🏇🏻 A League of Their Own
How tech & crypto are changing the fundamentals of fan participation and sports betting for the better
Welcome to Startup ROI, where we explore global technology trends and how they manifest themselves in France. Whether you're an entrepreneur, investor or tech enthusiast, I'm glad to have you here! This week, I review the intersection of sports gambling, gaming & crypto. If you enjoy this, go ahead and subscribe to receive a weekly newsletter to your inbox. Thanks for being a part of the community!
Today's Spread:
Playing with House Money
Bonfire of the Rarities
PMU: Hippodrome History
Same Game(s), Different Platform(s)
Know When to Hold'em, Know When to Fold'em
Playing with House Money
I had the pleasure of spending last week in a luxurious villa nestled in the hills on the Cote D'Azur. The picturesque town, Villefranche-sur-Mer, sports views of the coastline and is only a stone's throw from Monaco, the sovereign state and principality straddling the French Riviera and northern Italy. We took a boat ride one afternoon, departing from a marina in the neighboring village, Beaulieu-sur-mer and headed east, weaving through mega-yachts and fisherman alike until we found ourselves face to face with the microstate known as a playground for the nouveau riche. Across the water, I spotted the casino, prominently positioned among the architectural hodge-podge. I couldn't help but think of Dirty Rotten Scoundrels, a broadway theater hit turned film comedy classic featuring Steve Martin and Michael Caine in which the two con-men trick wealthy women into handing over large chunks of their savings (in the fictional town of Beaumont-sur-mer of all things!). It got me thinking about gaming and gambling and how tech may transform or flat out change it for the next generation.
Today, we'll evaluate the world of sports betting and it's convergence with gaming culture and crypto. Sports betting has a storied history in France but today it's the tech companies who are radically altering the way we play the game.
Bonfire of the Rarities
I'm neither a gambler nor a sports fanatic. I am, however, pretty fascinated with Web3 and emerging applications built around crypto and blockchain technologies. Which is why this recent headline captured my attention:
Soccer, in nearly every country outside the US, is practically a religion. And just like in the US, the leagues themselves are supplemented with a variety of secondary businesses: merchandise, gambling, fantasy leagues, and trading cards. So it shouldn't be a surprise that a market with a billion+ fanatics might be interested in a novel way to participate in the action this season. SoRare just so happens to offer a unique synthesis of trading cards, fantasy sports and crypto assets that has garnered the attention of soccer fans around the world. What is perhaps more impressive than the app itself (a reinvention of existing concepts) is the speed with which they've raised funding and gotten buy-in from soccer clubs and leagues. The latest round (mentioned above) is still in the works but would value them at around $4B, making them the 17th French unicorn and the 10th crowned this year alone (2021).
So what exactly do they do? To best understand, we'll have to review some crypto fundamentals:
Cryptocurrency: a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.
Blockchain: Blockchain can be described as a data structure that holds transactional records while ensuring security, transparency, and decentralization. You can also think of it as a chain of records stored in the form of blocks which are controlled by no single authority.
Non-Fungible Tokens (NFTs): An NFT is a digital asset that represents real-world objects like art, music, in-game items and videos. They are bought and sold online, frequently with cryptocurrency, and they are generally encoded with the same underlying software as many cryptos.
I assume, if you're reading this, you have some level of familiarity with cryptocurrency; namely, Bitcoin and Ethereum, the two most popular protocols to date. If not, here's a quick summary. Bitcoin is typically referred to as digital gold, designed for long-term storage and some occasional transactions. Ethereum extended upon this foundation and built programmability into the currency itself, enabling smart contracts or the ability to execute transfers of ownership with code once certain criteria are met. This opened up a whole new universe of crypto applications and made the Ethereum Network the preeminent platform for doing so. As it happens, SoRare's existence is tied directly to this underlying technology.
*This is a radically simplified history of blockchain technology. For more, check Coinbase's Crypto Basics
Let's take a look at the rules of the game, shall we? For anyone who's played fantasy sports before, this should look entirely familiar. But there are a few key differences. It's kind of like Pokemon, eBay and Yahoo! Fantasy Sports had a baby on the blockchain. Everything is centered around the collectible playing cards, which in this case, are NFTs. Though subtle, this makes a substantial difference in the way you can structure "play" within the league, because the playing cards have inherent scarcity, ownership, and programmability (read: their properties can be updated through code). To get started, it's simple: signup and connect your ether wallet of choice (or credit card for the crypto-n00bs). You'll be assigned a starter pack of players, but if you're looking to compete, you'll have to head over to the Transfer Market. There, you can bid on other players (auction-style) or find "buy it now" direct listings to help build your dream team. Once you've got a deep enough bench of players, you can start participating in tournament style play -- 5 players to a team: Goalkeeper, Defender, Midfielder, Forward, and an Extra Player (any position you like). Tournaments and prizes vary, but in general you win points based on player performance and there are caps on XP (experience points) to level the playing field in each individual competition.
In my article titled Anti-Social Social Apps, I talked about how futuristic ideas start out looking like games/toys. This logic applies here as well. In some ways, a game like SoRare is a crash course on crypto, market dynamics, NFTs, and investing. SoRare isn't the first of it's kind either. Cryptokitties, released in 2017, is a blockchain-based game where you can collect and breed digital cats (think Neopets for Web3). The very same studio has partnered with the NBA to release Top Shot, a crypto-collectible game for pro basketball in North America. They've taken the old-timey, static paper card concept and digitized it on the blockchain, maintaining all the important aspects (scarcity, rare finds, high valuations) while infusing the best qualities of NFTs (dynamic, internet native, traceable & easily monetizable). Now, you can create a card that memorializes a single point in sports history: an awesome dunk, a championship game etc. The convergence of trading cards, NFTs and blockchain technology makes holographics and limited edition Babe Ruth's seem lame. SoRare has taken this one step further with the added layer of tournament style fantasy football (soccer).
There are two aspects to all this that are particularly telling: the fact that sports leagues are co-signing these projects and that users are eating it up. TopShot has nearly a million active users. SoRare has 90K monthly active users (MAUs) across 140 countries and over $70M in card sales since the beginning of 2021 (aiming to hit $1B by 2024). For leagues and platforms alike, this is a brand new, highly lucrative business model. For users, it's a new way to engage with the players and games that you love. While it isn't quite gambling, it contains sports, money, a degree of luck and strong dopamine hits. So what does this emerging business model tell us about the future of sports, team/fan interaction, and sports betting in general?
As usual, we should start from the beginning…
PMU: Hippodrome History
I've got to imagine that sports betting has been around since the dawn of sports (or shortly thereafter) with varying degrees of formality. In France, in 1891, the most popular sport to bet on was horse-racing. That year, a man by the name of Joseph Oller (who according to his wikipedia page, definitely knew how to party) invented the concept of pooled betting and later that year a law was put into place to safeguard gamblers and regulate the new bookmaking technique. In short, bettors played against each other (not "the house") and the amounts played were divided up among the winners. In theory, this allowed any bookmaker, at the racetrack or otherwise, to set odds and take bets as long as they followed the rules.
By 1930, a new law was passed that granted a single organization the right to run the show. That organization, TheRacetrack Society, had been in charge of the hippodromes (horse racetracks) and the market for race horses up until that point. With their new power, they formed what is now known as Pari Mutuel Urbain (urban pooled betting) which has become an institution of French sports culture. By 1954, the simple betting system (pick the #1 or #2 horse) evolved to include much more complex gambling schemes. In 1985, the PMU changed its designation to a GIE (economic interest group, not-for-profit) and brought 57 individual bookmakers under one roof. According to their designation, they are required to return 75% of money taken in to winners, 9% to The State, and 8% to the racetracks. The idea behind this structure is to keep an industry with nearly 70K employees flourishing, provide funds to the state, and drive social and economic activity around the country. Despite their status as a non-profit, the organization ended up re-distributing €760M to racetracks in 2019 -- a fairly mind blowing figure. In 2010, when online gambling was legalized in France, the PMU extended their purview to include digital poker games as well.
So why the history lesson? First of all, going to the racetrack just doesn't seem like something people really do anymore. Outside of fanfare, fancy hats and Pimm's cups at the Kentucky Derby, I get the sense that the "glory days" of horseracing are behind us. Second, the PMU Logo is virtually everywhere in France. Nearly every cafe, bar and tabac is sponsored and licensed to collect bets and cash out winnings. I guess what's so baffling to me is that it still exists and is so profitable. Why? Because the only people I see placing bets are the neighborhood "characters" drinking high ABV tall boys at 10AM watching the TV screens from outside the shop while they chain smoke. I guess what I'm trying to say is that while the current customer base is a captive audience, I'm not sure they are a lasting one. And culturally speaking, I don't get the impression this activity appeals to our generation. Expanding into digital poker is a logical pivot, but with competition and evolving consumer taste, I wonder who stands to benefit most from gamblers of the Internet Age.
Same Game(s), Different Platform(s)
I had to do my homework on book making before writing this piece. Frankly, I wasn't all that well-informed. Classic gambling cliches like "the house always wins" stuck with me, but as I've come to learn sports betting and casino games are two completely different beasts. For the most part, it comes down to probability and statistics. With cards, coin flips or roulette wheels, for example, you have a limited number of outcomes that make statistical probability fairly easy to model. In basketball or soccer, there are simply too many variables which makes predictions a challenge, requiring a lot of domain expertise and experience. In both cases, emotions tend to run high with the gamblers themselves and intuition typically overtakes reason. Where there is asymmetry of information (and a combination of luck, instinct and addictive behavior), there is money to be made.
The best explainer I found on the business of book making is here. In short, there are two levers that book makers can pull to increase their earnings. The first, is balancing the books i.e. trying to make sure there are an equal number of bets on both sides. This can be difficult, especially if one team is a clear favorite. Which brings us to lever number two: setting the odds. Typically, the higher the odds, the lower the payout and vice versa. Which is why placing a bet on an underdog can be appealing: high risk but high reward. Book makers are constantly trying to adjust odds to manipulate the flow of bets to one side or the other (balance the books). But more importantly, they are using their knowledge/experience to create odds that give them a built-in revenue source on each bet (this is called the vigorish or the vig, for short). It's sort of like a service fee and depending on your skill as a bookmaker, it should net you positive earnings regardless of the outcome of the match.
Now imagine trying to take all of that into consideration simultaneously and without a calculator. Welcome to 1891. Fortunately, today, all of the statistical probabilities, real-time odds adjustments, payouts and even various types of bets and games can be consolidated into a single iPhone app. Which is to say, how can an organization like PMU, which relies heavily on in-person betting and is limited to horse-racing and recently online poker, compete in the long run?(To be clear, they aren't tallying up winnings in the back room, but placing bets and cashing out in person does require infrastructure/overhead). And it's not just the technology and limited options that are the problem. The next generation of gamblers, sports enthusiasts and thrill-seekers are looking for an entirely new experience.
The natural evolution of gambling in the digital age was first to the desktop and then to mobile. During the Eurocup you couldn't turn a corner without being reminded to download Betclic, the French mobile betting app, and put your money on Les Bleues. The next phase, however, is with eSports and the gaming industry. Today, the traditional sports betting industry is valued at around $200B. The eSports market is expected to hit just over $2B by 2023 with a CAGR of around 18.61% over the 5 year period starting in 2018. In absolute value, global sports betting alone dwarfs eSports as a whole, but the latter is much younger and growing at a rapid pace. Just take a look at this quote from Business Insider on eSports' growth prospects:
...The industry has seen a huge uptick in investment from venture capitalists, and more recently from private equity firms. The number of investments in esports doubled in 2018, going from 34 in 2017 to 68 in 2018, per Deloitte. That's reflected in the total dollars invested, too: Investments are up to $4.5 billion in 2018 from just $490 million the year before, a staggering YoY growth rate of 837%, per Deloitte. These investments are distributed to players across the ecosystem — from esports organizations, to tournament operators, to digital broadcasters — allowing it to function and grow.
If consumer interests are pivoting from physical to digital and from traditional sports to eSports then you have to imagine a massive transfer of market value is on the horizon. Pandascore, a French tech company building the eSports data & Odds API has positioned itself precisely in front of this sea change in consumer interest. Remember when I said that sports, compared to casino games, have significantly more variables and are therefore harder to track? Well, in eSports, you've still got tons of variables, but technology helps fill in the gaps and build real-time models for setting odds.
In games ranging from Call of Duty to FIFA, Pandascore pulls and normalizes the data and provides widgets for 3rd party apps to build eSports betting into their product. With growing consumer interest in the gaming and eSports sector and lower barriers to entry as an eSports book maker, I can imagine the opportunity here is enormous. Furthermore, what kind of implications does this have on the future of gaming and crypto. If we can bet on eSports can amateurs earn money in a virtual world? According to a recent article in Not Boring, Packy Mccormick highlights how some people are already doing this in a game called Axie Infinity. Needless to say, the way we spend our time and our money is going to look quite a bit different in the not so distant future.
Know when to hold 'em, know when to fold 'em…
So where does all this leave us? We've meandered from crypto-based fantasy sports to betting on the ponies to digital poker and eSports odds. If there's any takeaway, it's that, culturally speaking, we like competition, gambling, and an exciting way to spend our money (regardless of whether we win it back). The industry for sports betting is huge and unlikely to go anywhere anytime soon. But I can't help but think about the ways in which consumer behavior, digital habits, and cryptocurrency might converge on a new type of betting. The great promise of crypto is one of decentralization: cutting out the middleman. And gambling, inherently, requires a middleman to set the odds and reconcile the payouts. What happens when that 3rd party becomes code? What about if that code isn't owned by anyone except perhaps the people playing the game? What if we could even the odds with a perfectly balanced book? What if we could still derive utility and satisfaction through participation without leaving it completely to chance?
This piece isn't so much about gambling as it is about the promise of the crypto-enabled application ecosystem. Some people gamble for adrenaline or fun. But many do it for the chance to reverse financial hardship or to attempt to eradicate the inequity they find themselves in. Sadly, this approach is perpetuated by false hope and odds that are quite literally stacked against you. It's early days, but the utopian vision for decentralization through blockchain and equal economic opportunity is starting to show in the most nascent of commercial crypto products.
The future of this space is going to be wild. I would put money on that!
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