Thinking Points

  • Japanese law played a big part in the slow adoption of Japanese e-sports.
  • However, the Japanese e-sports industry is now organized enough to issue professional licenses which help avoid problems with the law.
  • Taking a quick look at the development of e-sports in North America helps identify where the opportunities may lie in Japan’s delayed e-sports development.

Why would anybody want to watch other people play video games?

Probably for the same reason we are fascinated with NBA star Kevin Durant’s one-foot jumper or four-time Super Bowl MVP quarterback Tom Brady’s ability to buy time in the pocket: Watching people at the top of their game doing seemingly magical things is entertaining.

In e-sports, instead of watching one-foot jumpers, spectators watch double kills in shooter games. This is not a myth. Popular video game titles like Activision’s Call of Duty and Riot Games’ League of Legends have long-time professional players with large followings. Newzoo estimates the global e-sports market to grow to $905.6 million in 2018, a 38% year-on-year growth.

Newzoo esports 2018 revenue estimate

Source: Newzoo

Newzoo expects the global e-sports industry to reach $1.4 billion by 2021.

Recently, the Japan e-sports Union (Jesu) issued professional licenses to video game players in Japan. This made the news, not only in the video gaming scene, but also on English-language mainstream news sites like Bloomberg. Seth Fischer of Hong Kong based Oasis Capital is already betting on Japanese e-sports.

Today, I would like to go over the nuts and bolts of Japanese e-sports so you can stay informed on some of the opportunities presented by the up and coming industry.

A snapshot of North American e-sports

In North America, we have companies like Major League Gaming (MLG), subsidiary of Activision (NASDAQ: ATVI), organizing video game related events. At an MLG event, professional video game players go head-to-head in front of a big audience with hopes to win a trophy (and cash prize!). Big companies sponsor teams, players, and/or events. The structure resembles the professional sports leagues in North America like the NBA, NFL, NHL, and MLB.

Source: Scuf Gaming

One key difference between major professional sports and video games, however, is that fans get to watch professional players practice nearly every day in real time over the internet. Websites like Twitch.tv (Amazon subsidiary), Youtube (Google), and MLG.tv (Activision) give professional gamers a platform to broadcast practice sessions to their fans. For professional video game team OpTic Gaming, content creation is just as important as winning tournaments.

What’s with Japan’s lack of competitive e-sports events?

While gamers have made careers out of MLG events in North America, Japanese law has made it difficult to organize paid tournaments. A Nikkei article points to Keihin Hyoji Hou, or Act against Unjustifiable Premiums and Misleading Representations for the lack of paid tournaments. Because tournament performance is dependent on participants purchasing video game hard/software, prize money can be seen as a tool to lure consumers. Hence, companies can either limit prize money to the upper limit of 100,000 yen ($940 USD) for Keihin Hyoji Hou, or go further and risk getting in trouble with authorities.

One way to avoid this problems is to create a professional league. With a professional league, the average consumer is viewing the event rather than participating for a prize. Three key Japanese e-sports organizations merged together to form JeSU. The new organization started issuing professional licenses to individuals and teams in February 2018.

Put another way, it isn’t that the Japanese government relaxed regulations. Rather, the Japanese e-sports industry got together and decided to form a professional league to avoid regulation.

Now Japan has JeSU-approved professional gamers

Earlier, I briefly mentioned how the e-sports industry in North America is shaped. It goes without saying that we should take a look at Japanese video game developers with strong IPs. But taking it a step further, if Japan were to follow the footsteps of e-sports in the west, you probably ought to take a closer look at what sort of companies are involved in MLG’s operations, then see what sort of similar Japanese companies would show up in Japanese e-sports.

Take Amazon’s Twitch and Google’s Youtube for example. Both are well known livestream broadcasting platforms among Japanese video gamers too, however, it isn’t the only platform available.

Niconico and OPENREC are also broadcasting platforms commonly used by video gamers in Japan. Niconico is a grandchild company of Kadokawa Dwango (TSE: 9468). OPENREC is operated by CyberZ, a child company of CyberAgent (TSE: 4751).

For an investor looking for larger e-sports exposure through non-video game software developers, Kadokawa Dwango would probably be a better place to look. This is simply due to CyberAgent being a relatively large company with many different services outside of e-sports. It is probably worth noting that the Vice President of JeSU is Hirokazu Hamamura, CEO of Gz Brain, a video game focused multimedia company 100% owned by Kadokawa.

The more obvious plays

To get a quick idea of the more obvious plays in Japanese e-sports, let’s take a look at game titles that JeSU has officially recognized for pro e-sports:

wdt_IDTitlePublisherExchangeTicker
1Winning Eleven 2018Konami Digital EntertainmentTSE9766
2Call of Duty WWIIActivisionNASDAQATVI
3Street Fight V Arcade EditionCapcomTSE9697
4Tekken 7Bandai NamcoTSE7832
5PazudoraGungHo Online EntertainmentTSE3765
6PuyopuyoSegaTSE6460
7Monster StrikeMixiTSE - Mothers2121
8Rainbow Six SiegeUbisoft EntertainmentEPAUBI
TitlePublisherExchangeTicker

Source: JeSU (Japanese)

A couple big titles not included in JeSU’s list are Nintendo’s (TSE: 7974) Super Smash Bros and Cygames’ Shadowverse. CyberAgent has a majority stake in Cygames while DeNA (TSE: 2432) is part owner.Source: JeSU (Japanese)

The bottom line

Japan is now ready to make up for lost time in e-sports. This may trigger investors to start taking a closer look at Japanese video game companies, an already popular industry. Personally, I think investors are better served looking at companies less known for video game development that also benefit from the e-sports movement. Though recent performance has lagged, Kadokawa Dwango is a good example with core segments revolving around video game multimedia.

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.

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