Transformation of Sports Betting

A recent conversation with one of the most colourful characters in global sports betting, Harry Findlay, reminded me how rarely most entrepreneurs have a truly transformative idea.

The advent of betting exchanges, in particular Betfair, has had a 3-dimensional impact on European bookmakers (margins – the profit on every transaction; velocity – the speed at which they collect cash; volumes – traded bets).

Today’s sports betting business resembles a fraying rope, at one end, the commodity or mass market giants, Bet365 and Paddy Power Betfair dominate with huge marketing budgets driving increasing mobile betting volumes amongst the £5-£10 recreational players. At the other lie a small number of “premium” boutiques and large international (Asia) betting firms, competing on differentiated service and a volition to “lay” a £1,000+ bet.

Mass-market sports betting is akin to retail supermarkets. High volume, low margin and viciously cut throat competition will prevail over the next 3 years.

The “premium” player end is no less competitive. The need for scale, a powerful brand, the passion and competency to deliver a high-touch premium customer experience and a competitive balance sheet will defeat many of today’s incumbents. Too small, too niche, too busy prioritising commodity players and too weak.

Yet the sports betting industry despite increased regulatory pressure, changes in societal mores and disruptive technology, doesn’t lack for wannnabe entrepreneurs. Most though never end up with anything more than a small business. There is a pressing need today to think bigger.

The big opportunity in sports betting is not in isolation, a rival trading platform to Betfair. The transformative idea is a business that is able to transform the market size exponentially, professionalise it and turn it into an institutional quality, alternative investment class. That’s why businesses such as Stratagem, Smartodds and Starlizard are an object of serious interest to investors, outside the confines of the professional gambler’s lair.

The naysayers decry the randomness of sports results, to support their argument that this will never happen. What is not random about catastrophic Gulf hurricanes, Mexican earthquakes and California wildfires?

Parallels can be found with the way that insurance risk was “trapped” amongst insurance and reinsurance players upto the late 1990s. Offering non-correlated risk to professional investors and healthy yields, today close to 20% of the total pie is now diverted to the capital markets via insurance linked securities. Why should sports betting risk be “trapped” amongst existing incumbents with relatively small balance sheets?

Just as with insurance risk, the evolution requires a business with

  1. Discernible and practical value. Superior data and analytics to turn data into information, information into knowledge and ultimately, knowledge into wisdom consistent with the investor’s strategic goals.
  2. A clear, accurate idea of the professional investors of today and tomorrow?
  3. The intellectual firepower to attract and retain professional players and investors (structuring and matching capital with risk)
  4. Intelligent pricing skills and judgement (quantitative and qualitative).
  5. Commitment to constant innovation and reinvention (new products, new markets, new technology and new relationships)

Perhaps that is one of the above businesses or an entrepreneur quietly making waves but yet to attract the glare of media attention. Either way, the sports betting industry is primed for dramatic reinvention just not in the manner most market observers have presumed.

© James Berkeley 2017. All Rights Reserved.

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