In 2018, the Supreme Court paved the way for a gold rush towards legal sports betting in the U.S. With the legal restriction lifted, companies big and small flocked to stake their claim in this potentially lucrative new terrain.
But fast forward a few years, the dust has settled on a far different scene. The picture that has now emerged is one of consolidation, history of huge operating losses and evacuations, with a handful of mega-books dominating the market, leaving smaller players struggling to stay afloat.
The goal of a bookmaker is to take bets on both sides of an event to balance its book which means ensuring that the total risk on each potential outcome is roughly equal. However, several factors such as the jurisdictional constraint of making it illegal to take a wager from someone outside the state throws a wrench in this balancing act preventing sportsbooks to freely adjust their odds to ensure a balanced book. Imagine a stock market where each state had its own operation, with different regulations and trading hours. How chaotic would that be?
To avoid savvy bettors called sharps to take advantage of their odds, they follow the jungle’s herd principle, cohesively sticking to each other with their offerings to keep predators attacking them by identifying and exploiting discrepancies in odds across different providers. They mimic a leading bookmaker’s odds to avoid attracting unwanted attention from sharps hoping that the coordinated odds will keep them safe from sharp attacks and give them the opportunity to win in the long run.
A sportsbook is essentially a tightrope walker, one misstep could mean falling down and after a few falls, it could mean you are dead. This has essentially been the state of the union of our sports betting industry in the last five years causing a good percentage of the initial entrants exiting the business to the point that a tiny number of operators are now controlling more than ninety percent of the business.
The job of a book is not too dissimilar to the job of a market maker in the options and futures industry aiming to buy and sell at prices that minimizes their risks with the goal of making money on the spreads rather than the direction of the market or its end outcome. In an ideal scenario, sportsbooks could adjust their odds dynamically based on the betting activity to maintain this equilibrium. However, jurisdictional constraints, risk of sharp attacks and the inherent bias of local fans often prevent them from doing so freely.
In addition to the jurisdictional challenges, another layer of complexity is local fans rooting for their teams. This phenomenon often comes to the forefront when teams from different regions, such as an East Coast team facing off against a West Coast team. Die-hard fans, driven by loyalty and regional pride, are inclined to passionately support their home teams through betting activities. This inherent bias can create a skew in the betting balance of a book. The influx of bets favoring the geographically closer team can disrupt the delicate equilibrium that sportsbooks strive to maintain.
Furthermore, the advantage held by national sportsbook operators with presence across various states and other countries introduces an additional dimension to the competitive landscape. Unlike smaller operators confined to one or a limited number of states, national and international sportsbooks enjoy the ability to manage their risks on an aggregate level. A lopsided bet on a local favorite in one state can be offset by a surge of wagers on the opposing team in another. This empowers them to aggregate risk and manage their risk exposure more effectively.
In response to the challenges faced by smaller sportsbook operators, I propose an innovative initiative I call the “Valve Project”. This project aims to create a collaborative platform where smaller and independent books can unite to trade their risk exposures and use it as a pressure relief. Valve envisions a secure network where smaller operators can share and offset risk with one another. By establishing this interconnected ecosystem, participating books can tap into a collective intelligence anonymously that transcends geographic limitations, neutralizing the impact of biased betting patterns and localized risk pressures.
The core principle of the Valve Project lies in the power of collaboration. Smaller books, which may individually struggle against those who have national, and international operations, can leverage their collective strength such as their customer base and local presence to create a more balanced and resilient risk management strategy. Valve acts as a pressure relief and a conduit for the exchange of risk, allowing participating books to minimize their exposure based on the aggregated data and insights contributed by their peers.
Through this collaborative effort, Valve aims to empower smaller books to not only compete but thrive in a market that is dominated by larger players. By embracing a unified approach to risk management, these operators can enhance their resilience, foster innovation, and collectively navigate the challenges posed by biased betting, regional risk exposures, and the broader dynamics of the sports betting industry.
To summarize, local casinos and operators that have their own independent books can leverage their local presence and customer base and play a major role in the ecosystem but their success hinges on adaptability and innovation to compete with the larger books that have national and some with international presence who can manage risk universally across different jurisdictions. They should think of the Valve Project as a risk buffet and a partnership with each other to trade their risks as well as share data intelligence anonymously with each other through Valve’s ecosystem to better compete against the larger players.
