Edition 17: The chicken-and-egg problem between innovative sports betting tech and deeper liquidity

The age old question applied to concern of deep liquidity in sports betting markets

Oct 11, 2021

Good morning and welcome to Edition 17 of the Handle. We’re happy to have all of you here for another edition, and this week we will be diving into the age old chicken-and-egg problem regarding innovative sports technology and the simple, casual bettor. Enjoy!

Through the beginning of this football season, it has become exceptionally clear to us at The Handle that recreational bettors, for the most part (looking at you with your egregious monopoly, New Hampshire) have it pretty good.

You might be wondering… what grounds do we stand on to say that? Investors and operators alike are throwing out buzzwords and lofty valuations to reel in casual bettors and enhance their betting experience. If this is the case, how can we believe the status quo isn’t too shabby?

Well, we are the early 20s casual bettors everybody and their mother is targeting in attempts to acquire and retain as customers. Our demographic, 21-22 year old passionate sports fans, simply aren’t yearning for that much more at the moment.

Recreational bettors in most big states have at least a handful of operators to choose between, the standard offering is -110 which many see as a fair standard, and for the most part, bettors can bet from the comfort of their couch. Moreover, bettors can reliably get down the $50-$100 they want on any given event. The live betting product for recreational bettors may not be perfect, but the average bettor doesn’t want to be trading in and out of positions while watching the game, they just occasionally like to get get some extra action during commercials. Deposits and withdrawals are fairly reliable and the user interfaces for most of the platforms (except Sugarhouse, someone please help them) are spectacular.

The point we are making here is that most of the current product innovation isn’t going to be a slam-dunk difference maker for someone who casually wants to bet on an NFL game Sunday morning before kickoff. Having an automover won’t make a difference to this guy or girl as long as the book is willing to take the square $100 bet. Having a functional app will always be more important than offering every single plausible microbet. Even more importantly, these groups of bettors are getting accustomed to paying -110 as the standard for their bets, meaning that they would be thrilled if they got to pay -105 but there is no consumer urgency for creating the type of liquidity that this transformation would require.

Unsurprisingly, everyone agrees that the “casual bettor” we are talking about above is the backbone and future of the industry. The stable, long-term loser who is able to bet in smaller increments, but does not quickly burn out. If the books get lucky, they may even convince this person to spend some time in the online casino.

We have heard some voices clamor for the advent of financial market type technology via betting exchanges like Sporttrade or Prophet Exchange. Supporters of the exchange model claim there is latent liquidity waiting on the sideline to jump in and allowing for a lower vig and taking action on bigger bets. This type of argument is very in the vein of “If you build it they will come”, with the they referring to deep pocketed market makers and others who would be willing to wager thousands and thousands of dollars on a Tuesday afternoon baseball game.

In order to educate and onboard casual bettors of the benefits of a model like this, high network efforts and widespread adoption are necessary and likely years away. And again, the recreational bettor has it pretty good now.

On the other hand, building new technology to allow for the “finaclilzation” of sports bettingis incredibly difficult and expensive. Especially considering we are just positing that this latent liquidity exists, which we will assume for the sake of argument in this article, but have actually no idea the extent to which that is the case Building technology like this requires significant numbers of competent software developers and funding. It requires strong knowledge of software, sports betting, and financial markets, and that trio of competence gets expensive.

Is it really worth it for investors to provide the capital required to create the infrastructure necessary to bring the latent liquidity off of the sidelines and into the game if there is no strong evidence it exists or what the margins will look like? Investors wouldn’t be betting on the backbone of the long time staple of the sports betting world, the casual bettor, but rather the strength of finance type transactions in the United States, where sports betting is still in its toddler phase.

Now, there is some investigation that could be done into the work Nellie Analytics is doing across the pond, and those with deep knowledge of capital markets may find themselves talking to hedge fund managers who want to get involved in trading on sports and thus be able to convince VCs to pony up the capital to make the technology required to financialize sports betting.

This is the essence of the chicken and the egg issue facing this type of widespread adoption. The latent liquidity has no interest in jumping off the sidelines in the era of the soft book. At the same time, investors have limited incentive to back a technology that will depend on a pool of liquidity that is not currently in the marketplace to be profitable.

With all of the excitement around sports betting right now, it may be a now or never moment for these types of technologies. Capital is flush and investors are excited, evident by the weekly multi-million dollar valuation in the news. Hedge fund managers and bankers still think the NFL is incredibly beatable market (lol you aren’t beating the NFL on Sunday with Excel unless you are @PlusEVAnalytics) and if that perception dries up, so will the perception that there is all of this latent liquidity that justifies this type of investment.

Notice what hasn’t been mentioned in the past few paragraphs? The casual bettor, whose experience may be only marginally improved by the adoption of the above model. But it likely won’t bring as many new casual bettors off the sideline or make them bet more. It won’t change their experience or desire to bet $100 dollars on Tom Brady to cover against the Patriots at 7:30pm on Sunday night, likely on a PPH account somewhere tailing the same bet as a few of one’s buddies. It won’t make it easier for them to withdraw their money after a big win. It won’t solve problem gambling issues. And it certainly won’t capture the nuances that personalization or socialization of betting require to be successful.

All of this is to say we think the backbone of this industry is the casual bettor and they have it pretty good right now. When developing new products and spending heaps of capital on technological innovations to elevate the casual bettor experience, we hope the players in the market actually do their due diligence and speak to casual bettors to develop and roll out new features the right way. We are excited about the innovation that develops and hope it actually keeps the casual bettor in mind, because we’re not so sure if you build it they’ll come.

Miscellaneous Recent Consumption

Press
- There is a lengthy delay in the launch of mobile CT sports betting, meaning bettors will need to wait until week 6 of NFL season to bet online. Matt Waters of Legal Sports Report with more here.
- I came across this piece By Lloyd Danzig last night and think it’s a must-read. Danzig, Managing Partner of Sharp Alpha Advisors, posted a 20-minute read last August on The Sports Betting Industry in 2020: A Tale of Substitute Products & Negative Switching Costs. Danzig discusses the state of US betting, the gamification of “smacktalk culture”, the innovator’s dilemma, and more in this pseudo-manifesto on the state of the industry.
- MGM Resorts will seek to gain full control over BetMGM if DraftKings successfully purchases Entain (DK submitted a $22.4 billion bid for Entain). Front Office Sports with more here.
- World Wide Wob (Rob Perez) and Underdog Fantasy Announced a partnership. Rob was previously partnered with FanDuel. Video release here.
Twitter
- Interesting tweet here with Pinnacle’s Data Scientist job posting and the technical skills required to land the gig.