Edition 26: Pick Buying: A Massive TAM but no buzz
How can we explain it?
Happy Monday and happy 1/2 year anniversary of The Handle! One week closer to the New Year and 2021 sure has flown by. Hoping you and your loved ones have a healthy and happy holiday season!
This week, we’re going to spitball an estimate on the Total Addressable Market (TAM) for pick buying among casual bettors, and then dive into why we haven’t seen the level of investment and interest that generally comes from a sizable TAM in a fast-growing sector.
Today’s The Handle is brought to you by Wagers, the premier platform for USA sports betting news, startup information, and stock performance. Check them out!
The Pick Buying Market
To estimate the size of the market, we need to have an idea of how many people bet on sports. We’ll use an estimate from the American Gaming Association that estimated 7.6 million people legally gambled in 2020 on legal books. In 2021, new states have legalized gambling and the market has matured, so we feel confident saying there are probably 10 million Americans, who are regularly betting this NFL season. Considering that long ago gambling was among the biggest taboos in American society, this is remarkable, but that’s not the point of this newsletter.
Now, for the long-time readers, we went back to the well and conducted an informal survey of 100 bettors in our generation on what their opinions on pick buying were. Unfortunately, we don’t have anything to incentivize these bettors to take our survey, so we assumed a $10 a month price point for 10 months of the year, or $100 annually and asked if they would be willing to purchase a subscription for what they believed to be a winning bettor’s picks. Our answers shocked us. We got 65 people who said they would either definitely purchase, or strongly consider purchasing this package. I’ve been consuming gambling media and know that buying picks is a -EV proposition, but I have to remind myself that I’m not the average bettor. Anyway, the point is not to make a normative judgement on pick buying, but rather to get across that it is a very popular course of action for bettors.
So let’s do a quick back of the envelope calculation. Generously assume 50% of bettors on regulated apps would pay $100 a year for picks they thought would win, and that there will be 10 million people on regulated books in 2021, boom, you get a billion dollar TAM. Note, this TAM is likely growing as the number of Americans regularly betting on sports legally increases with each new state with legalization, and if someone’s picks really were winning, it’s likely that more than 50% of bettors would be willing to buy the picks. Long story short, a $1 billion TAM is in the ballpark for 2021, but likely on the lower end of the spectrum in the years ahead.
So where are all the companies?
This is a bit of a technical question that we are going to dive into here. The TLDR for the lack of interest in companies that sell winning picks is that selling winning picks is anti-scaling, meaning that any individual company has almost no ability to scale and onboard new customers.
But let’s take it from the top. First, it is really really hard to beat the market in major sports, which ostensibly is what people would want to buy picks for. No one wants to buy picks for second division soccer in Lithuania, they want to buy picks for the NFL games they are watching with their buddies on Sunday. As a result, even if a pick seller goes on a hot streak, it’s more likely that they were lucky than skillfully beating the market. Consumers will continue to pay citing long winning streaks as a result of survivorship bias, even considering most touts will fudge the numbers in terms of their record, CLV %, or ROI %. Even in a situation where they were simply flipping a coin, assuming each pick was independent, the likely outcome is the pick seller would revert to being a long term loser even though they appeared to be a winner after one NFL season. As a result, it is likely that once a pick selling business starts consistently losing, their customers will be gone.
Next comes the residual skepticism from bettors. If someone is trying to sell me picks, especially in an incredibly liquid market like the NFL, my first question is going to be why don’t you just bet it yourself. Now there are answers that justify pick selling, but those come from real professionals, not the guy with 1,100 twitter followers who's claiming he’s been limited at every book because he’s up fat stacks of cash. Intuitively, if a bet wins, why wouldn’t the pick seller simply scale the operation and bet more himself which would be far more profitable than just taking my $100 a year subscription.
Now we are getting into the meat of it, specifically, why pick selling does not scale. Let’s pretend I’ve found the holy grail. A winning pick seller. Someone who sells NFL picks on Sunday morning that I can bet and reliably wins. I tell all my friends about this guy (or girl), and they tell their friends. All of a sudden, this pick seller has 1000s of subscribers. That’s great right? Wrong. As soon as this consistently winning bettor releases his plays at scale, books will move the line in response to his action. As a result, not all of the people buying the pick will be able to get down at the same number our pick seller did. The people who might have gotten +6 instead of +7 will be long term losers on this pick, even though they paid the same amount as the people who were fast enough to get down at +7. The losers will eventually stop paying for the service because they no longer have access to reliably winning picks, and scale fails to happen. This is what we mean by pick selling being anti-scale.
BRIEF ASIDE: Time to explore why pick selling is -EV for the average bettor. Let’s pretend that we have found a winning bettor who sells picks! He hits 53% of the time at -110, and clears the threshold for profitability of 52.54%. Let’s say he charges $100 for 25 plays, or $4 a play. Seems pretty reasonable right? We’re looking at recreational bettors, so let’s say the average bettor is putting down 55 to win 50 on each of these wagers. Effectively, because we have to add the cost of the pick service into the vigorish, it becomes 59 to win 50! At 59 to win 50, or -118, our pick seller needs to win 54% of the time! Now, with the pick seller’s fee included, these picks are actually -EV for us, and we are long term losers.
Pick selling is not only unlikely to scale, but the space is flooded with bad actors such as Vegas Dave or Stu Feiner capitalizing on the lack of reliable bettor education. These fraudulent touts engage in malpractice marketing techniques such as intentionally obscuring results and playing with the psychological heartstrings of rudimentary bettors lacking an understanding of EV. There are even entire Twitter feeds dedicated to exposing Vegas Dave.
Long story short, we at The Handle have the long-term health and safety of bettors in mind. While not all bettors with a Twitter following are playing -EV bets, we generally disavow folks selling picks online. The lack of transparency is problematic with a lack of available tools in the market to check these touts' records and verify the picks they’re selling. Check out the product over at Betstamp, a platform built by legitimate sports bettors with functionality built-in to verify lines and records. Their product does a good job of verifying pick-sellers accurately and taking away some of the dark clouds around the industry.
All in all, the fact that bookmakers move the line in response to a wager from a winning bettor means that pick selling is never going to be a place where one company can consolidate a solid place in the market while also providing value for bettors. Be skeptical of any company or individual that claims it will corner the pick selling market.
Miscellaneous Content Consumption
Press
Check out the Earnings+More weekend edition of their newsletter, where they dive into LV Sands/888 bid rumors, retail betting in Maryland going live, and more here.
Pat McAfee re-upped with FanDuel Sportsbook on a new four-year, $120M dollar deal to be the exclusive sponsor of The Pat McAfee Show. Chris Altruda with more here.
Tweets of the week
Chris Krafcik with some thoughts on Churchill’s potential sale of TwinSpires, including some strategic buyer possibilities:
Sportradar & Kambi announce a five-year extension:
Jeff Edelstein on the DraftKings & NFL NFT deal announced last week:
Dave and Busters getting involved in the industry? Alfonso Straffon took this quote out of their 3Q21 earnings call.
Sporttrade CEO Alex Kane with some thoughts on Ohio's legislative process.
Pods of the week