Intrade Technology Revived as Fantasy Sports Website

A co-founder of the shuttered prediction market website Intrade has licensed that technology and has opened a fantasy sports website.  The New York Times story discloses how the site, Tradesports.com, is now open for public testing. 

Intrade was closed a couple of years back after US regulators accused the site of offering contracts without regulatory approval, forcing the site to withdraw from the US.  Subsequent to that, following an accounting review found irregularities in internal accounts, the site ceased operation and froze customer accounts.  This new site will leverage the trading technology utilized by the prior site.

To attempt to stay within fantasy sports skill game safe harbors, the new site will require players to trade sufficient shares across three or more different contract propositions.  The company will make money by having more money come in via entry fees than what is paid out in prizes, similar to other pay-to-play fantasy sports websites.

Proof Fantasy Sports Players are Dedicated (Or Crazy)

There are over 35 million fantasy sports players in the US and Canada.  Fantasy sports is a multi-billion dollar business with no signs of decreasing popularity.  Every major sports league actively supports and/or sponsors their own fantasy sports games.

However, some fantasy sports players are truly in a league by themselves.  One particular fantasy league was featured on NBC's Tonight Show.  The person who ends up in last place actually has to get a tattoo (a permanent one) of a design chosen by the person who wins the league.

Check out these Tonight Show clips and see for yourself! (Clips courtesy and credit to NBC.com)

Part 1


Part 2

Daily Fantasy Sports Contests Continue Rise in Popularity

The daily fantasy sport contest format continues to grow in both customers as well as companies providing the product.  With the growth of this product also came the claims from various quarters that these games weren't legal or at the least took advantage of some "loophole."  These barbs were typically provided by competitors not providing these games, or online gaming providers shut out of the US market, or typical naysayers who didn't like fantasy sports in the first place and had some other axe to grind or ulterior motive.

Regardless, the daily fantasy sports game market is growing such that revenues from this segment is on the order of one-third of the yearly $1.6 billion spent on fantasy sports - not insignificant money.  An article that tries again to stir the pot and create the appearance of uncertainty of the legality of daily fantasy sports games can be found here. 

Daily fantasy games have threats, but in my view they are not from the legal front, but from the competitive front.  The threats come in two ways.  The first is from the current large fantasy operators like CBS, Fox, ESPN, Yahoo, etc.  These operators currently focus on the season-long contests but don't have any barriers to keep them from offering daily games.  Once they do, the current leaders in this segment may lose significant market share and quite possibly be run out of the market.  The current daily game operators should keep looking over their shoulder because the big boys could enter this market whenever they want.

The other competitive front is from new entrants with an even newer and superior short-term fantasy sports game.  Current daily games generally have prize to entry fee ratios somewhat less than 2 to 1. So for a $10 entry fee game, the winner will win somewhere around $18, where the game operator keeps $2 for their expenses and profit.  The new daily game contest format can offer games that have prize to entry fee ratios as high as 100 to 1, or for a $10 entry fee game, could offer a prize as high as $1,000.  Since this game concept is patented, it can't be copied and the current daily game operators will have no easy counter to this superior product.  If you were a customer and for $10 could play two $5 games, each game having a chance to win up to $500, what game would you think they would play?  Right, a no brainer.

The daily game segment will continue to grow and is on the cusp of some very disruptive change.

Daily Fantasy Game Errors in Legal Article

An article in Gaming Law Review and Economics tries to describe the future of the daily fantasy format as an "unsure bet."  The title of the article also tries to portray daily fantasy games as exchange wagering.  This article by and large is weak and a poor attempt to challenge the legality of the daily fantasy game format.  The article is biased and references are "stretched and tortured" in order to fit the article's bias.

I'll discuss just a few of the errors.  The first is that the UIGEA created or enabled the daily game format.  The evidence used was that the UIGEA was passed, then the daily format appeared after.  The daily game format could have easily been fielded before the UIGEA and the UIGEA doesn't impact the daily game format.  If the length of time the multiple games that constitute the basis of a fantasy sports game could entail an entire season, post-season or in the daily game format, either a day's games or week's worth of games.  In all of these cases, multiple games are used as a statistical foundation for the fantasy games and it can be argued that the UIGEA took its cues from the reality of how fantasy sports games were played to create their definition and contouring of the safe harbor.

Another error is the so called admission by a fantasy sports operator that by not offering their games in certain states that is an admission of the uncertain legality of the daily fantasy sports format.  Baloney.  There are certain states in the US where there really isn't enough of a distinction between skill games, sweepstakes and gambling such that even the season-long fantasy sports operators avoid offering games in those jurisdictions.  If those states' laws are very strict as to what they define as gambling, no rational fantasy sports operator, daily or season-long, operates there.  To use that as an admission of the uncertainty of the legality of the daily game format is more than a stretch, it is basically dishonest and again shows the bias of the authors.

The last issue I'll discuss is the authors' "fantasy" about the daily games using mark to market accounting.  The daily games operate like the season-long games.  You select some players that have a fictional "salary" constraint such that you craft the fantasy team of players where the total "salary" fits within the constraint.  The actual games are played and the statistics generated by the players the fantasy sports contestant chose are converted to a single numerical metric or score, with the contestant whose team has the highest score wins.  To call that mark to market accounting in order to try and make a case that daily fantasy games are radically different from season-long games in dimensions other than just the timeframe is just wrong.

There is a saying that everyone is entitled to their own opinion but not entitled to their own facts.

For those interested, the article can be found here.

New Jersey Casinos Not Yet Offering Fantasy Sports Contests

Although New Jersey published regulations authorizing pay-to-play fantasy sports contests back in March, not one Atlantic City casino has of yet moved forward with an offering.  The reasons for this are discussed in the story, which can be found here.  The were two primary reasons discussed detailing why no fantasy games are yet offered.  One is that the casinos didn't see a successful path forward competing with larger, national entities such as ESPN.  The other is that this is summer and allegedly sports betting only revolves around the NCAA basketball tournament and the Super Bowl.

I'll quibble with both of these reasons, but first I do need to quibble with the article ever equating the concept of fantasy sports contests and betting.  Playing fantasy sports games is not betting.  Fantasy sports games are a game of skill and by legal definition not gambling, provided the games, gameplay and prize structures fit within the statutory safe harbors.  It is just journalistic laziness to refer to such contests as betting.

With regard to the reason that the casinos don't see an easy path to compete with a similar game to the ESPNs of the world, valid point.  The key is to find a fantasy sports game that would be attractive to players that the ESPNs of the world can't emulate.  Does such a fantasy sports game of that nature exist?  Yes.  We will discuss that later.  Not having a compelling game to draw patrons that would provide sufficient direct and indirect revenue to offset the cost of offering is a very valid point.  In my view, none of the existing fantasy games that have been considered have the hope of meeting that hurdle.

The reason for that varies on the type of game.  For the league-based season-long contests, the contests are just too long and the casinos rightly have figured out that they may be able to draw customers a few times during the year, but not on a weekly basis for an extended period.  For the short-term contests, the prize structures are such that the gross margins of these games are just too thin to satisfy the profit needs of the game operator and the casino.

Regarding the reason that the casinos aren't offering the games because this is summertime and there's no interest in sports contests for money is a crock.  Fantasy baseball is going on now and it is indeed quite popular and indeed people are playing for money.

So what kind of fantasy sports contest would have a hope of being viable for Atlantic City casinos?  Again, it would have to be something that would be attractive to fantasy sports players and perhaps even sports bettors (even though sports betting is not yet legal in New Jersey).  By attractive, that means a game that has a good prize to entry fee ratio (odds if we were talking about betting).  Also, attractive means that the margin of the games would be sufficient to satisfy the needs of the game operator and the casino with regard to profit.  No sense offering a game that costs more to offer than revenue generated, right?  The final nuance of attractive would be a fantasy game that offered some level of exclusivity, something the current large fantasy sports operators can't match.

Is there such a fantasy sport game available that can do this?  Yes.  YouGaming's pari-mutuel fantasy sports game is such a game.  Here's why:

First, the pari-mutuel fantasy sports game concept is protected by no less than 3 US Patents.  That takes care of the exclusivity element.

Second, the games can have gross margins that will satisfy the profit needs of the casinos and game operator.  For typical "daily" fantasy sports games, gross margins may vary from 5% to 10%.  Given the costs of operation, it will be practically impossible to have profitable games.  The pari-mutuel fantasy sports games can easily have gross margins in the 20% to 30% range, and can be offered in the "daily" format.  Now if you compare that to the theoretical margin on a straight sports bet, which is 4.54%, this advantage is substantial.

Third, the pari-mutuel fantasy sports games can also offer games with high gross margins while offering superior prize to entry fee ratios (odds if we were talking betting), allowing the game operator and casino to meet their profit objectives.

So given a game where one out of every five entries can win a prize, where the top prize is 100 times the entry fee, the gross margin of such a game is greater than 20%, and having a level of exclusivity for the casino(s) that offer it, one can see that this kind of game would have a level of attractiveness to Atlantic City properties.

Also, this kind of game would be attractive to offer in an online format to the casino(s)' customers.  Unlike some of the free play casino games used as a marketing tool, this game format can be offered online in a pay-to-play format, generating revenue and awarding cash prizes.  This offering of course done in a branded format.  The casino will be able to extend its brick and mortar presence with a revenue-generating game.

There is another potential advantage to such a game, but it will have to wait until New Jersey is officially allowed to offer sports wagering.  Such a game can also be offered in a wagering game format, which current fantasy sports games will have great difficulty doing, and even if they did, would not result in a superior wagering game to conventional sports betting.

How to Help Horse Racing Industry Sustainability in the US and Canada (Part 3)

This will be a longer post than the previous two posts on this topic, which can be found here and here.  To continue, we've determined a good demographic for new racing wagerers and identified three groups that might fit this demographic.

To recap, what would be a good demographic for racing?  One that had the following characteristics:

1. Younger, naturally...
2. Cerebral (handicapping is an analytical exercise)
3. Affluent (you can't bet money you don't have - preferably)
4. Willing to risk money (that's the ultimate desire - someone has to place a bet)

 What kinds of people would fit this demographic?  I'd look toward the following as a start:

1. Poker and blackjack players
2. Sports bettors
3. Fantasy sports players

We will now take a look at these with regard to the desired demographic as well as the ability to bring them to the track and convert or increase their pari-mutuel spend.

To get to the ultimate result, people of a desirable demographic placing new pari-mutuel RACING wagers, we have to clear some hurdles with them that act as barriers.  There are basically three (not in a particular order):

1.  Interest in RACING
2.  Ability to handicap a race
3.  Knowledge of pari-mutuel wagering

If we don't get a person to a capability in all of these 3 areas, the person won't bet in any appreciable amount, if at all.  You may say that we do this now with traditional marketing.  No, not exactly.  In the post that examined the various advertisements, which ones were the most effective?  The ones that had racing and wagering secondary to the food, beverage and social experience.  In other words, the party was the draw, not the racing.  That's why the cheap beer, hot dogs and music works to draw people to the track, but doesn't result in large increases in handle or persistent additions of a younger racing wagering base.

Inherently racing knows this, so the three hurdles that they attempt to clear with the customers in the "party" approach appealing to the mass market are:

1.  Interest in a party
2.  See some pretty horses
3.  Simple pari-mutuel bets where you have a chance to win something

There's a bit of a difference between how to attract a younger, cerebral, affluent, risk-taking demographic and the mass market.

So, racing needs to focus on the right demographic and move away from mass market approaches to just get people through the turnstiles at the racetracks.  With regard to the groups fitting the desirable demographic, the Horseplayers Association of North America (a pro-bettor group) did a simple survey on a chat board soliciting responses to sports bettors and poker players why they didn't bet the horses.  The post on that topic is here and the HANA blog post is here.  The three basic reasons were:

1.  Takeout is too high (remember the bets they generally make have lower vigorish)
2.  Conduct that impacts the integrity of the race (they think racing is fixed, if you didn't catch that)
3.  Not interested in the sport (no surprise)

So this great demographic needs to somehow get interested in racing, think they can win and learn how to handicap and bet a race.  Do you see how traditional approaches haven't been effective with regard to these folks?  The powers that be in the US and Canada aren't going to lower takeout by any appreciable amount anytime soon and they aren't going to do much about racing integrity issues except nibble around the edges.  As a result, interest in the sport shouldn't be expected to improve.  Appears racing is doomed, right?  Not so fast.  First a bit more background of what has to happen with regard to a successful conversion.

Assuming the new racing wagers have to occur at a facility (track or OTB), we have to get a person to the facility and then get them to make a pari-mutuel wager.  With the current situation, it doesn't seem like we'll be able to directly get a person to the track and bet the horses.  Like traditional racing marketing, can we just get them to the track?  Sure, we can do the mass market party approach or perhaps set up poker rooms at racetracks.  Unfortunately, we still have to clear those three aforementioned hurdles, even if those folks were playing poker at the track or OTB.

With regard to a potential path forward, I'm going to ignore poker players and sports bettors for now and focus on fantasy sports players.  Since sports betting is still mostly restricted in the US and Canada, there will have to be some legal changes to make that type of wagering widely available at racing venues.  Not so with fantasy sports.

The fantasy sports demographic is a great one for racing.  It is an $800 million industry now, with a total economic impact of over $4 billion.  There are approximately 32 million fantasy sports players in the US, 3 million in Canada.  The demographic is lucrative, being affluent, educated and approximately 85% male, 45% within the 25-49 age group, 53% with household incomes greater than $75,000 and 30% with household incomes higher than $100,000.  On average, they are about 15 years younger than the average horseplayer, making this demographic a fantastic one for racing.  A cool infographic on the fantasy sports player is shown below:

Source:  www.columnfivemedia.com

The reason we're going to examine this demographic is that with regard to fantasy sports, there are certain legal/regulatory advantages that allow fantasy sports to be played as a skill game for money that isn't legally considered gambling, although some call it a distinction without a difference.  Regardless, lots of money is risked on fantasy sports here in the US and Canada.  The state of New Jersey recently adopted regulations allowing Atlantic City casinos to offer fantasy sports games in their properties.  A post on that topic is here.  If racing had kept their monopoly going, these people likely would be horseplayers.  But they didn't grow up following racing, they grew up with professional football, baseball and basketball.  And that, folks, is key.

Let's look at something new.  Let's look at providing a fantasy sports pay-to-play skill game at tracks and OTBs that is based on pari-mutuel principles.  If the law allows in certain jurisdictions, we can provide outright pari-mutuel wagers with regard to professional sports.  Here's what a sample tote might show: 

Source:  YouGaming Inc

What would be the metric bet on?  It could be as simple as which quarterback has the most passing yards this week or as complex as some metric based on passing yards, touchdowns, completion percentage and interceptions.  Yes this picture is a bit dated, as Carson Palmer now plays for the Arizona Cardinals and not the Oakland Raiders.  Again, this would be something for a regulated wagering application, not a pay-to-play skill game.  What kind of wagers?  Anything that is offered now:  WPS, Exacta, Trifecta, Pick 4, Pick 6, etc.  Imagine a NFL Pick 6 per week (QB, RB, WR, TE, K, DEF) with a carryover.  Think that wouldn't draw some betting interest?

So, what would be the difference?  In the skill game variant, the player (punter, etc.) would pay the entry fee, which would give the player a certain amount of virtual currency, the same amount for each entry.  The player would then have a series of races that correspond to a particular position (e.g. quarterback, running back, team defense, etc., with regard to football) wherein the player would make various pari-mutuel wagers.  The pari-mutuel wagers are made with game currency, not actual currency.  That's where the legal safe harbor and separation take place.  At the end of the real-world games, stats are compiled, game wagers are paid and the players (punters) with the highest resulting virtual currency win prizes.

To be honest, just coming up with a new game doesn't guarantee people will play.  So any games of this type will have to have some level of attractiveness over and above current fantasy sports game offerings.  This one has a couple.  They are:

1.  Shorter timeframe
2.  Higher prize-to-entry fee ratio

Many fantasy sports games are season-long.  These new games can also last a season, if desired, or can just cover a slate of games or games occurring that day or week.  For the NFL regular season, blocks of games start at 1pm and 4pm Eastern (approximately).  So, you could have two games, each covering that block of games.  Or, you could do that and have games that just dealt with the stats generated each quarter of a four quarter NFL game.  You'll see that there are possibilities for quite a few games in a relatively short period of time compared to typical fantasy sports games.

With regard to prizes, prizes for fantasy sports games can vary from just bragging rights to hundreds of thousands of dollars.  For daily-type games, the predominant mode is head-to-head, so the prize-to-entry fee ratio is on the order of 1.8 to 1, giving a portion to the operator as an administrative fee or takeout.  Some of these games have a larger number of participants, but the general top prize-to-entry fee ratio is around 10 to 1.  

For these new pari-mutuel fantasy sports games, there could be not just top prizes but prize tiers, 1st, 2nd and 3rd.  The more people enter, the more entries will fall into the prize tiers.  Think of this like academic studies where the professor grades on a curve.  In a class with 30 students, the professor may only award 4 students an A grade, 8 B grades and 12 C grades.  If there were 60 students in the class, the professor may award 8 students an A grade, etc.  Same principle here.  So the prize-to-entry fee ratios for these new pari-mutuel fantasy sports skill games could be on the order of 50, 20 and 2 to 1 respectively, providing up to 1 in 4 entries the ability to win a prize.  This kind of game has advantages that could prove extremely attractive to fantasy sports players.  They can win large sums without risking large sums.  And since the entry fees may be in the $5 to $50 range, they could enter more than once in order to execute different wagering strategies.  

What you may be seeing here is that racing has tried to attract new bettors with racing.  What is being discussed is bringing in new bettors with something else, something that interests them.  A ha!

Let's revisit.  To get to the ultimate result, people of a desirable demographic placing new pari-mutuel RACING fantasy sports wagers, we have to clear some hurdles with them that act as barriers.  There are basically three (not in a particular order):

1.  Interest in RACING fantasy sports
2.  Ability to handicap a race fantasy sports
3.  Knowledge of pari-mutuel wagering

You see that if we want to attract fantasy sports players, provided we have an attractive game, all we need to do is teach them pari-mutuel wagering as they already have an interest in and ability to handicap fantasy sports.

Some may say that the concept of bringing in players betting on something else has been tried before, namely with slots at tracks.  I agree and disagree.  I agree that gambling on slots is different than gambling on horse racing.  I disagree in that slot gaming does not and never did have the potential to generate new horseplayers.  What is being proposed here does have that potential.

This new game concept could have utility with tracks and OTBs on a couple of levels.  The first level of course is the money generated either by pari-mutuel fantasy sports wagers or entry fees for skill game fantasy sports contests.  I won't discuss in depth, but the tracks might find these games attractive as the pari-mutuel takeout structure for a horse race won't be exactly the same for this game as certain takeouts that are primarily track or horsemen focused don't apply.  Potentially, a greater percentage of the takeout or administrative fees could end up with the tracks and OTBs.  If this was a regulated wagering game, very likely the person would have to be at the facility, so that might make the ADWs ineligible to offer a regulated wagering fantasy sports game, but could offer such a game in a pay-to-play skill game format.

Also, since tracks only have so many race days per year, there is a lot of time those tracks aren't generating lots of attendance (assuming that they are drawing well during race meets).  Yes, they can still operate as an OTB during their "dark" periods, but the patronage isn't likely that staggering.  But if they can attract sports fans that follow football (including college football), baseball, basketball, hockey, NASCAR, etc., improving their F&B revenues AND playing fantasy sports games for money (which is what drew them in), that may be very interesting.  Even if some days are race days, will the tracks turn these sports fans away?

What is important to note that in this scenario, racing is getting more revenue even though not a single dollar has been incrementally wagered on a horse race.  We've increased revenues via pari-mutuel, but in a different way, with a different game.  I think this path, even though counter-intuitive, is the correct one.  In theory, we got a desirable demographic to the track and got them to make pari-mutuel wagers.  In addition, with that new game revenue, we're helping to sustain racing with incremental pari-mutuel based revenue.

We're not done yet.  Assume we did get the above, we still need to figure out how to get some crossover racing wagering.  With regard to pari-mutuel racing wagering, we still need to clear those three hurdles.  That is a difficult thing to ask as some of the negatives espoused by players in the HANA post aren't going to go away.  Here is where the racing marketing folks need to earn some of their salary.  

My view is that is if current educational efforts on how to handicap could be tweaked some (or perhaps run as is), with this demographic that is at the track, you may get some crossover wagering while they are watching the games.  This crossover may manifest more during race meets, but at OTBs, they won't have the advantage of the fantasy sports players having the experience of the actual venue.  The advantage the racing industry will have is that they will have the right demographic at their property.

If a track/OTB has a loyalty program, perhaps they could modify the program to entice racing wagers from the fantasy sports players.  For example, if a player's club member accumulated $250 in fantasy sports wagers in a month, the next month any racing wagers would accumulate loyalty points at a 5x rate.  This might not only spur crossover racing wagering from the fantasy sports players but perhaps get some of the horseplayers to participate in the fantasy sports games.  A win-win.

By expanding wagering utilizing pari-mutuel principles, this should help the racing industry from a political and regulatory standpoint.  They could make the claim that pari-mutuel wagering is "their" gaming turf, and they have the right to expand pari-mutuel.  Where casinos could balk at tracks wanting slot machines and blackjack tables, their argument is weaker when it comes to just another pari-mutuel game.  In fact, there's no reason casino racebooks (de facto OTB) couldn't offer these games, so they get to participate as well.

To summarize the possible approach to help racing sustainability, the focus should be on expanding pari-mutuel wagering.  Given the current attractiveness of the racing product with people not familiar with racing, the key is to attract them to the tracks/OTBs with what does interest them, provide them pari-mutuel games wrapped around what interests them and then work to generate some crossover incremental racing wagering.

This in no way is a naked claim that what is proposed here is the single solution that will save racing in the US and Canada.  The title of this series is about how to help horse racing sustainability.  However, the offering outlined here does at least have the potential to achieve the result outlined in the previous post:

1. Get more people of a desirable demographic to the tracks, OTBs and ADWs
2. Get those people to place pari-mutuel wagers
3. Get all people to increase their pari-mutuel spend per visit
4. Have that increased pari-mutuel handle help sustain the racing industry

References:

Lamb, M. & Singer, D. (2011, August). Driving sustainable growth for thoroughbred racing
and breeding. Paper presented at the Fifty-ninth annual Round Table Conference on
Matters Pertaining to Racing, Saratoga Springs, NY. Retrieved from
http://www.jockeyclub.com/resources/selected_exhibits_1.pdf

Downes, David W., "Identifying New Pari-Mutuel iGaming Offerings in the United States" (2011). UNLV Theses/Dissertations/Professional Papers/Capstones. Paper 1145.
http://digitalscholarship.unlv.edu/thesesdissertations/1145/