As the U.S. sports betting market matures, operators are expected to invest increasingly in product innovation to differentiate themselves from the competition. To date, much of the discussion related to innovation has focused on in-game betting and micro wagering. But surprisingly, it could be out-of-game, out-of-season products (think: wagering on the outcome of a simulated sporting event) that give operators a leg up. Lloyd Danzig (managing partner, Sharp Alpha Advisors) pointed out that “macro trends such as Web 3.0 and the Metaverse have brought forth a new generation of simulated betting products…[And] companies like ZED Run have shown the increasing popularity of this form of competitive entertainment, especially among younger, crypto-native users.”
JWS’ Take: To be clear, we believe in-game and micro betting are going to be tremendous revenue and engagement drivers for the industry. But as Danzig noted, virtual wagering “offers a number of advantages over traditional sports. Operators have full control over the timing and quantity of games offered. Wagers can be made and settled at any time of day, all year round. [And] since the games are simulated using random number generators, players can wager on shortened, highlights-only versions of the games.” So, virtual wagering has the potential to significantly expand the number of betting opportunities available. If it becomes a widely adopted practice, the financial upside is seemingly limitless.
Betting on an event that never actually occurred may sound strange. But virtual is a big part of the European market. It is also popular in Australia and Turkey. Bettors in those locales will wager on simulated horseraces, soccer games and even greyhound racing.
There are reasons to believe virtual sports betting will catch on here too. Strat-O-Matic CEO Adam Richman said he thinks the U.S. could be “the next big market” for it. He cited the increased demand for the company’s simulated content, which has exploded in 2020 and 2021 (NBC Sports Boston, Marquee Sports Network, the New York Post, the San Francisco Chronicle, the Los Angeles Times and The New York Times are among the outlets that have run/are running Strat’s SIM media content).
The ability to wager on shortened, highlights-only versions of games (akin to popular online casino games) should also pique the interest of a target demo that seeks instant gratification. And some will find “virtual events appealing to wager on because the odds are directly calibrated to the probabilities of various outcomes, meaning no one should have an edge over anyone else,” Danzig said.
Sportradar and Genius Sports both currently offer a broad menu of simulated events and corresponding betting markets. And several other companies, including Strat-O-Matic, are in the process of developing virtual sports betting products for the U.S. market. While the vertical may end up becoming a growth driver for the industry, not everyone is convinced it will. “There will be a hesitation to trust in the fairness of the outcomes. For others, there will always be an appeal to wagering on real-life sporting events that simulated matches cannot replicate,” Danzig said. “Including concerns over responsible gaming, there are several potential barriers that could prevent mainstream adoption.”
Stiff competition in the sports-focused NFT space could accelerate the adoption of virtual sports betting stateside, though. Companies like Sorare, Dapper Labs and Autograph have combined to raise over a billion dollars in recent months. Now, these well-capitalized companies are looking to distinguish themselves. While some have leaned into rights (think: Dapper Labs and NBA) and distribution (think: Autograph and DraftKings marketplace), others are looking to functionality as a means of differentiation, creating environments where virtual games and experiences occur and the NFT holder can make money on them. The most valuable company in the space is Sorare, which has a tokenized fantasy sports experience.
ZED Run is another company to have gamified its NFT product. While the virtual horseracing platform does not permit wagering, users can breed or buy virtual horses, pay a modest entry fee into races ($5 to $50), run their horses and win cash. Danzig said ZED Run’s success “demonstrates an openness to tokenized, virtual sporting events that may also translate into adoption of the more traditional form of betting on simulated matches.”
The blockchain-based game has been promoted as for entertainment purposes only, but ZED Run is working to adhere to the compliance regulations that govern the virtual sports betting business, a sector it believes has tremendous upside (which would help to explain why the company hired former TwinSpires president Ted Gay). ZED Run declined to comment for our story.
Virtual betting products have not really caught on in the U.S. to date. So it remains unclear if domestic sports fans prefer the look and feel of ZED Run (think: futuristic graphics) or a more life-like version of the simulated event (think: splicing together video highlights). Second Spectrum president Rajiv Maheswaran said his company remains focused on building out the core model. “A lot of what will make [SIM products] compelling is [whether a company] has the underlying physics to make someone feel like [the simulation] is an actual representation of a sporting event.” A determination on how they will present that to the sports bettor will come later.
Like Second Spectrum, Strat-O-Matic’s primary focus remains on the statistical reliability of its research-backed data (remember, Danzig noted trust in the fairness of outcomes was likely to be a headwind to adoption). “When you talk about simulation and sports betting, it is all about the research and the reputation of the SIM,” Richman said. Visual representation is secondary for the company.
Second Spectrum’s models are used by NBA coaches and Premier League managers alike (indicating they are a good representation). They do not currently power any sports betting products. But as Maheswaran noted, we are still in the very early innings, in terms of both legalized sports betting and predictive modeling. “There’s no doubt they will eventually get out into the ecosystem” over the next one to five years, he said.
