Mad Hedge Technology Letter
May 22, 2018
Fiat Lux
Featured Trade:
(THE BIG WINNERS IN THE SPORTS BETTING DECISION),
(LSE:PPB), (LSE:WMH), (LSE:888), (BYD), (IGT), (SGMS)
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Up to my elbows in the market for the past 50 years, I have seen my share of paradigm shifts transforming the world and markets with it.
The Supreme Court delivered another momentous decision overturning the 1992 decision to ban sports betting in most states.
The aftermath is decisively pro-business with a profusion of domestic and international winners that can bask in the glow of a future windfall swelling the industry coffers to the tune of $150 billion per year.
The estimated amount of illicit sports gambling activity that goes unreported is $150 billion, and that will migrate to official channels, but I bet the sum is vastly higher.
Sports betting is as American as apple pie.
This is highly evident each year with the NCAA men's basketball tournament sucking in eyeballs resulting in more than $5 billion in lost worker productivity.
The annual Super Bowl is practically an institution in this country as well as quarterback Tom Brady's starting spot on Super Bowl Sunday.
Not only is this ruling pro-business, but the verdict is another overwhelming win for technology and the state of Nevada.
Nevada was one of the few states to receive an exemption from the 1992 ruling, and its sports betting books have developed uninterrupted for the past 26 years.
The 26-year head start will mirror Amazon's seven-year head start in the cloud catapulting existing operations to the top of the food chain.
Sports team owners from all the major sports leagues are jumping with joy as the team valuations of each franchise received another boost with fresh capital pouring in like an overflowing dam.
This development effectively creates a digital sports industry operating parallel to the official leagues and will have business synergies galore.
Sports leagues are about to welcome a new tidal wave of viewer interest that seeks to capitalize on the new synergies.
Options derivative contracts on sports games could be another product down the road for this budding industry.
The two best tech companies in position to take the court ruling and turn it into material business are the leading fantasy sports providers DraftKings and FanDuel, which are both private companies.
In 2016, these two companies attempted a merger that would have given the company a 90% monopolistic market share and more than 5 million customers.
The following year, the Supreme Court blocked the merger as DraftKings continued to grow in excess of 8 million users.
Fantasy sports and the entire e-sports genre is experiencing skyrocketing popularity with youth (physical) sports participation falling off a cliff.
New York-based FanDuel and Boston-based DraftKings have a wide-reaching digital footprint in fantasy sports that is supported by rich tech architecture.
The abundance of tech capabilities will make the crossover into sport wagering seamless.
NumberFire, a sports big data company, was bought up by FanDuel in 2015, and has close to 1 million subscribers parsing through its analytics.
The sports big data movement was christened by Bill James who coined the study of statistics in baseball as sabermetrics. That was the platform used by the Oakland Athletics' General Manager Billy Beane that later developed into a movie and book called Moneyball written by Michael Lewis starring Brad Pitt.
FanDuel was able to poach an entire team of sports tech developers when Zynga 365 Sports went bust after a few sports titles failed to stick and FanDuel picked up 38 of the 42 leftover developers in 2015.
DraftKings has pounced its increasing headcount from 425 to 700 at its Boston headquarters taking advantage of the new legislation to ramp up the required staff.
Plundering talent across the pond, too, leaving no stone unturned is a statement of intent.
DraftKings anointed Sean Hurley, who cut his teeth as head of U.K. B2B sports betting technology supplier Amelco and niche online sports book Whale Global, as its new head of sportsbook.
Tapping the U.K. for sports tech talent makes sense.
The U.K. legalized sports betting in 1961. The Brits bet more than $20 billion last year.
There is an affluence of sports betting tech know-how for hire in Europe. American companies would be naive not to pursue staff reinforcements at a time when companies are fortifying talent levels.
Thus, opening up an extensive market full of sports-crazed fans gives U.K. firms a tasty new opportunity to pursue with existing foundations in place.
Upon the announcement, online sports book outfit 888 Holdings (LSE:888) exploded 15% on the London Stock Exchange.
It's subsidiary 888sport was the first foreign company to receive a license to operate by the Nevada Gaming Commission in 2013.
Paddy Power Betfair (LSE:PPB), based in Dublin, is another company poised to benefit and has launched a takeover bid for FanDuel to seize further gains in market share.
Discussions are ongoing.
This all comes after buying U.S. headquartered Draft, a fantasy sports rival, for $48 million.
There are obvious synergies between fantasy sports and sports betting as they both process ample amounts of data that help set the odds for each game.
Online sports betting is another industry that is waiting for Artificial Intelligence (A.I.) to enhance the betting products, creating a plethora of new business opportunities.
British firms use the same in-game add-on product strategy that is popular with e-gaming franchises such as Fortnite.
In-game bets allow gamblers to wager on specific events within a game such as the first scorer of a soccer match or the first player to receive a yellow card.
Niche betting has proved hugely popular.
Paddy Power has already made inroads in America with a horseracing and greyhound racing TV channel and sportsbook called TVG and an online casino in the state of New Jersey.
Cross-border talent poaching will heat up as premium dollars are up for grabs favoring the first movers that can retain business.
The last clear-cut U.K. winner is William Hill (LSE:WMH), which already has an outsized presence in America by way of its purchase of three Nevadan sports books: Lucky, Leroy's, and Club Cal Neva, for a grand total of $53 million.
The deal gave William Hill an 11% market share of sports book revenues in Nevada. The British bookmaker's sports book can be seen dotted all over Las Vegas and Reno thoroughfares.
CEO of William Hill, Philip Bowcock chimed in saying America will benefit with an injection of "100,000 new jobs" stateside, and consumer safety will increase with the need to bet under the table swept into the dustbin of history.
The U.S.-based fantasy sports powerhouses, U.K.-based sports betting sites, and the State of Nevada are the unwavering victors.
The last stratum of indirect winners are the companies that manufacture sports betting equipment.
No doubt that states will likely set up brick-and-mortar sports betting establishments. Companies such as Boyd Gaming (BYD), Scientific Games Corporation (SGMS), and International Game Technology (IGT) could see a nice revenue bump stemming from the equipment they manufacture.
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Quote of the Day
"Cybersecurity is not only a question of developing defensive technologies but offensive technologies, as well," said President of the United States Donald J. Trump.
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