From Euphoria to Reality

If sports betting is the pot of gold at the end of the rainbow, why are operators spending wildly to acquire a customer who may or may not be loyal to that operator? Bruce Merati explains why operators need to choose carefully and conduct due diligence before choosing a technology partner.

From Euphoria to Reality

As sportsbetting operators get a better handle on their operations, the euphoria surrounding the business is beginning to diminish. They are getting reality checks about their newfound business, feeling its low margin and its financial effect on their bottom lines as the result of competing with operators who are spending insane amounts of money in marketing and promoting their products.

By its nature, sports betting does not generate sufficient cashflow to justify a high marketing and advertising cost to acquire a customer. Another challenge facing the industry is having a platform that works seamlessly across all distribution channels which is also ready for online gaming as they get legalized in each state. The big decision they face is either to develop their own systems, which is time consuming and expensive, or partnering up with a solution provider which is also not an easy process either.

Operators need a sportsbook solution that is user friendly, easy to operate, is compliant with the regulations of all jurisdictions and is online gaming ready. Casinos are used to the practice of placing slot machines from different manufacturers on their casino floors, monitoring their performances and replacing them based on profitability of each machine. They cannot do the same with their sportsbook systems because once they made their selection it is very hard to make a change.

Over the years casinos have realized it is better to focus on their B2C business than developing their own products such as slot machines or casino management systems. The same applies to online gaming and wagering, unless an operator has a deep pocket, a broad market and is extremely disciplined in developing software, it is better off not to manufacture its own online solution and leave it to those whose only focus is to develop such technologies. Also, casinos typically don’t buy products from each other, so if an operator develops its own solution, it must absorb all its development cost internally versus B2B suppliers who can sell their products to any casino.

Over the past two decades several international online gaming system providers created very profitable businesses. Their success has mainly been due to having a free hand, not facing political headwinds from regulators and competition form land-based casinos. The gaming industry outside the U.S. didn’t have organizations like American Gaming Association lobbying against them.

Historically, gaming in the U.S. has been heavily regulated and dominated by land-based casinos who spend billions of dollars building properties in a state that has legalized gaming. These casinos usually have monopoly on anything gaming in that state making it difficult for an online gaming technology company to come in from outside to compete with them. California is currently experiencing this where the tribes have created a coalition to keep DraftKings and Fanduel out of the state’s sportsbetting initiatives.

By its definition, customer acquisition means owning something which is long-term, however when it comes to online sportsbetting there is no such a thing as customer acquisition as most online bettors are not loyal. They are mostly promotion chasers who have several betting apps on their phones, always shopping for better odds and promotions before they place their bets. One might argue it is more appropriate to call it customer leasing since an operator mostly owns a customer until its promotion lasts.

To avoid sharps getting in between them, online sportsbook operators tactically form a pack and offer almost the same odds even if their books are not in balance. From most bettors’ point of view, unless an operator has a terrible app, pre-match online bets are commodities, what matters to them most is the odds of a game and the promotional offers that comes with a bet. Overall, which operator they place their bets with is not a critical factor if they are offered completive odds.

Online sportsbook software providers outside the U.S. have created an architecture where their system uses one engine to serve many operators. With this structure, operators are given their own skins but not the whole system. This was made possible since the business was not regulated in most countries, and they didn’t have to meet much regulatory requirements. After reversal of PASPA, these companies entered the U.S. market not being ready for the rules and regulatory requirements of U.S. jurisdictions.

After the Supreme Court ruling on PASPA, some operators and regulators were eager to jump in, they lowered their bars, accepting whatever solution they had for their non-U.S operations. Some state regulators even went as far as giving the newcomers provisional licenses by deferring their normal investigation process into the future. It is now becoming obvious to all stakeholders that meeting each jurisdiction’s requirement is extremely expensive and time consuming to the point that some software providers would be relieved if they were dumped by their U.S. partners.

In summary, sportsbetting is a good addition to the gaming industry’s product offerings but operators need to recognize that they may gain a customer through promotions for some time but cannot acquire them permanently nor prevent them from betting online with their competition. Moreover, developing an online gaming solution is time consuming and expensive, and since the software platform of an operator is a critical element of its long-term success, operators must be vigilant in their partner selection process and make sure the sportsbetting platform they select is robust and is ready to offer all forms of online gaming.

Articles by Author: Bruce Merati

Bruce Merati is cofounder of BC Technologies, a sportsbook system provider and CEO of Uplay1, a gaming IP company.