How European technology and new business models will shape the US sports betting market

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First published on August 14 in Casino & Gaming International magazine:
https://issuu.com/cgimagazine/docs/2018-3/26

There are three things you need to know before deciding to read this editorial. The first is that I am going to explain why the outdated, legacy technology solutions that are being used in the US market need to be replaced. The second thing you need to know is that I am an entrepreneur who has spent nearly twenty years delivering B2B solutions for online gaming and sports betting technology, so I actually know something about the subject. Finally, I’m going to assume you are up to speed on the repeal of PASPA and so I’m not going to waste your time discussing the slow rollout of state by state regulations and will instead focus on the systems that work within the state-by-state regulatory framework and across the highly fragmented US market.

Let’s start by going back to 2007. The USA was in its post-UIGEA prohibition, the recession was still a year away and the European market for sports betting was positively booming. Operators, in a bid to increase turnover, had starting accepting bets on football (sorry, soccer) after the game had started. Only about 2-3% of stakes were being placed in-play, but it was blatantly obvious to all of us in the industry at the time that live betting was going to be huge.

My theory, at the time, was that live data coming directly from the sporting venue would get faster and more detailed, as well as becoming more reliable and expensive as sports authorities began to license the official data rights. Further, I believed that this live sports data would be used to drive real-time pricing models, which would fundamentally change how you run a sports betting operation. Compiling the betting odds would transition away from being a manual task and would be replaced with automated computer algorithms in the same way that these changes had taken place in the financial markets. Quantitative mathematicians would work on the algorithms and the role of the trader would evolve into a specialist function to focus on the value added aspects of risk management that are harder to automate, such as customer profiling. This wasn’t just a guess, with seven years of online gaming experience already under my belt I was looking to start another company and spent that summer researching the sports betting market and writing a business plan.

Fast forward to around 2011, and the problem was that reliable live sports data just wasn’t sufficient to support the expansion of live betting. Bookmakers were using broadcast TV and live streaming services so that traders could watch the games and manually type in the odds changes. Companies were building up huge trading teams with a single trader focused on trading a single game. At the same time, people began to realize that the broadcast TV could be delayed by 7-10 seconds from real life, and some savvy punters were putting scouts into the venue to try to “beat the feeds”. It was the start of the arms race to see if the bookmaker or punter could get the data first. Companies like Runningball and BetRadar had already begun to develop professional scouting networks and created some of the first commercial data feeds for both of these types of customers. Slowly, over the next few years their coverage expanded to cover more and more events and more companies started collecting and distributing data on other sports. The sector was thriving and companies like Sporting Solutions and BetGenius started supplying odds feeds (as opposed to just the sports data); companies like Boolubus built flash-based betting interfaces so bookmakers could push live price changes to their websites; and iOS app usage exploded as mobile betting went from being “the next big thing” to the most important user experience to get right.

Fast forward again to today, and there is a healthy industry of data feed suppliers providing near comprehensive coverage of events and reliable service. Just five years earlier it was near impossible to run an automated bookmaking platform, but today is is quickly becoming the norm. As an illustration, my company runs 35 different sports betting brands across 8 platforms in 10 different countries with a full time trading staff of just 12 people focused on risk management. On a single Saturday, we will distribute some 20 million price changes out to these various platforms, with each platform used to deliver a different pricing strategy for a different client (and one platform reserved for our multi-tenanted services). Odds compiling has well and truly been replaced with on-demand data feed services and automation.

So this is where we need call out legacy sports betting platform suppliers. Any sports betting platform that was designed before this important market evolution was not built for the right purpose. In the US, the regulated market was restricted to Nevada and ROI targets for any regulated US-facing company would mean that technology investments could not be justified. While the US market has the best access to investment capital, sports betting was seen as toxic and the VC funds would instead push $1billion of investment into the daily fantasy sports bubble. The large US casino equipment suppliers largely ignored sports betting as well, because the casino operators were not asking for it. Europe has seen significant capital investments into developing sports betting technology and so European technology is significantly more advanced.

But that does not mean that all of the European suppliers have invested wisely either. Over the last decade, software development tools and systems architecture has fundamentally changed. The large, monolithic platforms that were designed for a global “.com” era of online gaming are not fit for purpose in today’s “.country” regulatory framework, where flexibility trumps legacy technology. Sure, these legacy suppliers boast about having some of the largest UK sports betting operators as their customers, but these same flagship customers have all been eclipsed by a start-up called Bet365 who took control of their platform was not held back by a legacy technology supplier. The pursuit of maximising profit through the “time and materials” business model, means that large European incumbent suppliers find themselves today rooted to an outdated technology architecture with multiple forked code bases and unable to benefit from the efficiencies that modern companies take for granted. Implementing a legacy platform being sold by the large European suppliers (or US post acquisition) might sound like a safe choice, after all “nobody got fired for hiring IBM”, but it is also ensuring the lowest flexibility with the highest possible operating cost. Cost efficiency is one of the main reasons why the fully-managed services have become the fastest growing sector in the market today.

The fully managed business model is great for anyone who does not want to buy a platform, hire a trading team and run a sports book. This can include large and small casino operators, lottery operators, media companies entering the space and even existing European operators are using these services to move into new territories. The SaaS business model means that the operational costs are kept to a minimum and shared across multiple operators. I am such a huge fan of this business model that I built my company on it. But this model is not right for everyone and further caution is merited when examining these solutions as well. For example, the odds are often the same for all operators and the customer experience from some suppliers tends to be a cookie cutter approach with all websites looking practically identical. To set themselves apart from the pack, the larger managed services suppliers will boast of having a trading team with several hundred traders and this is generally accepted by the uninformed buyer as operating at an impressive scale. I would suggest exactly the opposite: that the success of these suppliers comes from having been spun out of a successful B2C operation but they are held back by their own legacy software issues that require huge manual trading teams. In fact, we were able to win business away from one of these suppliers, who’s sales pitch boasts the most sophisticated risk management systems in the market today, because their traders were manually screen scraping their data and did not even know that they were taking late bets.

But the biggest problem with the managed services model, in my opinion, is probity. Several of these suppliers have been funded by their black market operations which can include places like Turkey, China and Iran. I thought that black market suppliers would be prevented from entering the US market, yet at the time of writing they are live in New Jersey.  I expect there may be another chapter to this story.

Let’s get back on track. The fully-managed business model, when executed properly, will be perfect for most casino and racetrack operators in the highly fragmented US market. Rather than investing millions into their own platform and trading teams, these customers can quickly and efficiently offer their own-branded sports betting services and focus on differentiating themselves with the user experience and tactical price boost offers. But I would suggest that any multi-state operator who wants to capture a significant market share in the US should find a way to maintain more control over their business. Again, purchasing a legacy technology platform that needs to be installed into each state at great cost is not an attractive option either. This is where licensing a modern, highly automated sports betting platform driven by data feeds can offer the benefits of retaining full control with the cost efficiency of a managed service.

Modern architecture can deliver centralised control over the data feeds and risk management functions and should allow for distributed sports betting platforms to be quickly deployed into different regulatory environments. As an example, we have an African client who operates in five different territories, some territories have gross profits tax while other territories have turnover taxation. The client needed a different strategy for managing their margins across these different territories to cope with the different taxation rules. In response, we setup two different platforms on our private cloud hosting facility and sent different price strategies (one was a high margin and the other was a lower margin) into the two different platforms. You would never deploy that solution if you had to spend millions of pounds on each platform implementation, but with modern technology launching a new SaaS platform is easy. If you consider the proposed tax rates in different US states, not to mention proposed integrity fees by the leagues, it is easy to see that a multi-state operator could need to operate a different pricing strategy for each different state.

I am extremely bullish on the US market for sports betting, but it will be a slow and complicated path to building a market worth some $5billion or more. In my opinion, selecting the right technology partner could be the difference between winning market share and looking for a new management team.

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