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eSports: Quite Possibly the Next Big Thing in Media/Entertainment

We estimate eSports-related revenues will increase from ~$200 million in 2015 to roughly $2 billion by 2020 driven by a combination of tournaments, advertising, sponsorships, broadcast rights, and fantasy/wagering, etc.
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eSports: Quite Possibly the Next Big Thing in Media/Entertainment

  1. 1. Relatively unknown outside of video game circles, eSports is one of the fastest growing segments of entertainment and media, set to jump from a few hundred million dollars this year to roughly $1 billion in 2018. We see significant opportunity for monetization in tournaments, advertising/sponsorship, broadcasting, fantasy/wagering. In this deep-dive industry primer, we provide a broad overview of eSports, with the primary beneficiaries, in our view, being key game publishers (e.g. ATVI, EA, TTWO), hardware platforms (MSFT, SNE) and online streaming sites (AMZN, GOOG). The biggest media and sports growth opportunity you’ve never heard of. We believe that eSports is on the cusp of reaching mainstream adoption, reaching 200 million active participants as early as next year, with popular video game titles such as Call of Duty launching with expanded eSports functionality, and with game publishers committing significant resources to build out eSports infrastructure. As one gauge of the burgeoning opportunities in eSports, we note that venture funding of eSports companies over the past 18 months (approximately $175 million) exceeds all prior funding to-date. While game developers/publishers such as Activision, EA, Take Two and UbiSoft are natural beneficiaries of the eSports trend, we note there are also significant opportunities for online streaming platforms (Amazon, Google), platform holders (Microsoft, Sony) and high-end PC/component manufacturers. eSports combines some of the best of sports and media. From a social and competitive perspective, eSports shares much in common with traditional sports: social interaction, competition, thrill of victory, interest in spectating/watching others, learning how to play and fantasy. Importantly, we also see multiple potential incremental revenue streams coming from eSports, including: online and in-person tournaments, advertising, sponsorship, broadcast rights, royalties/rev. shares, fantasy leagues and wagering. Moving from engagement tool to monetization tool. eSports is still primarily a tool to help engage and retain core gamers. However, we expect this to change quickly, with publishers focusing as much on incremental revenue opportunities and increasing ARPU. Importantly, video games are one of the only forms of media that is generating higher rates of monetization with online disruption, rather than declining rates (e.g. print, cinema, music, video). Potential to drive P/E multiple expansion. While investors remain largely focused on the pace of growth in the console cycle, we believe this misses two key growth opportunities in 1) back-end online monetization; and 2) eSports. We believe that significant growth in either or both of these areas would drive earnings multiples in the sector another leg higher. INDUSTRY UPDATE Prices as of 10/01/2015 Ticker Price Mkt Cap (mil) Rating Risk ATVI $31.46 $23,595 O A EA $66.49 $21,077 O A TTWO $29.39 $3,209 N A Baird covered companies October 2, 2015 Baird Equity Research Technology & Services Interactive Entertainment eSports: Potentially the Next Big Thing in Media & Entertainment Colin Sebastian csebastian@rwbaird.com 415.364.3350 Benjamin C. Gaither, CFA bgaither@rwbaird.com 415.364.3318 Andrew Lee awlee@rwbaird.com 415.364.3344 [Please refer to Appendix - Important Disclosures and Analyst Certification]
  2. 2. Details What in the World is eSports? In this deep dive industry primer, we provide a broad overview of eSports, a fast-growing phenomenon that has its roots in core gaming circles, but importantly, is starting to gain traction among mainstream gamers. In short, eSports adds many of the features and content found in traditional sports to the video game sphere, and is the gaming equivalent of organized and professional sports leagues. In fact, from a social and competitive perspective, eSports shares much in common with traditional sports: social interaction, competition, thrill of victory, interest in spectating/watching others, learning how to play, etc. From a monetization perspective, eSports includes hosting amateur and professional games and tournaments (both online and offline), spectating, sponsorship and advertising, broadcasting rights/revenue share, fantasy and wagering. While still a nascent industry, eSports viewership is already significant, with some estimates exceeding 200 million annual watchers, and over 100 million eSports “enthusiasts”. We note that this “enthusiast” demographic represents less than 7% of the approximately 1.7 billion global gamers, representative of what is still a large market opportunity. As an audience, eSports viewers are highly engaged, and time spent watching eSports is expected to expand nearly three-fold to 6.6 billion hours (~26 hours/viewer) by 2018, according to IHS. Figure 1: eSports links video games, sports, and fantasy/wagering October 2, 2015 | Interactive Entertainment 2Robert W. Baird & Co.
  3. 3. Source: R.W. Baird Figure 2: Expect strong rise in eSports playing/viewing 0 50 100 150 200 250 300 350 400 2014A 2015E 2016E 2017E 2018E 2019E 2020E Viewers(Millions) Source: R.W. Baird estimates Massive incremental revenue opportunity for video game developers and content distributors . We believe that eSports is on the cusp of rapid user adoption and exponential growth with new revenue streams for video game developers, publishers, and content distributors – in addition to the “prize money” awarded to gamers themselves. Overall, we estimate that eSports is on pace to generate nearly $300 million in revenues worldwide this year (including up to $100 million in North America and Europe), and is set to reach $1 billion in revenues by 2018, and reach nearly $2 billion in annual revenues by 2020 (46% CAGR) – see Figure 14. We assume that the number of eSports viewers will increase more than 20% annually over the next 4-5 years, with monetization (ARPU) more than doubling. Importantly, we believe that our estimates could prove conservative; depending on how aggressively game developers build eSports features into popular video games. Eventually, in our view, most new video games will offer some features of eSports; but for now, companies that appear to be best-positioned to capture outsized revenue streams from eSports include Activision Blizzard (Call of Duty, Hearthstone, Starcraft), Valve (Dota 2, Counter-Strike) and Riot Games (League of Legends); while Amazon (Twitch) and Google (YouTube) are already key viewing platforms. In addition, we note that platform holders including Microsoft and Sony are tip-toeing into eSports with As one gauge of the burgeoning opportunities in eSports, we note that venture funding of eSports companies over the past 18 months (approximately $175 million) exceeds all prior funding to-date (see Figure 3). Figure 3: eSports venture funding on the rise October 2, 2015 | Interactive Entertainment 3Robert W. Baird & Co.
  4. 4. $9 $10 $15 $1 $46 $18 $- $21 $64 $35 $77 0 5 10 15 20 25 $- $10 $20 $30 $40 $50 $60 $70 $80 $90 Millions Funding (Left) Deals (Right) Source: CB Insights Brief History of eSports The genesis of popularized eSports lies in Korea, and specifically the years following the Asian financial crisis of 1997. During this time period, the South Korean government overhauled the country’s telecommunications and internet infrastructure, creating an environment where Internet cafés, rather than basketball courts, became the most popular hangouts for large numbers of young people. At the same time, popular games such as Starcraft and Counter-Strike embraced organized game-play, offering both online and in-person tournaments. Eventually, Korea also became the first major region to offer regularly televised eSports via dedicated TV channels (e.g. OnGameNet and MBCGame). More importantly, this also marked one of the first successful attempts to monetize eSport content via a mainstream distribution channel. According to the Korea eSports Association, OnGameNet and MBCGame generated $200 million in eSports revenues in 2007. Figure 4: eSports competitive landscape October 2, 2015 | Interactive Entertainment 4Robert W. Baird & Co.
  5. 5. Source: R.W. Baird Current State of the Market Today, eSports are dominated by two primary categories of games: Multiplayer-online battle arenas (MOBAs) and first-person shooters (FPS). League of Legends (Riot Games) is the most popular eSports game in the world as measured by game-play, and reported that over 27 million people watched the 2014 LoL World Championship, which is more than the 2015 NBA Finals (19.9 million) and 2014 World Series (15.8 million). Dota 2, another popular MOBA, recently hosted The International tournament, which boasted a prize pool of over $18 million, including $6.6 million awarded to the first-place team. For the most part, popular eSports games today are “free-to-play” and “free-to-watch”. As Figure 5 and 6 show below, eSports prize pools have grown exponentially in the last five years, and live attendance is an increasingly popular pastime. More importantly, we note an increasing trend within developer circles to bring eSport tournaments in-house (i.e., Riot, Valve, Activision), and correspondingly adding new revenue streams through entry fees as well as valuable ad and sponsorship revenues. Longer-term, we expect additional monetization through broadcast/viewing royalties, subscription revenue shares, fantasy and wagering. Figure 5: Rise of global tournaments driving larger prize pools October 2, 2015 | Interactive Entertainment 5Robert W. Baird & Co.
  6. 6. Source: eSports Earnings Figure 6: League of Legends World Championship live attendance growth (2011-2014) Source: Riot Games eSports is a key marketing and user retention tool. While eSports viewership continues to grow at an impressive rate, we note that most eSports ventures may not yet be reaching profitability on a stand-alone basis, with much of the direct monetization potential likely to stem from new platform initiatives. As such, eSports is still primarily a marketing, engagement, and retention tool, helping to increase the longevity of games. Beginning next year, we expect this to change, with publishers focusing as much on incremental revenue opportunities as they do user retention. Figure 7: eSports: An increasingly well-known phenomenon October 2, 2015 | Interactive Entertainment 6Robert W. Baird & Co.
  7. 7. 0 10 20 30 40 50 60 70 80 90 100 2012 2013 2014 2015 Google Searches for "eSports" League of Legends Championship 32M unique viewers League of Legends Championship 27M unique viewers Source: Google Trends Advertising and Sponsorships may be key to monetization. Overall, eSports viewers are young, more educated, and better off financially than the population as a whole (Figure 8). According to MLG, 22% of eSport "enthusiasts" are considered "big spenders", in comparison to 8% of all gamers. We note there remains significant opportunity for advertising in the eSports market, with most games providing valuable access to an increasingly elusive young adult demographic (more specifically, 18-35 year-olds), which are almost twice as likely to be “cord cutters” than the general population. According to Experian Marketing, 13.5% of people in the 18-34 demographic have broadband, but no pay TV, in comparison to approximately 7% of the U.S. population. George Woo, Intel’s Event Marketing Manager, has stated that eSports enthusiasts are “web-savvy people who…do not watch TV, use ad block in their web browser, and consume their entertainment almost entirely on-demand.” In response, Intel created the Intel Extreme Masters, one of the premier gaming tournaments in the world, and Intel has stated that IEM “has proven more than worth the spend.” Figure 8: eSports viewers are a valuable advertising demographic October 2, 2015 | Interactive Entertainment 7Robert W. Baird & Co.
  8. 8. 0% 10% 20% 30% 40% 50% 60% Full-time Job High Income Bracket E-sports Viewer Total Population Source: Newzoo Video streaming bringing eSports into the “mainstream”. In our view, the on-demand nature of streaming platforms such as Twitch and YouTube Gaming are key drivers of eSports growth. Live-streaming enabled major tournaments to reach the general public, and significantly extended reach beyond live (in-person) events. Over time, we expect advertising dollars to follow as eSports hits key inflection points in viewership. According to SuperData Research, gaming-related video content is already a $3.8 billion industry, with the vast majority of revenues generated by advertising ($2.9 billion). In 2014, Twitch (acquired by Amazon) recorded 100 million unique viewers per month (66% increase from 60 million in 2013). Additionally, engagement is particularly impressive, with the average Twitch viewer logging over 2.5 hours per day on the platform. However, we note that streaming platforms are particularly regional, with Twitch being the most popular in North America and Europe, while Afreeca and Douyu are the most popular in Asia. In the U.S., YouTube is the only major competitor to Twitch for gaming video content; however, monetization remains low, as it is primarily on-demand, rather than live. Nevertheless, we note there is potential for YouTube to usurp Twitch in the long-run as a destination for gaming content, as YouTube gaming channels already generate over 3.5 billion views per month. YouTube draws 72% of gaming video content viewers, while Twitch generates 43% of gaming video content revenue, according to SuperData Research (Figure 10). Figure 9: Twitch concurrent viewership continues to rise Source: TwitchApps October 2, 2015 | Interactive Entertainment 8Robert W. Baird & Co.
  9. 9. Figure 10: Gaming video content revenue by platforms 36% 43% 6% 2% 5% YouTube Twitch ESL Azubu MLG Source: SuperData Research Imagining the Future of eSports New broadcast networks and fantasy sports increase engagement and monetization. With Turner Broadcasting and video game developer Valve recently announcing a Counter-Strike Sports league to be aired on TBS, we expect a further push of eSports content into mainstream broadcast media. For example, there would be significant benefits to traditional cable and satellite companies in gaining relevance and viewership among younger demographics by becoming the aggregators and distributors of eSports content. We view this in parallel with the content also moving “over the top”. As mentioned above, cable broadcasting of Starcraft in Korea generated $200 million in 2007 alone, and given the increasing accessibility of eSports and the growing audience of highly engaged “enthusiasts,” eSports programming monetization potential has increased materially. We also see potential for content (IP) owners (e.g. video game publishers) to control their own distribution channels. According to Newzoo, 40% of all eSports viewers do not play any of the top eSports franchises, which draws a favorable parallel to traditional sports and indicates eSports possesses significant commercial potential as a “spectator sport.” We also note a growing interest in fantasy eSports. For comparison, the U.S. fantasy sports market has over 56.8 million participants and is valued at roughly $20 billion annually, according to the Fantasy Sports Trade Association. In our view, fantasy eSports has the potential to expand eSports monetization meaningfully through additional marketing and increased user engagement, as evidenced by Riot Games’ launch of an in-house fantasy League of Legends platform. Figure 11: Number of fantasy sports players October 2, 2015 | Interactive Entertainment 9Robert W. Baird & Co.
  10. 10. Sources: FSTA, R.W. Baird Daily Fantasy eSports is also beginning to gain meaningful traction, as evidenced by Fanduel’s acquisition of AlphaDraft, a leading DFeS platform, and Draftking’s launch of an in-house DFeS platform. According to Eiler’s Research, daily fantasy eSport sites will collect approximately $20 million in entry fees from 600,000 active users in 2015. Drawing parallels to traditional sports, we believe DFeS has the potential to materially expand monetization, as shown in Figure 12 below, the average player now spends approximately $257 annual on daily fantasy sports (vs. $5 in 2012), which is also more than $162 annual spend on traditional fantasy sports. Figure 12: Number of fantasy sports players $- $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 2012 2015 Materials Daily Fantasy Sports Traditional Fantasy Sports Source: FSTA October 2, 2015 | Interactive Entertainment 10Robert W. Baird & Co.
  11. 11. Revenue opportunity and biggest winners. In order to frame the revenue opportunity, we attempted to estimate the revenue per fan each sport generates. We combined the revenues generated from various professional sports leagues (>$50M revenue) with the estimated global fans for the respective sport. Naturally, major sport leagues are monetizing significantly better than the nascent eSports market, predominantly due to cable/broadcasting deals (Figure 13). According to Newzoo, the average eSports “enthusiast” currently generates ~$2. Figure 13: Revenue per fan of various sports ($ in Millions) Sport Revenue* Fans (Ms) Revenue/ Fan Football $11,335 400 $28 Basketball $5,077 400 $13 Baseball $10,315 500 $21 NASCAR $3,100 75 $41 eSports $192 101 $2 Sources: R.W. Baird, Company reports, Deloitte, Newzoo, Topend Sports Off the heels of a strong 2015, we see meaningful opportunity for fan monetization to increase in 2016 due to an increasing number of catalysts. In terms of sizing the eSports opportunity, we assume that growth will be driven by an increasing number of games that are eSports enabled, and a corresponding increase in players and viewers; for example, the recently announced Call of Duty World League and Turner’s Counter-Strike cable program. In addition, we expect a variety of new ways of monetizing eSports, including more events, in-game content, advertising, sponsorships, fantasy and wagering. Finally, we expect a broad increase in the number of points of distribution of eSports content, including new media networks. While there are a number of independent “eSports” leagues and competitions today, we believe it is very likely that at least some game publishers will decide to “in-source” or “verticalize” eSports content, although there would be significant benefits in utilizing media distributors (e.g. cable/satellite/OTT providers) to reach a broad (mainstream) viewer base. Figure 14: eSports on pace to hit $1 billion in revenues by 2018 B ase Case 20 14A 2 015 E 2 016 E 2 017 E 2 018 E 2 019 E 2 020 E CA G R World Population 7,266 7,349 7,433 7,515 7,597 7,678 7,758 1% Y/Y Growth 1.2% 1.2% 1.1% 1.1% 1.1% 1.1% 1.0% To tal N u m b er o f Ga m ers 1 ,77 5 1,9 84 2,2 30 2,4 80 2,6 59 2,8 41 2,9 48 9% % of Population 24% 27% 30% 33% 35% 37% 38% eSp o rts view ers 10 1 1 39 1 78 2 23 2 66 3 13 354 2 3% % of Global Gamers 5.7% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% Y/Y Growth - 38% 28% 25% 19% 18% 13% ARPU $1.90 $2.10 $2.50 $3.00 $3.75 $4.50 $5.25 eSp o rts R even u es $19 2 $2 92 $4 46 $6 70 $9 97 $ 1,4 06 $ 1,8 57 4 6% Y/Y Growth 52% 53% 50% 49% 41% 32% Sources: R.W. Baird, UN, Spil Games, SuperData Research, Newzoo Bull/Bear Scenarios: In our bull case, we assume that eSports viewer monetization will reach ~30% of the monetization of major sports, while our base case assumes a steadier ramp. Overall, the simple point is, even with relatively conservative assumptions on user growth and increased monetization, it is not difficult to foresee eSports being a $1 billion industry by 2018. Figure 15: eSport industry Bull/Bear case October 2, 2015 | Interactive Entertainment 11Robert W. Baird & Co.
  12. 12. B u ll Case 20 14A 2 015 E 2 016 E 2 017 E 2 018 E 2 019 E 2 020 E CA G R eSp o rts view ers 10 1 1 39 1 78 2 23 2 66 3 13 354 2 3% % of Global Gamers 5.7% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% Y/Y Growth - 38% 28% 25% 19% 18% 13% ARPU $1.90 $2.10 $4.00 $6.00 $7.00 $8.00 $8.50 eSp o rts R even u es $19 2 $2 92 $7 14 $ 1,3 39 $ 1,8 61 $ 2,5 00 $ 3,0 07 5 8% Y/Y Growth 52% 145% 88% 39% 34% 20% B ea r Case 20 14A 2 015 E 2 016 E 2 017 E 2 018 E 2 019 E 2 020 E CA G R eSp o rts view ers 10 1 1 39 1 78 2 23 2 66 3 13 354 2 3% % of Global Gamers 5.7% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% Y/Y Growth - 38% 28% 25% 19% 18% 13% ARPU $1.90 $2.10 $2.50 $2.75 $3.00 $3.25 $3.50 eSp o rts R even u es $19 2 $2 92 $4 46 $6 14 $7 98 $ 1,0 16 $ 1,2 38 3 6% Y/Y Growth 52% 53% 38% 30% 27% 22% Sources: R.W. Baird, UN, Spil Games, SuperData Research, Newzoo Developer support an important leg of the eSports stool. Of the leading western game publishers, we see Activision Blizzard as best leveraged to eSports growth for a number of reasons. When you look at the history of eSports, the top games grew out of hyper-competitive grassroots community (Halo, Super Smash Brothers); Activision Blizzard has a number of games with a large competitive community (Call of Duty, Starcraft, Hearthstone), and increasingly appears to be developing games with competitive design in mind (Overwatch releasing in 2016). However, looking back historically, the real inflection point for an eSports game growth is when developers prioritize support for tournaments (i.e., Riot Games, Valve). For example, Super Smash Brothers has been a staple in the eSports industry since its initial release on Nintendo 64; however, Nintendo has done very little to support matches until hosting the Super Smash Invitational at E3 this past year. With Nintendo’s support, the Super Smash Brothers Invitational proceeded to break the all-time concurrent viewership record for a fighting game tournament. As such, we believe that Activision’s future prospects in eSports are very positive, as the company appears to be a few steps ahead of other publishers in eSport investments, as illustrated by the company’s yearly world championships at Blizzcon, as well as the company’s previously mentioned Call of Duty League. We also believe that Electronic Arts will eventually launch greater eSports features within a number of its core franchises, even after ceasing support for EA Sports Arena last year. Figure 16: Layers of eSports Monetization 78% 4% 7% 7% 5% Broadcasting, Advertising, Sponsorships Tickets Fantasy eSports/Wagering Merchandise Other Tournaments Sources: R.W. Baird, SuperData Research October 2, 2015 | Interactive Entertainment 12Robert W. Baird & Co.
  13. 13. Appendix - Important Disclosures and Analyst Certification Covered Companies Mentioned All stock prices below are the October 1, 2015 closing price. Activision Blizzard, Inc. (ATVI - $31.46 - Outperform) Electronic Arts, Inc. (EA - $66.49 - Outperform) Take-Two Interactive Software, Inc. (TTWO - $29.39 - Neutral) (See recent research reports for more information) Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 0 8 16 24 32 40 2013 2014 2015 2016 08/02/13 O:$19 02/07/14 O:$22 08/06/14 O:$26 05/07/15 O:$27 08/05/15 O:$30 09/22/15 O:$36 Rating and Price Target History for: Activision Blizzard, Inc. (ATVI) as of 10-02-2015 Created by BlueMatrix Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 0 20 40 60 80 2013 2014 2015 2016 04/03/13 N:$19 07/24/13 N:$25 03/13/14 N:$33 05/07/14 O:$37 07/23/14 O:$43 10/29/14 O:$45 01/28/15 O:$56 05/06/15 O:$75 07/28/15 O:$80 Rating and Price Target History for: Electronic Arts, Inc. (EA) as of 10-02-2015 Created by BlueMatrix October 2, 2015 | Interactive Entertainment 13Robert W. Baird & Co.
  14. 14. Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 0 8 16 24 32 40 2013 2014 2015 2016 02/06/13 N:$13 05/14/13 N:$17 07/31/13 N:$19 05/14/14 N:$20 08/06/14 N:$21 10/30/14 N:$25 02/04/15 N:$34 05/19/15 N:$33 Rating and Price Target History for: Take-Two Interactive Software, Inc. (TTWO) as of 10-02-2015 Created by BlueMatrix 1 Robert W. Baird & Co. Incorporated makes a market in the securities of ATVI, EA and TTWO. 10 Robert W. Baird & Co. Incorporated and/or its affiliates have been compensated by Electronic Arts, Inc. for non-investment banking-securities related services in the past 12 months. Robert W. Baird & Co. Incorporated and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Robert W. Baird & Co. Incorporated may not be licensed to execute transactions in all foreign listed securities directly. Transactions in foreign listed securities may be prohibited for residents of the United States. Please contact a Baird representative for more information. Investment Ratings: Outperform (O) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H - Higher Risk - Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of September 30, 2015, Baird U.S. Equity Research covered 737 companies, with 51% rated Outperform/Buy, 48% rated Neutral/Hold and 1% rated Underperform/Sell. Within these rating categories, 13% of Outperform/Buy-rated, 6% of Neutral/Hold-rated and 1% rated Underperform/Sell companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) the correlation between the analyst's recommendations and stock price performance; 2) ratings and direct feedback from our investing clients, our institutional and retail sales force (as applicable) and from independent rating services; 3) the analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort and 4) compliance with all of Robert W. Baird’s internal policies and procedures. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx . You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 777 E. Wisconsin Avenue, Milwaukee, WI 53202. Analyst Certification. The senior research analyst(s) certifies that the views expressed in this research report and/or financial model October 2, 2015 | Interactive Entertainment 14Robert W. Baird & Co.
  15. 15. accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Disclaimers Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. 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This material is not intended for persons in jurisdictions where the distribution or publication of this research report is not permitted under the applicable laws or regulations of such jurisdiction. Investment involves risk. The price of securities may fluctuate and past performance is not indicative of future results. Any recommendation contained in the research report does not have regard to the specific investment objectives, financial situation and the particular needs of any individuals. You are advised to exercise caution in relation to the research report. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. RWBL is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the FCA under UK laws, which may differ from Australian laws. This document has been prepared in accordance with FCA requirements and not Australian laws. Dividend Yield. As used in this report, the term “dividend yield” refers, on a percentage basis, to the historical distributions made by the issuer relative to its current market price. Such distributions are not guaranteed, may be modified at the issuer’s discretion, may exceed operating cash flow, subsidized by borrowed funds or include a return of investment principal. Ask the analyst a question Click here to unsubscribe October 2, 2015 | Interactive Entertainment 15Robert W. Baird & Co.

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