Why I'm Betting The House On eSports, Part II
For the past nine months or so, I had written off fantasy eSports (Vulcun, Alphadraft) as an uninteresting niche in the potential betting markets around gaming. My hesitancy was twofold: (a) I didn’t see why incumbent platforms such as FanDuel or DraftKings couldn’t also service eSports & (b) Given my time in the poker industry – where there were ample poker celebrities yet fantasy poker never materialized – I didn’t think it could yield a sustained, large market. I assumed that gamers would only want to bet on their own game-play, not others’. I was 100% wrong and it’s a painful mistake. Here’s why -
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When you consider the evolution of betting markets, a given industry has historically supported only a single dominant betting experience: either observer or first person. Here’s how I define those terms:
Observer/Fantasy – In this betting model, you are betting on the outcome of a third party(ies) against either a group of people or against a market maker (casino/house). However, the outcome of your bet is entirely dependent on the actions of others. For example, if you are betting that $GOOG will have a good quarter or that the Cubs will win the World Series, you have zero direct involvement in that outcome. In fact, in these markets, manipulation of the outcome is often considered illegal.
First Person – In these models, the outcome is entirely dependent on your own actions. For instance, when playing poker, you are not betting on the outcome of some player in another room, you are betting on your own decisions of what cards to play, when to stay in and when to fold. Assuming that the “luck” of the cards breaks even long term, your performance is entirely dependent on your own actions, not a third party’s.
Because my experience in betting markets was biased by 6 years in the poker industry (both as a professional player and then as an executive at CardRunners Gaming), I naively assumed that betting markets were strongest as first person experiences. What I didn’t realize at the time is that if you look historically at betting markets, online poker is actually the rare anomaly, not the norm.
In fact, the “observer” angle being the dominant form factor is actually intrinsically logical. Why? Because betting markets fundamentally must be built to scale. But First Person markets are unnaturally constrained by time – namely, that an individual can only earn the rewards of his or her own performance. Part of what makes the stock market such a brilliant, liquid, market is that you can generate rent from the hard work of millions of people. In the poker world – the opposite - you were limited by your own efforts.
Further, the truth is that at a theoretical level, poker could well have supported the “observer” model as well. Meaning that there’s no fundamental reason that fantasy poker (or betting on the performance of 3rd person players) could not have become a scaled market. The reason that market never emerged is because online poker lacked an “enabler:”
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Fantasy eSports has excelled because of the presence of an “Enabler” - most notably, Twitch - which live streams desktop and console games for enthusiasts to watch. So important is Twitch to the fantasy eSports experience, that it is in fact directly integrated into Vulcun’s platform. Poker never had a similar enabler.
The First Person: Anyone Can Be a Pro
What gets me so excited about eSports is the potential flywheel affect between the observer and first person sides of the eSports betting market. Here’s what I mean –
I still remember the 1997 NBA Finals when Michael Jordan, playing with an awful flu, hit a buzzer beater over the Utah Juzz. It was such an exhilarating moment that literally all my friends on my block, without any formal coordination, ran outside to the alley to play a game of basketball…we simply couldn’t only watch the game, we needed to play.
A decade later, I was sitting in a glitzy hotel with the top executives at Full Tilt Poker pitching an unprecedented partnership between CardRunners and the gaming giant. They seemed unimpressed by our brand – mostly doubting the value a group of college aged poker whiz kids could add to their platform when compared to their TV poker celebrities such as Phil Ivey, Chris Ferguson and Mike Matusow.
I disagreed. I told them their position was flawed – that their high volume players were disproportionately represented by college aged or young adult males who had enough disposable time to invest hours a day on their platform. For these players, old school road gamblers simply were not relatable. Our college whiz kids, I countered, represented a “relatable fantasy experience.” They are the same age, with similar backgrounds, and no discernable difference in intelligence – they would serve as a relatable inspiration for the aspiring pros to work towards their goals of being great.
The argument worked. We inked what was then, one of the largest partnerships ever with an online gambling operator.
That argument applies to eSports as well. Unlike the NBA or NFL where professional performance is largely constrained by genetics to maybe a few thousand individuals in aggregate, becoming an eSports professional is theoretically available to the vast majority of the 208M gamers worldwide. Of course it requires immense hard work, and tens of thousands of hours of gameplay – nevertheless, becoming great at eSports remains one of the most democratic opportunities of any sport in existence.
It’s for these reasons that I’m also bullish on the First Person side of the betting market. While I’ve seen recent estimates put the total number of gamers who’ve played eSports for real money at sub ten percent, I expect that number to increase greatly as prize pools expand, media coverage increases, and low budget qualifiers enable recreational players to compete on arena stages with professionals.
Because eSports is unique in that its structured to provide liquid markets across both fantasy and first person, there is a real flywheel potential – that fantasy eSports and spectator style viewership will drive enthusiasts towards betting on first person games while first person gamers – constrained by their own time - will want to scale their earnings across the fantasy markets. It's this flywheel effect - the first I've ever seen in a betting market - the leads me to believe eSports could become the highest monetized gaming market in history.
And Now For The Counter:
There are basically three big reasons why eSports from a “First Person” betting market perspective might well outright flop:
Scaleability – As I noted in my piece Game Over: Why Daily Fantasy Has Already Been Won, betting markets are a VIP driven businesses and high volume players drive the majority of revenues on the platform.
But not all volume is the same. Online poker sites were able to extract disproportionate revenue per player by enabling “multi-tabling,” in effect allowing players to play many simultaneous games of poker. Although the option was available to all players, only professionals had the dexterity to manage 12 simultaneous hands of poker profitably.
Daily Fantasy Sports offer a similar experience known as “multi-entry” where players can (often without manually even inputting the same lineup) replicate their desired lineup across multiple tournaments of varying buyin-size instantaneously and without friction.
Both multi-tabling and multi-entry enhanced two things: (a) platform liquidity – enabling more games to run, and (b) generated increased revenues per player.
As far as I can tell, first person eSports lacks a parallel infrastructure – meaning that no single gamer can provide liquidity across multiple games simultaneously. And while I don’t think it’s a pre-requisite for a healthy ecosystem, it does make me wonder if it’ll be harder for First Person betting platforms to scale. I can envision some creative solutions to this problem, but nonetheless, it worries me.
Skill Gap – In poker as in fantasy sports, there are mathematical long-run winners and losers. However, in the short-run (small sample sizes), the skill gap between an amateur and a professional is not insurmountable. The effect of this delta in skill (let’s call it 65/35 to keep it simple) means that a complete amateur will still emerge victorious from a poker tournament or DFS match a reasonable percentage of the time.
The intrinsic issue for eSports is the skill gap: namely, that a professional gamer will beat a new or amateur player pretty much 100% of the time. That makes it difficult for amateurs to have an enjoyable experience when entering the market. It also makes it difficult to market a betting platform to recreational players (because it is therefore fundamentally impossible to have a “Moneymaker” moment or replicate FanDuel’s aggressive marketing of averages Janes winning DFS tournaments).
All that said, this problem is not unique to eSports. For example, boxing solved a similar problem with defined weight classes. The “handicap” system introduced by the PGA allows an expert and a rookie to play a competitive game in spite of skill differences.
That said, where there is a lot of money on the line, there is a huge incentive for players to misrepresent themselves as inferior to their actual skill. I don’t know if the skill gap question is ultimately the Achilles heel for eSports but it could be the factor that forces external regulation of the industry.
Platform Integration – eSports first person betting requires players to engage an off-platform third party to wager, settle bets, and track tournaments because the game providers do not have betting functionality built in. In a practical sense, what this means is that unlike the fantasy eSports platforms that have integrated Twitch directly, there is a lot of friction in first person tournament betting in that a bettor must: (a) Join a third party betting provider (b) Fund Wallets (c) Select match from a 3rd party lobby (d) Then connect to Game directly and play.
For competitive gamers, that level of friction is irrelevant: they are already regularly engaged with multiple third parties: gamer forums, gaming news sites, existing tournament platforms, etc. The unknown questions really are: (a) Will game developers respond to demand and open their platforms to enable direct integration by tournament facilitators and aggregators or (b) Will recreational players be comfortable multihoming between platforms in the same way we engage with other sports (ie, we watch a game via television/stream while betting or playing fantasy on a 3rd party such as Yahoo!, Fanduel or Bodog).
Parting Thoughts
In my opinion, eSports betting markets aren't yet even in the first inning of their journey. For comparison sake, at the time of this publishing:
PokerStars regularly eclipses 100k active players on its platform during off-hours (that number can spike to 250k+ on Sundays)
Although FanDuel/DraftKings don't report simultaneous players, FanDuel did report 1M players who placed an active bet in Q4 2014. I think it's a safe assumption that on peak NFL Sundays, a good 20% were likely DAUs meaning they hit 200k players on peak days.
Vulcun reports players "Online Now" and I've personally never seen more than 2,000 simultaneous logins. **I have no scientific way of tracking this, but I check occasionally and gives a rough size of scope.
Kickback reports "Players Online" and I've never seen more than 150 simultaneous logins. **Again I have no scientific way of tracking this, but I check occasionally and gives a rough size of scope.
These stats reflect that the industry is in its absolute infancy, but with the potential to saturate exceptionally quickly, especially given the viewership of Twitch and Youtube.
I’ve written a lot so will leave it there for now. If you are building any platforms in the eSports space or have some great resources to check out, please e-mail me or post in the comments. Thanks!
Special thanks to Taylor Caby for his feedback on this post