Small startups go for broke into legal sports gambling
As the chief executive officer of a fledgling sports gambling company, Tom King said there have been two watershed moments in the last year. One, of course, was the Supreme Court’s recent move to let states legalize sports gambling. The other was the rise of HQ, the smartphone trivia app that draws over one million people to compete for cash in its twice-daily games. The Supreme Court gave King confidence that his company, ReadyfireInc., would be able to offer new gambling products legally; HQ showed him that people would use them.
In the short term, the primary beneficiaries of the Supreme Court’s decision are likely to be the established casinos and gaming companies in New Jersey that handle the action from Jets fans visiting their local horse track. But Readyfire is betting that legal sports betting will expand until it’s commonplace for people to place wagers on their phones during lulls in the action instead of checking Twitter. As it aims to create many new gamblers, Readyfire is developing games that will appeal to people who are unlikely ever to set foot in a casino or cultivate a relationship with the neighborhood bookie.
A lot of stars have to align before a startup can start taking bets through a smartphone app. Even if many states do liberalize their laws, each will likely have different standards and licensing requirements. It will be very expensive to navigate this world. Officials could support sports gambling while balking at signing off on smartphone apps striving to make compulsive gambling as simple as Candy Crush. Chris Grove, managing director at Eilers & Krejcik Gaming, a research and consulting firm, predicted that there will be an uneven patchwork rather than a single nationwide gambling market for the foreseeable future.“We won’t have a 50-state sports betting market in our lifetime,” he said.
Readyfire’s first product, Halftime Live, is a sports-themed HQ lookalike that takes place during the halftime of sporting events. It launched in February, and its average game draws about 6,000 people, handing out prizes in the $400 range. Running a trivia game for cash is already legal, but King sees Halftime Live as a way to build up an audience open to experimenting with other types of smartphone-based sports games for money. Some of these aren’t gambling at all; some would fall under existing rules regulating fantasy sports; and still others would require changes to state law. “Now that it’s legal, there will be a broadening of the market, where people are open to doing sports bets,” King said.
King lays out a scenario where someone would come to an app and decide, say, that she liked Tom Brady. Putting down $5 would set off a series of bets paying out different amounts if he threw for two touchdowns, or if the Patriots won, or if he had more yards than any other quarterback playing that day. The user could either look under the hood to check the odds for and wisdom of each bet or more likely not worry much about it. Each aspect of the game might fall into a different legal category. Part of Readyfire’s service would be to convert all that complexity into the simply pleasure of a digital dopamine drip. Every time Brady completes a pass, the player on her phone would be a step closer to winning, without having to bother with the exact mechanisms of the game.
Another company that has been building an audience it hopes to convert to sports gambling in the near future is WinViewInc., whose investors include Graham Holdings Co., former owner of the Washington Post, TV company Discovery Inc., and Monumental Sports & Entertainment, which owns several sports teams. WinView offers a quiz-like game where people make series of predictions about what will happen in a particular match. Because smarter players outperform others, such contests are considered games of skill, rather than gambling, and are allowed.
Tom Rogers, the former CEO of TiVo, is WinView’s executive chairman. He said his company’s technology could be used to offer proposition bets, where people wager on something other than the outcome of a game, like whether a kicker will make the next field goal. Such games are popular in Europe, where sports betting is legal. They would require further legal changes to become broadly accepted in the U.S., though, and he’s content to wait.“We will certainly be active in the gambling market, I don’t want to say it changes our road map,” he said.
Paul Martino, a general partner at the venture capital firm Bullpen Capital and a co-founder of Readyfire, thinks the ambiguity of the marketplace favors startups willing to take risks larger companies are too prudent for. Martino was an early investor in FanDuel, the daily fantasy sports company which launched a product that felt like gambling but, the company argued, fell under a separate legal category. The nascent industry attracted large audiences, albeit by spending heavily on marketing and never actually turning a profit. It also barely survived a bruising, years-long legal battle.
In the end, the daily fantasy sports companies seem to have come out well-positioned to capitalize on the legalization of sports betting. A week after the Supreme Court made its decision, FanDuel was acquired by Paddy Power Betfair, a European gambling giant.
Readyfire’s plan, said Martino, draws from that lesson. It plans to walk right up to the line of what lawmakers will tolerate, snapping up customers while more cautious companies wait for the legal situation to clear up. “Only startups are going to do this,” he said.
Others question this strategy. Any company wading into legal gray zones risks imperiling its chances of getting the licenses that states will inevitably require, according to Eilers & Krejcik’s Grove. The cost of securing these licenses, fulfilling compliance requirements, and surviving what is sure to be a heavy tax burden tilts the tables heavily in favor of large companies, said Justin Park, CEO of RotoQLInc., a company that sells data subscriptions to daily fantasy sports players and gamblers. Monthly subscriptions cost between $13 and $100, and the company has revenue in the millions of dollars, according to Park.
Park thinks startups will do best providing services that benefit from gambling. He doubts they’ll be able to compete with large companies when it comes to operating actual gambling platforms, once the profit-squeezing taxation structures and politicized licensing processes are set in place.“You’re going to have to come in with some serious money to compete,” he said.