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Sharp Alpha Advisors: betting intelligence drives performance

By - 26 November 2020

Prior to his appearance at Betting on Sports America – Digital on December 1-2, Lloyd Danzig, Founder and CEO of Sharp Alpha Advisors, offers G3 his insight on the US sports betting landscape.

In a wide-ranging interview, Lloyd explains why now is a great time to be an investor, the continuing significance of social betting stateside and the role of AI towards greater customisation and personalisation within the user experience.

What advice would you give entrepreneurs looking to take advantage of the US sports betting industry?

There has never been a better time to be an entrepreneur with a passion for competitive entertainment, especially within sport betting. The industry is at an inflection point, with billions of dollars in annual growth expected for at least the next decade. While market leaders will continue to pave the foundation for this growth, competitive forces are such that early-stage companies are poised to capture enormous value in return for supplying much-needed innovation. The first sports betting “unicorn” has not yet been crowned, and perhaps has not yet been founded.

On that note, I would advise any prospective entrepreneurs to absolutely try and bring their ideas to life, while keeping a few words of caution in mind. Being a die-hard sports fan or lifelong sports bettor is not sufficient to guarantee success. First-time founders reliably find it more difficult to raise capital than they ever imagined, though that seems to be the case in every industry. Adapting to the severe regulatory burden associated with gaming is a particular hurdle that many start-ups struggle with.

Ultimately, there will be more than enough reward to cover the risks incurred by sports betting entrepreneurs, but those rewards will not be distributed uniformly.

We are still in the nascent stages of sports betting in the US. How has Covid-19 impacted the sports betting investment landscape? Are there now greater opportunities for investors?

Putting aside the immense personal hardship caused by COVID-19 and noting that this is not a recommendation to buy or sell securities, the sports betting investment landscape appears to have benefited significantly from both a supply and demand perspective. Start-up deal flow is more robust than ever, albeit concentrated in the Pre-Seed, Seed, and Series A stages. Public valuations and liquidity are at all-time highs, though some feel this to be unwarranted. An increasing number of angel investors, private funds, family offices, and SPACs (Special Purpose Acquisition Companies) are supplying capital to fuel the industry’s exponential growth. There is even a sports betting ETF that offers investors broad-based exposure to the entire business landscape via a diversified basket of public companies.

The success of DraftKings and Penn/Barstool stock prices as well as the seemingly ubiquitous coverage of their performance comes at a time when retail trading has taken on an unprecedentedly social and thematic aspect, while also having an outsized impact on the markets.

There is reason to believe that the growth of sports betting may exceed even the most bullish of expectations. For example, Goldman Sachs expects companies in this industry to be primary beneficiaries of an estimated US$230bn in annual discretionary spending that is being reallocated as a result of COVID-related restrictions and behavioural shifts.

As great of a time as it is to be a sports betting entrepreneur, it is an even better time to be an investor in the space. Unprecedented fiscal stimulus and accommodative monetary policy have resulted in a low interest rate environment where capital is cheap, but yield is hard to find. Those with a proper risk appetite and investment horizon as well as an eye for undervalued assets will have significant opportunities to outperform the broader market.

Of course, the world economy is mired in extraordinary uncertainty and volatility. Predicting market movements over the short and medium terms is made extremely difficult by the amount of noise and exogenous influence in the system, hence the many references we hear to analysts being “cautiously optimistic”. Over the long term, however, the outlook appears more resolutely bullish.

Why are high profile mergers and acquisitions happening now?

M&A activity continues to be driven by access to customers, gaming licences, and technology. Given that the mature market is expected to be dominated by relatively few players, the scarcity of premium media properties and technology vendors has compounded the exuberance surrounding the industry to produce the current flood of deal activity.

You frequently hear references to the state of the US market as being a “land grab” or “gold rush.” This reflects the frenzied nature of attempts to secure first-mover advantages and market share leadership positions in new jurisdictions, as additional states continue to legalise sports betting.

Consider the case of DraftKings with over US$1bn in cash on the balance sheet and no debt. In that position, strategic M&A represents one of the most compelling mechanisms for efficiently improving competitive advantages, expanding reach, and ultimately driving long term profitability.

There is also a growing push for sports betting operators to be as vertically integrated as possible. This is accomplished by building core functionalities in-house as well as by integrating them via M&A, with the goal being something close to complete ownership and control over the entirety of the sports betting stack.

Looking forward, there is a pervasive expectation of consolidation within the industry, both in terms of corporate structures and user interfaces. A market dominated by a small number of participants, all of whom attempt to compete by offering “one-stop shop” sports betting experiences, will likely come to fruition largely due to the mergers and acquisitions that enable profit-maximising business combinations and integrations.

How significant is the social element of sports betting?

It is difficult to overstate the importance of the social element of sports betting, particularly in the US. One simply needs to compare a William Hill betting parlour in even the nicest part of London with a randomly selected Las Vegas sportsbook to quickly notice the unique sociocultural role that betting plays in the United States. A majority of lifelong sports bettors and fantasy sports players will report that bragging rights, social engagement, and friendly rivalry are the most valuable components of their experience. While only a very small percentage will actually be profitable over the long run, a majority prioritise the entertainment that sports betting provides, especially in a social context.

There is ample evidence to support this point. Last year, US$8.5bn was wagered on March Madness with over half, US$4.6bn, being wagered through bracket pools. 76 per cent of NFL bettors continue to place wagers with friends and family or in office pools and fantasy contests. 63 per cent of bettors report being more likely to gather with friends or family to watch a game if they have wagered on it. One third of sports fans say they would be more likely to place a bet on a game if a friend, family member, or co-worker was doing the same. The list goes on.

And yet, current product offerings are relatively devoid of social functionality. It is not as if the decision makers at DraftKings and FanDuel are unaware of this factor, it’s just that market forces currently make it cost prohibitive to develop disruptive innovation in house. A large contributor to the US$4.5bn valuation placed on the Barstool Sportsbook before its launch was the expectation that they would leverage their social influence to acquire and retain customers at a vastly cheaper rate than the competition.

With Barstool representing the exception rather than the rule, there is a ton of activity in the start-up arena focused on filling this exact void. For example, Betcha is a real money player prop platform that offers users an odds boost when they place a bet on the same game as a friend, regardless of whether it is the same bet. Especially as Barstool continues to succeed in leveraging their personalities and community to drive handle, this topic will gain mainstream awareness.

Right now, a prospective user considers a number of factors when selecting a sportsbook, such as pricing, promotions, and user interface. However, the sportsbooks that their friends use are not likely to materially influence decision making. This differs greatly from most adjacent industries such as video gaming, social media, and connected fitness, where network effects are brand-specific within peer groups. While this has been the status quo in virtually every international sports betting market for over a decade, a tectonic shift is emerging whereby betting platforms of the future may feature social functionality even more prominently than odds.

Is enough being done to educate American sports bettors?

I suppose that what constitutes “enough” will vary based on whose perspective you are talking about, but right now I don’t think there is anyone who would say the answer to this question is “yes” in relation to the US market.

According to the AGA, 55 per cent of US sports bettors who place most of their wagers through illegal operators actually believe themselves to be betting legally. This is especially significant because the same AGA study showed that 74per cent of all US sports bettors say that it is important to only bet through legal, regulated channels.

In addition, 90 per cent of sports bettors say they are interested in content that will help refine and inform their wagering decisions. A number of early-stage companies are building solutions that can live as independent products but also be integrated into online sportsbooks or media platforms. For example, Fansure is a start-up that offers B2C solutions, which help sports fans find compelling betting trends, as well as B2B products, which assist media platforms in automating the integration of betting-related information into their content.

At the same time, established operators and suppliers are building software to address the surge in demand for more analytically oriented betting content.

Of course, operators will always face a tension between providing users with information that drives betting activity and enabling those users to gain a statistical edge that would be financially detrimental to the operator.

Still, the “Betting Intelligence” category is one of the fastest growing verticals in the sports betting industry today.

How do you see the role of artificial intelligence evolving?

Artificial Intelligence is most commonly found in places where pattern recognition and predictive analytics are playing or could play a critical role in a business model. For example, companies like Netflix and TikTok use AI to analyse past viewing behaviours in order to recommend the content a user is most likely to want to consume right now.

Within the sports betting industry, oddsmaking, and risk management are popular use cases, particularly because they are processes which already attract quantitative approaches. On the back-end, AI is being applied in the service of processing payments and conducting KYC/AML checks more efficiently.

In all of these cases, analytical frameworks can be used to recognise patterns in historical data and then make predictions relevant to a business case. For example, a basketball team’s past performance can be used to predict its likelihood of winning a particular game. A trail of fraudulent transactions can be audited in order to reveal correlations, which can then be leveraged to detect suspicious activity in real time.

Machine Learning offers a competitive advantage, when compared to current industry standards, in processing vast amounts of data and detecting patterns very quickly. It is also utilised by companies across industries to deliver curated content, advertisements, price points, and experiences based on users’ past behaviour.

As the sports betting industry continues to evolve, Machine Learning will drive the trend toward more customisation and personalisation within the user experience.

What are automated sports betting bots?

Sports betting bots are software programmes, typically built on top of forecasting models which seek out differences between internal predictions for event probabilities and those implied by available betting odds. When the programme identifies wagering opportunities that meet certain criteria, often in terms of expected value, it executes those wagers instantaneously. Certain bots are designed to specifically find arbitrage opportunities between sportsbooks or those that arise from the exploitation of promotions. Others rely on superior data science skills and predictive capabilities that allow for the identification of mispriced odds.

Automated sports betting strategies are most commonly found in markets that contain betting exchanges. This is because the operators of an exchange, like Betfair in the UK, maintain a riskless position as relates to market events. Since exchanges simply take a commission on winnings by pairing opposing bettors together, their main incentive is to maximise the liquidity and volume moving across the platform. As such, exchanges often publish APIs and encourage the development of automated trading tools such as sports betting bots.

In contrast, fixed odds operators are functioning as the counterparty to every bet taken and, thus, sit in zero-sum relationship with customers in the context of any individual wager. This incentivises the operator to minimise the action accepted from successful and sophisticated customers, especially those that may be using algorithmic approaches to identifying profitable bets.

While the growth of sports betting will continue to fuel interest in automated trading strategies, fixed odds operators in the US are unlikely to welcome them on-platform any time soon.

How can companies ensure they leverage AI efficiently, specifically machine learning?

Properly and efficiently leveraging Artificial Intelligence (AI) and Machine Learning (ML) requires that a business possess an adequately nuanced understanding of the technology and how it can enhance the execution of their value proposition. It is critical, but often quite complicated, to conduct high-fidelity cost/benefit analyses. Organisations also must properly bridge the communication gap that often exists between technical practitioners and non-technical business leaders.

The most powerful Machine Learning models in the world are rendered useless in the face of biased, incomplete, or unstructured data sets. They are also susceptible to producing unexpected results when encountering foreign situations. Thus, intellectual capital is often the most valuable resource that can drive the proper infusion of AI into a business model.

Over the long-term, efficiently leveraging AI/ML will demand that the proper procedures and protocols are in place to ensure that the technology functions in the manner intended and doesn’t distract from the company’s ability to execute on its core competencies.

Will blockchain technology become more mainstream in the coming years?

Blockchain technology offers a number of compelling value-adds to the sports betting industry. Users benefit from the ease of deposits, guaranteed and timely nature of payouts, and transparency as relates to the integrity of the bookmaker or exchange. A properly implemented blockchain allows wagers to be placed without permitting any single party, including the business operator, to alter historical betting records or delay payment.

The relative attractiveness of these features tends to vary geographically depending on the availability of substitute products in any given region, which is often directly linked to respective regulatory frameworks.

To the extent that a blockchain-based platform offers users desirable functionality that competitors do not, for example peer-to-peer betting in the US, there is certainly an opportunity to capitalise on the broader growth in cryptocurrency and distributed ledger technology. That said, the hurdles of customer education and market adoption, not to mention legislative risk, may provide regulated online B2C operators with a head start in combating these competitive advantages.

With the fragmented regulatory landscape within the US as a tailwind, blockchain technologists have a great opportunity to provide disruptive sports betting innovation, but also a number of challenges to overcome in the process.

What is the future for sports betting in the United States? How do you foresee the landscape changing in the next twelve months?

Over the next 12 months, we will continue to see operators enter into partnerships with media companies, teams, leagues, universities, and technology suppliers. Market access and customer acquisition will be some of the primary motivating factors.

We will also start to see more deal activity that brings critical functionality in-house. In an effort to further vertically integrate their offerings, operators will consider the acquisition of video streaming, oddsmaking, and payment processing technologies, among others.

From a regulatory perspective, 2021 is a non-election year with key legislative bodies in session. Potentially accelerated by COVID-related shortfalls in state tax revenue, it is expected to be a year that significantly expands the addressable sports betting market in the US.

I often think back to the first season-long fantasy baseball league I played in back in 2001. At the time, no one referred to them as “season-long” contests because there were no other varieties, such as daily fantasy, to warrant the qualification. Back then, speculation about the future of fantasy sports completely excluded the DFS category that ultimately came to completely redefine the industry. It is likely that a similar phenomenon is currently at play in the sports betting space, where future market projections fail to capture key revenue categories that simply do not exist today.

Ultimately, the growth and development of the sports betting market is occurring at a time when the entire fan engagement ecosystem is undergoing a process of digitisation, gamification, and interoperabilitisation. The result should be a more robust fan experience, both at home and in-stadium, supported by an extensive collection of products and services that better enable users to engage with and enjoy their favourite teams and athletes.

Sharp Alpha Advisors is an advisory firm and consultancy that specialises in sports betting startups, investments, and technology. We help early stage companies that are leveraging innovation to capitalise on the growth of the industry. We also advise venture capital firms in sourcing and evaluating investment opportunities.

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