In part two of our exclusive interview with Lloyd Danzig, the Sharp Alpha Advisors Founder and CEO talks about the upcoming SBC Digital Summit, the resilience of the betting and gaming industry and how the ongoing health crisis has impacted investment and innovation within the sector.
Our readers can learn more from Danzig as he takes part in the inaugural SBC Digital Summit later this month, speaking alongside Tom DiEnno, Jason Scott and Wayne Kimmel on the Betting on Sports America track, ‘M & A and Investing in Sports Betting Companies’.
SBCA: Is there, and if so where, an opportunity for innovation and investment amid the current climate?
LD: If this crisis has paved the way for one thing, it’s the opportunity for innovation. The well-capitalized companies with fortified balance sheets as well as the earlier-stage ventures that were already planning to sustain 2020 operations without revenue are both supremely situated to enhance their product offering.
Consumer-facing companies that invest in their loyal customers, making them feel safe, both physically and financially, will quickly learn that profit maximization and consumer satisfaction/protection stand in anything but a zero-sum relationship to one another. I don’t think there’s any debating the fact that many of the most disruptive and transformative businesses and technologies that shape the next decade will emerge from necessities brought on by the pandemic.
As is usually the case, whether and what investment opportunities exist tend to depend on one’s investment horizon. In the short- to medium-term, there will be a major need for technologies and platforms that enable the void left by the absence of sports to be filled. The scheduling and logistics of allowing games to start taking place again are only one piece of the puzzle. Optimizing broadcasts for fan engagement and revenue opportunities in a post-COVID world may, at least temporarily, look significantly different than they did previously.
Just as we’ve seen a huge increase in interest in telehealth, video conferencing, and home wellness solutions, we should expect to see innovation in proportion to the time spent with a COVID-impacted sports entertainment product on the market, as well as the degree of suboptimality with which that product is conveyed. It certainly seems that there is a window of opportunity, ripe for capitalization by businesses that don’t rely on human contact.
We’ve seen various amounts of growth and interest in online poker, traditional esports, iracing, Madden simulations, NBA 2K contests, and other such alternative engagement mechanisms and betting markets. There is a large spectrum of success that has been enjoyed by such initiatives, but the US has not yet had a “must-watch TV” moment in the sports world. Many are hoping that the NFL Draft fills that gap, and it seems poised to do so, but only time will tell. Regardless, that is a non-recurring event, meaning any relief will be fleeting.
All that said, if you are a long-term investor who was bullish on the growth of the sports gaming industry in the US, it’s hard to argue that the bullishness should be significantly or permanently tempered. Averaged over a 10- or 20-year time horizon, it’s hard to predict anything but substantial compound annual growth in US sports betting handle, even if slightly muted from pre-COVID projections.
It is possible that the disposable income needed to wager on and attend sporting events is depressed over the short-term, though that requires a level of rational consumption and economic behavior on behalf of consumers that are notoriously irrational. Either way, I think it’s clear that the emotional and social demand for sports content as well as the energy to devote attention to it will revert to pre-COVID levels almost instantaneously, and arguably may exceed them.
Still, virtually every company on the planet is taking a revenue and valuation hit. It is critical that executives steer businesses through the crisis in a way that investors and partners will find indicative of the type of leadership they want to be aligned with. There is ample opportunity to demonstrate not only decisiveness but also pragmatism. However, the few ventures attempting to assert, without data-driven evidence, that their pre-revenue valuations are actually increasing under quarantine, should not see any mystery in their not obtaining venture funding.
SBCA: Gambling is often seen as being recession-proof and an increase in online gambling activity amid the COVID-19 outbreak indicates it has the staying power to defy a pandemic. Why is it so resilient while so many other industries struggle to cope?
LD: I think we may be seeing a consistent trend across gaming markets (from a geographic perspective), but not necessarily always motivated by an equal weighting of factors in each market. Incontrovertibly, the increase in available time to spend on leisure activities is a boon for online gambling. However, devil’s advocates could suggest it will be offset by the dramatic decrease in disposable income as well as a phenomenon known as the “wealth effect”, which describes changes in discretionary spending habits as a function of one’s perception of their own wealth.
If these macroeconomic factors are to have an impact, such an impact could be delayed as wages are often defined as being “sticky” and unemployment claims are typically a lagging indicator. In other words, it’s possible that the long-run equilibrium level of many consumer’s post-COVID discretionary spending allocated to gambling has not yet taken a hit commensurate with the shock to the economy. With the situation changing so quickly every day, it’s hard to make an accurate projection on this point. Generally, there has been shown to be some real income elasticity for lottery sales, though permanent changes in consumption tend to be based on long-run changes in expected future income.
The very fact that most consumers do not act rationally may be at least a partial clue to the resilience the gambling industry is thought to show to economic downturns. Additionally, we know that stress and boredom are generally correlated with gambling activity. Some studies have shown state unemployment rates to be positively correlated with lottery sales, as the lure of the big jackpot becomes increasingly attractive. There is likely not enough empirical evidence relevant to the COVID-19 crisis, given its unprecedented magnitude, to confidently opine as to its true long-run impact.
However, I think online gambling offers customers something unique that very few other activities can rival, which is a direct exchange of money for utility, satisfaction, or whatever operative word you choose to describe the enjoyment derived from the activity.
While the importance of sustainable gaming efforts should not be overlooked, a large portion of gamblers have done an incredible job calibrating their spending on gaming with utility maximization. For example, you’ll hear many talk about the fact that wagering $20 on a Monday Night Football game and losing is more akin to paying $20 for 3 hours of fun and engagement that might not have otherwise been possible. Compared to the prices of other activities, the $20 wager suddenly seems like a great investment in one’s own enjoyment. Smacktalk culture is alive and well in the US, as evidenced by Barstool’s $450mm valuation in the Penn Gaming deal.
In addition, though the following holds more in some regions than others, there is an enormous social component to online gambling. Whether it’s a poker game with video chat functionality that is actually linking social groups, or the shared experience of wagering on the same event and rooting alongside and against one another, there is a massive social benefit that starts to build with a compounding network effect. In other words, five friends wagering $20 on the same event will create more aggregate downstream utility than five individuals each wagering $20 on separate events in isolation.
Particularly at a time when demand for human connection and companionship are at all-time highs, it’s no surprise that available online gambling mechanisms remain popular. Of course, it is important to acknowledge that there is likely some non-zero percentage of the population whose difficulty in gambling responsibly will be exacerbated by crisis.
Yet again, I feel we reach an issue where the morally praiseworthy path is also likely to be the profit-maximizing one over the long-run. Protecting at-risk customers during a time of need may result in the forfeiture of a nominal short-term cash flow. However, the long-term loyalty of that customer as well as the benefit to the perceived integrity of the industry (which is always damaged by stories of ruin and addiction) clearly outweigh it by many orders of magnitude.
SBCA: What are your thoughts surrounding the SBC Digital Summit and what do you think it can provide the industry with?
LD: One of my favorite things about the sports industry is the passion that every stakeholder brings to it. Virtually every conference-goer I met was a sports fan long before their career took root. I think this is best showcased when people get together and get excited about the future growth of and innovation within the industry, and that it’s a major loss to not be having these meetings in person. That said, to the extent that virtual forums can provide some sort of proxy, it’s excellent to bring people together in this way.
I also have noticed an enormous increase in the demand for knowledge, unique insights, and domain expertise. Especially as the US industry is so nascent, there aren’t many questions that can be answered with a quick Google or Wikipedia search. Many of the most important answers and thoughts regarding the future of the industry currently exist only in the minds of those who have conceived them. Again, the virtual conference is a great mechanism for distributing these ideas, considering the current constraints we are all subject to.
Perhaps above all else, I think the human connection that is fostered by seeing each other’s faces and interacting in the most authentic way possible is priceless. Those putting the work in during the early days of this industry will have a real formative role in shaping the clay that is the infrastructure of the mature state of the US sports betting space. It can be difficult to stay motivated and to summon the energy required to take the initiative to innovate and take risks. However, I know that one of the best antidotes to this problem is the energy that builds when we are all in the same room together. Hopefully, the SBC Digital Summit can bring some of that energy to each of us in our homes.
To read part one click here.