The Handle is a regular newsletter dedicated to providing the best insights in gaming news. To get The Handle delivered to your inbox, subscribe here.
This week we’re going to explore what we call the tweeners, or the companies birthed after the repeal of PASPA in 2018 that aren’t quite licensed operators in the space, but still derive their value from offering wagering to consumers.
Tweeners
As said by many before us, sports gambling became a wild west after the PASPA ruling that paved the way for legalization in New Jersey. It was a rapidly burgeoning industry with an incredible amount of excitement and capital following that excitement. Companies that were adjacent to the sports betting space but existed prior to PASPA repeal quickly established positions as market leaders in the gambling space, such as FanDuel & DraftKings. Old gambling stalwarts quickly looked to dip their toes in the emerging market. Generally, these companies were able to put together the logistics required to get gaming licenses and take bets across many states. Granted, these operations are still losing significant sums of money, but they have real hope of reaching scale and maybe one day even profitability!
On another pillar, we have the content companies that have thrived in the post-PASPA era. These are media sources such as The Action Network, VSiN, and plenty of others. These make their money (generally) through affiliate marketing, directing new consumers to their first account. These are still companies that have a defined role in the industry. They are not taking or writing bets, but providing information to consumers that they find valuable and providing customers to operators.
Finally, we get to companies without real, defined roles in the industry yet. They aren’t quite content companies or social companies. They don’t have legal bookmaking operations (yet). They may offer contest style games, or serve as an alternative daily fantasy sports platform. They offer some combination of free to play and real money wagering. Often, the bets will be something like picking a large number of player over/unders or specific prop offerings for games. So what exactly do they do?
This will be a bit easier to explain with an example. Let’s take a look at Betcha, a company recently acquired by Vivid Sports for $20M, with the potential to be worth up to $60M based on financial results. Betcha claims to be a social platform that is a combination of DFS and sports betting. Betcha offers free to play contests where users can combine props and select over/unders. These free to play contests often have real money payouts. Additionally, users can share their plays and talk to their friends.
So what is Betcha doing?
Free to play contests like guessing over/unders are seen as an on ramp to gambling by operators, especially if real money can be won with no stake required. Additionally, Betcha can offer contests for a game on live tv to theoretically convert the casual sports fan into a paying customer. These contests are complimented by a social feature that connects fans and brings them closer during the course of their wagering. They can talk smack and build community. That’s the thesis at least.
Unfortunately, it’s not that simple.
Starting with the social aspect, nothing is a true social platform until it reaches a critical mass of users and can experience the network effects. Betcha is nowhere near that threshold, no one we know has ever touched it and we should be that exact target demographic of digitally native sports fans. Worse, without significant revenue from other sources, there can’t be sustainable expansion of free to play games that result in real money won. The math just doesn’t work. And free to play games with no prizes are pretty similar to stuff that ESPN has had on their website since I was in elementary school (yes, I do miss Streak for the Cash). Moreover, Betcha is not a licensed operator for real gaming in any state nor is preparing to become one. In the long term, this tweener position doesn’t seem tenable.
Betcha’s main value prop is directly related to sports gambling. It’s relying on the buzz created by the industry to drive its valuation and customer acquisition. It clearly advertises itself as a gambling company, offering options that users will recognize as wagers, but fundamentally it is not a licensed operator or trying to become one (at least that we know of). It’s uncomfortably in between being a gambling company and not a gambling company.
Now, we’re not just picking on Betcha here. There are a lot of companies in the space that have rode the legalization wave to high valuations that did not cut their teeth by immediately planning to move into the legalized space. Often, they focus on contests and DFS. Two that come to mind are our good friends at Underdog, who are currently planning to move toward being a fully regulated operator with their acquisition of Goat Gaming, and Prize Picks, a smaller DFS company. There are also companies operating peer to peer exchanges in a more decentralized way that are not traditional licensed operators. They must have a nice legal opinion saying that peer to peer exchanges do not constitute sports gambling, which must have been the opposite conclusion of other peer to peer hopefuls such as Sporttrade. BettorEdge is the first example that comes to mind.
So what’s the end game for these companies? We’re honestly not sure. Built to be bought? Maybe, that’s exactly what happened with Betcha and Vivid Seats. We’re not sure how they are going to feel about that acquisition in a few years. Become a sustainable on ramp for operator customer acquisition? Doesn’t feel likely. The advertisements from legal operators will always have more funding and better visibility than start ups in the tweener space. That means these operators will build their own more sustainable avenues. Successfully carve out a niche? Yeah, this feels like the bull case for these companies. Carving out a small DFS niche in a non major market sport seems like a realistic end game. The margins will be tight and the TAM is small, but the market exists. It may not have justified the initial valuations these start-ups sought, but it represents the maturing of the industry where not every company has the potential to be a unicorn. We may be new to the space, but we can spot these tweeners who are riding the wave of a valuation frenzy.
We’re looking forward to seeing some of these companies expand their free to play offerings to contests such as March Madness style brackets or Super Bowl office pool squares. Don’t get us wrong, as long as these companies are paying out real prizes in free contests, people will get involved. However, at the end of the day, without real money, these games lose a lot of their allure.
Where’s the fun in playing in a free DFS contest or guessing over/unders in a game now that gambling is legal. We’ll be keeping our eyes peeled to see how these evolve in the coming months and years, especially if the industry starts to feel the heat from investors to become profitable.
