on top and will make huge returns as a game comes online and explodes in popularity, we also see it as just as likely that many games never get made, grow stale or flop upon a market entrance. I would classify this risk type as the same risk as investing in a real estate development project with the concern being that the building is never completed. The key difference here is that this wager on virtual land has an extremely higher risk vs. physical assets at today’s date because its underlying “land” may be gone tomorrow. I would urge investors to think carefully before investing in this space unless you have carefully balanced the risk/reward.
Nearly all the virtual land assets today are at an “in-development” stage of production. Do not bet money you can’t afford to 100% lose:
Unlike art NFTs, which can have an inherent value to a buyer if the physical appearance of the asset gives the buyer pleasure, it is unlikely that many of the land assets today have an inherent value unless they have a “utility” functionality within a video game itself and the buyer of such an asset is an avid gamer that derives value from such utility.
Think of this asset class as 100% speculative at the moment. Pre-sales of virtual land will be common, but there is seemingly no predefined way that virtual land assets can create tangible value until a video game is completed and the framework is constructed. Expect that buyers of virtual land assets will have absolutely zero control over how the asset is monetized, if the asset is ever monetized or if the video game itself ever becomes a success. For investors who are not involved in the creation of digital video game assets (i.e. pure investors) I would put these wagers at the same risk weighting as randomly throwing chips down on a roulette board and hoping for the best. I highly expect that insiders (i.e. persons involved in video game creation) will create unique markets for their own assets as they are created and test them out first to friends and family. Once a model is successful (i.e. it makes money), it will be put forward in an industrial manner, but after that time it obviously has inherently less value uptick possible. If you are lucky enough to have someone who specializes in video game production in your circle, it may be worth a shot to take a heavier look at these assets. Even in the latter circumstance though, I still would not recommend betting any real retirement funds here, just cash that you are willing to lose completely if things go wrong.
The intellectual property over the video game ecosystems themselves will have more value than that of in-game virtual land plots or utility NFTs for accredited investors:
The rise and development of this virtual land asset class is only one more feather in the cap of the video game industry. The industry itself can compete directly with the juggernauts of the entertainment world, whether that be Netflix or the NFL. More and more players are coming online everyday and more and more capital is being spent on this pastime. We see no reason that this trend does not continue into the future. Games like Fortnite, referenced above, create billions of dollars annually as a result of creating a unique product and continuing to develop and enhance that product for their consumers.
Each video game itself can be an investment. We have seen several SPV (special purpose vehicle) projects pitched to our portfolio company, where the funders and developers share in the overall game success. Each of these SPVs have the ability to become essentially an investable business of their own framed around a game of their own. We expect to see many video game companies in the future bringing on a third element (i.e. capital investment) to the SPV equation.
Think about this the same as how Hollywood makes movie productions today. What we are seeing by being hands-on in the market is the general deconsolidation in the nature of talent, and business structures that many now use in the digital development space. Teams seem to be comfortable partnering with counterparties with whom they believe add their own inherent value to the project. Digital entertainment companies today do not necessarily need to own 100% of the IP, 100% of the human capital and engage in 100% of the “work.” Not all of the companies creating the future of the metaverse will have the typical publicly-traded corporate structure, but rather will function as strategic partnerships that will need funding as one element. Investing in an individual production could be an interesting investment in the future. We see the probability of these types of gaming SPV products to enter the market increasing in coming years for accredited investors who are looking to participate in the space.
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*This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of our clients.