Game On! (Well, Sorta...Maybe?)

Monday, in a mostly expected move, the Supreme Court struck down a federal ban prohibiting sports betting. The move opens the door for states to legalize sports wagering under their own terms, with analysts expecting several dozen states to flood in, likely as early as Memorial Day in the state of New Jersey. Enthusiasts embraced the move as opening the floodgates to embracing, regulating and taxing the $150B or so odd dollars that are wagered “illegally” every year.

But as my friend Greg Bettinelli pointed out on Twitter, history suggests it’s best to temper that enthusiasm. In a lengthy tweetstorm, he noted that expectations are too high – that sports betting is a relatively low margin (5%) product, that regulatory demands will constrain innovation, and that supply of offerings is likely to far exceed demand.

The floodgates for legalized sports in US opened as Supreme Court ruled in favor of New Jersey (7-2), striking down Professional and Amateur Sports Protection Act (PASPA). Law banned sports betting outside of Nevada. Decision says federal law violated NJ's 10th Amendment rights.

— Greg Bettinelli (@gregbettinelli) May 14, 2018

Online poker’s regulatory journey is equally instructive. Now fully legal and regulated in three US states – Nevada, NJ and Delaware – online poker revenues in those states are about as disappointing as possible. When online poker launched in 2013, The NJ state’s Treasurer initially estimated that online gambling would generate $180 million in tax revenues in its first fiscal year; that number was subsequently revised downward to $34 million in March 2014 and hasn’t recovered. Nevada, for its part, nearly five years later is still generating less than a million dollars a month in online poker revenues.

Sports betting bulls have been quick to point out the fundamental difference to me – namely that poker is a product that demands wide pools of liquidity. Any attempt to separate player pools by state reduces the number of games, prize pools, and enjoyment – therefore, its poor showing in a state partitioned and regulated environment is unsurprising.

That is true, but the inverse is also problematic: because sports betting is a product that lacks network effects, it is intrinsically commoditized. In fact, nearly all casino gambling is commoditized*. Las Vegas casinos correctly recognized this risk in the early aughts and invested heavily in entertainment, food and retail complements to their gaming operations in order to differentiate their brands; Since 2004, gaming revenues have represented less than 50% of Las Vegas casino revenues and the trend is accelerating every year.

Gaming-Vs-Non-Gaming-Revenue-

But entertainment in the form of restaurants and nightlife do not really, in my opinion, have a digital analog. That means that most platforms or companies that could otherwise integrate sports wagering will be offering an uninspired, off the shelf product, no different than the ad networks that run at the bottom websites.

There is however an exception: daily fantasy sports platforms. As I noted three years ago in Game Over: Why Daily Fantasy Has Already Been Won, DFS has an extraordinarily high amount of network effects and platform lock-in. Unlike any given media property or even a specific sports team’s digital properties, Fanduel and Draftkings, through their heavy spend on product and R&D have built a powerful ecosystem of games, liquidity and entertainment. If there is any digital analog to Vegas casinos, I suspect it is these DFS operators that already provide real-time, 2nd screen entertainment for sports games and are likely to be the beneficiary of much of the increased focus on real money sports wagering.

The news this morning that Paddy Power Betfair is looking to purchase Fanduel is therefore unsurprising. Unfortunately for entrepreneurs, I continue to believe that there is not much white space for new DFS entrants. But there may be new opportunities: founders who are building sticky, digitally native entertainment platforms for sports have all of the sudden become the perfect partnership for an otherwise commodity product.

*Sports betting has some same-side network effects in that more bettors do allow for larger wagers to be accepted or some differences (and therefore edge) in game spreads.