Capper coins, gaming/esports ad revenue & betting exchanges
High-level run through of trending themes and recent developments within sports betting, gaming and broader tech...
Every two weeks I write a piece on sports betting, gaming or trending themes in tech. If you would like to receive it directly in your inbox, subscribe now.
To change things up from the typical feature pieces, I’ll unpack my thoughts on a handful of trending themes within sports betting and gaming and infuse a few emerging concepts from other progressive sectors within tech (e.g., crypto, creator economy, fintech) where applicable.
🤯 Let’s play around with the idea of investing in cappers
Sports betting handicapping services, sometimes referred to as VIP or paid picks, have been a staple within the sports betting community for decades. For those not familiar with the concept, think of it as handicapping-as-a-service. In exchange for a monthly subscription price, companies or individuals (i.e., cappers) do all the research and package up their best plays for customers to use. Some services sell packages (e.g., 10 NFL picks per week for each week of the NFL season), while others only offer individual picks. In today’s world, the business of paid picks carries a negative connotation due to a long history of fraudulent behavior, scams and, in some cases, flat out underperformance. That said, demand for these services still remains strong.
The format in which paid picks are delivered is rapidly shifting as technology evolves, blurring the line between new-aged cappers and creators. Historically, cappers would push out weekly email blasts to paid subscribers with little to no supporting data aside from the picks themselves. Today, offerings can include access to exclusive Discord servers, private Twitter DM groups or private group texts that are filled with contextually-relevant insights in addition to the slate of picks. Sports betting social media apps such as Betsperts even offer a platform for cappers to sell their picks and insights to users in the app’s ecosystem.
Given the rise in foundational social media platforms such as Twitter and Instagram, some cappers are ditching the traditional model and serving up free picks paired with engaging content (e.g., podcasts, VoD, live streams) to drive up the size of their follower base, switching monetization mechanics from performance-based subscription revenue to engagement/popularity-based revenue via affiliate deals or brand endorsements.
Here’s the question I’ll pose: What if we took it one step further and enabled the ability to invest in cappers, allowing consumers to own a financial stake in the capper’s work?
Because the line between cappers and creators is blurring, it’s worth exploring some of the progressive frameworks being utilized in the creator economy to apply to our capper use case. The ability to invest in creators via social tokens through platforms such as Rally, Roll and Coinvise enables creators to launch vibrant and independent (i.e., decentralized) economies with their communities. Here’s a quick explainer on how Rally’s creator coin works:
Create a Coin. Creators can launch their own branded coin on the Rally ethereum network
Drive Community Participation. Creators can reward their most loyal fans with coins and their fans can purchase additional coins
Engage & Enlighten Supporters. Fans who hold these coins gain access to private communities, exclusive content and physical and digital goods
Here are a few creators on the Rally platform, some of which you may recognize:
Because these economies are predicated on supply/demand mechanics, increased content value and awareness should drive demand for the coin higher, benefiting the coin price and those who bought a stake in the creator early on.
As it relates to cappers, leveraging a ‘capper coin’ could be a brand new monetization and engagement framework to utilize. Cappers benefit from the initial startup capital earned from the coin ‘IPO’, which is purchased by early supporters of the respective capper. In exchange for holding the capper’s coin, supporters benefit from access to exclusive picks, insights and content. If the capper outperforms and garners incremental awareness from their valuable picks, insights and content, more consumers should, in theory, purchase the capper’s coin. This provides the capper with a stream of revenue going forward that’s directly driven by the community that they cultivate. In this model, the success (or failure) of both the capper and the consumer is aligned.
Subscribing to picks is bound to underperform over the long-term. The best case scenario is that one is able to profit enough over an initial period of success to offset the aspect of continual ‘rent payments' for the picks and the losing period incurred prior to unsubscribing. Alternatively, following a free capper with broad reach may dilute one’s perceived ‘edge’. On the creation side, an affiliate model puts pressure on the capper to generate first-time depositor conversions, potentially changing the direction of a capper’s content. Sports betting consumers should have the ability to share in the upside of the cappers they believe in. While the business of being a capper has historically suffered from a perceived lack of integrity, the use of a capper coin could be the solution that aligns the incentives of the capper and the consumer for the first time. Why subscribe or follow when you can invest?
🎮 Ad revenue within gaming and esports
I recently came across PwC’s Internet Advertising Revenue Report for 2020 and one graph in particular caught my attention (see below):
While it’s no shocker that internet advertising is the top dog in today’s connected world, I was surprised to see how far down video games and esports are on the graph, sitting behind legacy channels such as Cinema and Newspaper. Could my reaction be an indication that I live in a bubble driven by tech optimism? Perhaps. However, my curiosity stems from gaming’s significant market size relative to some of the industries included in the graph as well as the expected growth in esports viewership in years to come.
While the revenue YoY (%) metric gives us a clue as to what media types are seeing the most ad revenue growth, the gap between gaming and esports ad revenue and the monetizable eyeballs within the two segments is significant. 244M gamers in the US spent over $40B in 2020. Globally, that number ballooned to 2.7B gamers who spent over $150B.
Additionally, the US esports audience size exceeded 66M last year and is expected to grow at a CAGR of 9.0% through 2023. It’s also unclear whether the PwC methodology lumps games live-streaming, which includes platforms like Twitch and YouTube that allow gamers to actively participate as content creators or as viewers, into the Gaming or Internet ad revenue bucket. Regardless, it’s worth noting that the games live-streaming audience is 2x the size of the esports audience. As a reference for comparison to the aforementioned legacy channels, the paid customer circulation of daily newspapers in the US is 28M and falling precipitously.
Despite the large opportunity for gaming and esports, there are industry-specific issues that present headwinds to ad monetization. Firstly, most current ad formats pull gamers or viewers out of immersion. With the exception of sports games like FIFA that utilize ad placements within virtual billboards bordering the pitch, simulating the ad placement format of IRL football games, the majority of gaming experiences view ad placements as non-contextual and impinging. As it relates to esports and streaming audiences, viewers don’t want to be hit with pop-up ads in the middle of watching an intense match unfold. Secondly, and as a result, most esports and streaming viewers utilize ad blockers that nullify 50-70% of ads served on platforms like Twitch, preventing impressions and thus deterring ad monetization.
While gaming is predominantly driven by a digital commerce revenue model, the opportunity for incremental ad revenue as viewership engagement continues to skyrocket across games and esports is huge. This presents a compelling opportunity for adtech and streaming infrastructure startups within the gaming industry to help bridge the gap through innovative ad formats, brand activations and engagement strategies. Of note, Maestro and 4D Sight, which I featured earlier this year, are building exciting streaming solutions that can serve use cases within gaming and across other horizontal markets (e.g., traditional sports, concerts, vocational).
📈 Sporttrade, Prophet and...Kalshi?
2021 will go down as the ‘year of the betting exchange’ as companies such as Sporttrade and Prophet prepare to launch the first wave of regulated sports betting exchanges in the US. Sporttrade’s betting exchange provides functionality similar to options trading or futures trading, allowing users to trade positions at any time in order to lock in profits prior to settlement. This pro-consumer design is fundamentally different from the traditional sportsbook experience in which a bettor’s money is locked in for the duration of a game or futures bet. Additionally, the company is opting to use probabilities as a pricing framework rather than traditional American odds. Instead of showing ‘Yankees-to-win’ at -200, the contract would be priced at the implied probability of 67%, or $67. In simple terms, the price of a contract equals the probability of the outcome occurring. Here’s an example (via BSM) provided by Sporttrade CEO Alex Kane that ties all of these concepts together:
“Lets say you want to bet the Phillies against the Nationals. Max Scherzer is starting so maybe the Phillies are a slight underdog and the market has priced the Phillies contracts at $48. That implies a 48% chance to win because at the end of the game, we will settle all the contracts if the Phillies win at 100, and if they lose at 0. What a betting exchange allows you to do is trade throughout the game. So let’s say the Phillies have a good first couple of innings, and you bought 10 contracts on the Phillies to win at $48. That’s a $480 investment. Two innings into the game, its 3-0 Phillies, and according to the market, the Phillies go from a 48% to 78% chance to win the game. Now as a participant you say ‘oh I bought 10 contracts at $48, and now I want to sell them at $78 and make a $30 profit per contract’. Those 10 contracts equal 300 bucks.”
While Sporttrade and Prophet will undoubtedly disrupt the US sports betting market in years to come, another company is leveraging a similar design in an adjacent market with far greater market access. Kalshi is the first federally regulated exchange dedicated to the trading of a unique asset class: event contracts. Approval from the Commodity Futures Trading Commission (CFTC) as an authorized Designated Contract Market (DCM) granted the company nationwide market access. Designed in a very similar fashion to Sporttrade, the platform allows users to trade on event outcomes related to topics such as the economy, housing, inflation, climate and more. Each contract has a yes price and no price that can range from $0.01 to $0.99, which is directly correlated with the probability of the respective outcome. Once the outcome of the event has been determined, Kalshi will pay out $1 for each correct contract, and $0 otherwise. Users also have the ability to close out positions prior to settlement to lock in a profit. Sound familiar?
Notably, federal law prohibits Kalshi from offering event contracts on geopolitical events like whether a war will break out in a certain country or political events like elections, votes or impeachments. Kalshi also chooses not to offer event contracts on sports outcomes, sparing the company from the meaningful amount of platform changes required to conform to state-by-state legislation. Platform work aside, I believe providing a trading experience on outcomes not related to sports is a compelling, differentiated product offering. The market for US sports betting operators is a highly saturated and competitive market right now, resulting in a customer land grab dynamic that Sporttrade and Prophet will be forced to navigate in addition to state-by-state liquidity concerns due to the Wire Act. However, a trading exchange that’s predicated upon non-sporting events and that’s benefited by nationwide market access (i.e., larger liquidity pool) taps a previously untouched adjacent market of non-sports fans looking for a gamified investing experience.
My big question is how sports betting exchanges like Sporttrade and non-sporting exchanges like Kalshi view potential consolidation down the road. In theory, each company will cultivate robust user bases that should have demand for each other’s product. For example, sports bettors may be interested in expanding their betting/trading activities to non-sporting events. On the other side of the coin, traders on Kalshi, who may be engaging in this type of activity for the first time, may find it exhilarating and want to expand their predictive prowess to sports-related events. Ultimately, both entities will accumulate high-quality, top-of-funnel databases over the next few years that can be synergistic to each other's path to scale. Kalshi represents mass value to a company like Sporttrade or DraftKings (should they want to diversify their offerings) because of its broad market access. In other words, Kalshi benefits from traders across all 50 states being able to utilize its product. Now consider the fact that only 27% of the US population currently has access to legal mobile sports betting in their state. This means that there’s still a significant number of state legalizations expected to occur over the next 3-5 years, including the top 2 states in terms of GDP production (CA, TX). Kalshi is accumulating a trove of rich, user-level data for each one of their users who reside in non-legalized sports betting states and who have a proven interest in trading/betting on event outcomes. This first-party targeting data will be incredibly valuable to a Sporttrade or a DraftKings as each additional state goes live.