Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,891% through to 30 June 2023.
In collaboration with iGaming NEXT, the August edition of Waterhouse VC takes a deep dive into the battle between Twitch and Kick for streaming supremacy.
Twitching into gear
Streaming involves transmitting media content, whether it’s live or pre-recorded, through the internet for immediate playback on computers and mobile devices.
Streaming allows audiences to connect with content creators across gaming, art, music, sport and several other categories.
A viewer can engage directly with the streamer through chat functionality and can pay them if they enjoy the stream, effectively monetising streaming for the content creator.
The rise of pro gamers and dedicated fan bases has boosted user numbers on streaming platforms like Twitch, which Amazon bought in 2014 for $970m, just three years after its 2011 launch.
The opportunity in streaming is vast, with just a handful of platforms dominating the $3.8bn industry.
Audiences converge to take part in gameplay, tutorials, and social chat rooms, hosted by their favourite gamers.
Most platforms are free-of-charge for both streamers and their audiences. The platforms monetise their audiences through advertising and by taking a portion of premium subscription revenue and merchandise sales.
For example, there are three tiers for Twitch users who want to subscribe to a streamer: $4.99, $9.99 and $24.99 per month.
In the case of Twitch, subscription revenue was split 50/50 between the platform and the streamer until June 2023 when the split was adjusted to 70/30 in favour of the streamer (details here).
Twitch also has ‘Bits’, which is the platform’s internal currency used by viewers to support/tip the streamer.
Revenue generated through Bits is split between the streamer and the platform according to several factors, such as the streamer’s popularity and their location.
See more statistics about Twitch at this TwitchTracker.
There are several reasons why Twitch adjusted the subscription revenue split with streamers, one being that the vast majority of streamers believe that they are underpaid for their work.
A 2021 leak revealed that only 0.01% of streamers make more than minimum wage. Another reason for Twitch’s new revenue split is increasing competition from burgeoning new platforms.
Kicking streaming on its head
Kick was launched in January 2023 and is gaining significant momentum among both streamers and viewers.
The platform is offering extraordinarily lucrative terms to streamers with a 95/5 split in favour of the streamers and also allows the streamers to keep all tips.
One of Kick’s key differentiators from Twitch is the platform’s positive attitude towards gambling.
In September 2022, a Twitch streamer admitted that he had borrowed money from popular creators under false pretences to fund gambling.
This event, combined with an existing negative perception of gambling streaming, resulted in Twitch banning most gambling streaming (excluding sports betting and poker), effective as of 18 October 2022.
The company said: “We’ll be making a policy update on 18 October to prohibit streaming of gambling sites that include slots, roulette, or dice games that aren’t licensed either in the US or other jurisdictions that provide sufficient consumer protection.”
In contrast, Kick’s gambling content is among the most popular content on the platform, which has successfully attracted some of the most popular streamers away from Twitch.
For example, ‘Trainwreckstv’ switched to Kick.com when Stake was banned from Twitch and in June 2023, ‘xQc’ inked a $70 million two-year deal with Kick.
There is a huge global demand for viewing gambling streams and Kick caters to this demand. As we have seen with the gambling industry itself, when bans arise, consumers still often find a way to gamble and the industry remains resilient.
The concept of watching gambling as entertainment is a nascent industry segment, and as with any new industry, regulation develops swiftly.
Easygo Entertainment Pty Ltd (Easygo) is “the Australian powerhouse behind some of the world’s fastest growing online brands including Kick and Stake” (Easygo.io).
Kick’s registered legal entity is Kick Streaming Pty Ltd and its only shareholder is Easygo, which was established in 2016 by Ed Craven and Bijan Tehrani.
Consequently, we can be confident that Kick will not ban gambling streaming. We have discussed Stake and the extraordinary growth of crypto wagering in several previous newsletters, such as May 2023.
Kick continues to attract fresh streamers, with its alluring 95/5 revenue split supporting the platform’s growth from 9,000 active channels in January to 67,000 active channels in April.
Over the same period, the platform quadrupled its monthly number of hours viewed, from 12.8 million to 51.8 million (Streams Charts).
This annualises to 620 million hours, which is just 2.8% of Twitch’s size. However, with such strong growth and a positive attitude towards gambling streaming, Kick poses a formidable challenge to Twitch’s dominance.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,891% through to 30 June 2023.
In collaboration with iGaming NEXT, the July edition of Waterhouse VC takes a deep dive into the world of gambling affiliation, and its potential for the crypto gambling sector.
Checking the fiat odds
As outlined in our previous newsletters (for instance, July 2022), wagering affiliates mainly earn their revenue by directing bettors to bookmakers. The primary revenue models employed are revenue sharing and cost per acquisition (CPA).
There exist several strategies for wagering affiliates to channel traffic towards bookmakers, such as creating sports-centric media content or contrasting various bookmakers’ odds and promotions.
An example of one of the most well-known bookmaker comparison websites is Oddschecker. The platform compares odds and promotions from more than 25 UK bookmakers while also offering betting tips and insights.
Affiliates like Oddschecker particularly thrive in emerging markets, like the US, where operators fight fiercely for customer acquisition. Both large and small operators spend up to $1,000 to acquire a customer, leveraging all available marketing channels, including affiliate marketing. The two largest US wagering operators spend over $1bn on marketing.
A number of affiliates have identified the potential in the US market, concentrating their organic growth and M&A activity in this region. In May 2021, Better Collective completed its $240m acquisition of The Action Network, a US-based affiliate offering odds comparison, various podcasts, and other types of media content.
In July 2021, Bruin Capital purchased Oddschecker from Flutter for a potential total of $218m ($190m upfront plus deferred considerations). With this acquisition, Bruin plans to enhance Oddschecker’s services while supporting its foray into the lucrative US market.
“There are strong links between Oddschecker’s UK development and its opportunity in the US, where the marketplace is very fragmented, and discovery and customer acquisition experts will be highly sought after.”
– George Pyne (founder of Bruin Capital)
Furthermore, in November 2021, FansUnite acquired American Affiliate, a collection of US affiliate websites, for $58.2m (equivalent to 9.7x EBITDA). At the time of the acquisition, American Affiliate had delivered 150,000 new depositing customers to US wagering operators, including DraftKings, FanDuel and BetMGM.
Checking the crypto odds
While the US and other newly regulated markets present exciting opportunities for affiliates, we are particularly enthusiastic about the prospects for affiliates focused on directing bettors towards crypto wagering operators.
We last covered the broader opportunity in crypto wagering in May. According to GlobeNewswire, the global online wagering industry generated revenues of approximately $58.2bn in 2021, with a projection of $145.6bn by 2030. We foresee that the industry’s future growth will primarily be driven by the widespread adoption of crypto wagering.
Similar to the US market dynamics, numerous crypto wagering operators are currently vying for market share. Consequently, affiliates are well-remunerated for delivering depositing bettors to crypto operators. Revenue shares offered to affiliates can be as high as 50%.
We believe that there is a particularly significant opportunity for a comparison website dedicated to crypto operators. This untapped opportunity will remain attractive as the crypto wagering industry matures.
Considering that OddsChecker was sold for $218m and generates 97% of its revenue from the UK, an odds comparison website operating in the substantially larger crypto wagering segment presents an immense opportunity. Furthermore, unlike crypto operators themselves, affiliates are typically valued at a significantly higher multiple of earnings. For example, Better Collective is currently valued at 12.5x EBITDA.
Betscanner
Betscanner’s main service will be to compare odds from sporting events offered by crypto bookmakers. The data required for odds comparison will be obtained either via data scraping or through direct partnerships with the bookmakers, with a focus on improving live odds comparison, user experience, and esports.
When established, revenue sources will include operators paying monthly retainers to not only drive new traffic but also ensure that they retain existing users through market visibility. Marketing tactics will encompass SEO, Google Ads, influencer marketing, social media campaigns, and exclusive sign-up bonuses.
Betscanner is one of several exciting opportunities that Waterhouse VC is participating in.
Media
On 21-22 June, our portfolio manager, Peter Stevens, spoke at iGaming NEXT Valletta on the topic “State of play: Can the economic crisis yield unique opportunities?”. If you would like to watch the panel discussion, here is the link.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,863% through to 31 May 2023.
In collaboration with iGaming NEXT, the June edition of Waterhouse VC takes a deep dive into some of the world’s most successful investors and how their strategies align with professional betting behaviour.
Convergence of betting and investing
“The market is a racetrack too. But I was not developing elaborate theories in those days. I was just a little kid.”
World-renowned investor Warren Buffett (chairman and CEO of Berkshire Hathaway), and numerous other famous investors were initially influenced by betting and bookmaking (particularly horse racing) before transitioning to financial markets.
The new wave of professional bettors are now finding success in financial markets as well, with significant cross-over in the statistical analysis and thought processes applied across the two domains.
For example, one prominent framework utilised by both investment firms and professional betting syndicates is the Kelly Criterion. Furthermore, in both betting and investing, the impact of decision-making biases and human psychology is critically important.
Warren Buffet
“You could get old racing forms… I would go through them using my handicapping techniques to handicap one day and see the next day how it worked out. I ran tests of my handicapping ability day after day.”
One may expect these to be the words of a professional bettor but they are in fact from Buffett.
Few people know that much of Buffett’s formative years were significantly influenced by horse racing.
He fervently assessed the Daily Racing Form and having figured out the probability of each horse winning a race, he even did some of his own bookmaking at the Preakness Stakes in Baltimore.
Through betting, Buffett learnt several important investing lessons, including:
“You’re not supposed to be every race” (Maiden King) – When applied to investing, this could be interpreted as there being no need to always actively invest and that it is sometimes best to do nothing.
“You don’t have to make it back the way you lost it” (Maiden King) – When applied to investing, this could be interpreted as the need to pivot investment strategies according to market conditions.
Jeff Yass
“If you’re the sixth-best poker player in the world and you play with the five best players, you’re going to lose… If your skills are only average, but you play against weak opponents, you’re going to win.”
Jeff Yass (co-founder of trading firm Susquehanna International Group) said the above when asked to describe Susquehanna’s trading strategy.
In 1985, Yass and a couple of friends bet at a track outside Chicago using analysis from a Compaq computer.
With the assistance of a statistician who had worked for NASA on the moon landing, they bet $160,000 across tens of thousands of wagers to get the exact order of seven horses in three races, ultimately winning $760,000, which was then the largest win in American racing history.
The win was never honoured, although Yass went on to make $28.5bn through Susquehanna according to Forbes.
Similarly to Susquehanna, the world’s largest betting syndicates have turned their attention to financial markets, trading equities, FX and derivatives.
For example, one of the world’s largest betting syndicates is now trading $40bn a week on FX.
On the flip side, prominent international investment firms like Susquehanna are also applying their expertise to professional betting.
In 2017, Susquehanna launched Nellie Analytics, based in Dublin, with a specific focus on sports betting.
In 2022, Susquehanna acquired a 12.8% equity stake in PointsBet, creating an opportunity for Nellie Analytics to explore a partnership in delivering sports analytics and quantitative modelling services to PointsBet.
Mohnish Pabrai
“Investing is just like gambling. It’s all about the odds. Looking out for mispriced betting opportunities and betting heavily when the odds are overwhelmingly in your favour is the ticket to wealth.”
Mohnish Pabrai (Founder of Pabrai Funds) is a fervent follower of Warren Buffett and Charlie Munger.
He published a thorough framework for value investing, ‘The Dhandho Investor’ (Dhandho is a Gujarati word translating to “endeavours that create wealth”).
There are numerous key ideas explained through betting analogies in Pabrai’s book. For example, he believes that the best way to increase returns and reduce risk is by making “few bets, big bets, (and) infrequent bets”.
He often relates betting analogies to the Kelly Criterion, which is regularly applied to both professional betting and investing.
Kelly Criterion
The Kelly Criterion was originally developed by John Kelly in 1956 to assess long-distance telephone signal noise.
It now assists investors and bettors in determining the optimal diversification of a portfolio/bankroll by calculating the proportion of their money that they should allocate to every individual investment or bet.
This proportion is the ‘K%’ in the above formula. For example, in investing, if the K% is 0.125, then a portfolio should be 12.5% invested in each stock in the portfolio, effectively telling the investor how many positions to take.
Of course, if you have a negative winning probability, ‘W’, there is no optimal Kelly percentage.
As shown below, position sizing is incredibly important in both betting and investing.
If you have a bet with a 51% probability of winning and invest 5% of your money/bankroll each time, you will achieve a very different outcome to if you invest 10%.
Minor changes to the percentage invested will ultimately make the difference between success and ‘Gambler’s Ruin’.
The Kelly Criterion is the solution to gambler’s ruin, whereby bets/investments are determined as a proportion of bankroll rather than as fixed dollar amounts, such that a person bets/invests less as their bankroll falls and bets/invests more as their bankroll rises.
The Kelly Criterion has been used by some of the world’s most famous investors, including Warren Buffett and Mohnish Pabrai.
Bill Miller outperformed the market for 15 years at Legg Mason and has been a vocal proponent of Kelly. Ed Thorp, who returned 20% per annum for 30 years, said of the Kelly Criterion: “Success leaves clues.”
Thorp also pointed out that Warren Buffett’s investing is consistent with the Kelly Criterion: “He (Buffett) and his associate Charlie Munger, when managing $200m, put most of it into just five or so positions.
“Sometimes he was willing to bet 75% of his fortune on a single investment. Investing heavily in extremely favourable situations is characteristic of a Kelly bettor.”
Betting on tennis betting
As mentioned in our April newsletter, on 1 July, Waterhouse VC will make an investment in Tom Dry’s professional betting syndicate.
With a little help from the Kelly Criterion, Tom’s operational metrics are very impressive. Tom has developed a unique specialisation in tennis, which is much easier to leverage than multiple sports.
We believe that his edge in tennis betting would be difficult to replicate due to the quantity of proprietary historical data he possesses and the factors that he applies to his model.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,868% through to 30 April 2023.
In collaboration with iGaming NEXT, the May edition of Waterhouse VC takes a deep dive into crypto gambling operators and their supplier ecosystem.
Opportunity of crypto wagering
In May last year, we first discussed the opportunity of crypto wagering, which is the fastest growing part of the wagering industry.
Some online crypto operators have rapidly become large businesses and well-recognised global brands, such as Stake.com and Sportsbet.io.
The global online betting industry generated revenues of circa $58.2bn in 2021, with $145.6bn expected by 2030 (GlobeNewswire).
We expect that the increased penetration of crypto betting will drive the majority of industry growth.
Sportsbet.io already records $2.7bn of turnover per month. To put that in perspective, in 2021, Australia’s largest operator averaged $1.2bn of turnover per month and has around 50% market share in the country.
Sportsbet.io has formed strategic partnerships with several prestigious football clubs, such as Southampton, Arsenal, and São Paolo.
Cryptocurrencies such as Bitcoin, Ethereum, and Litecoin facilitate quick and smooth transactions with lower fees compared to conventional methods.
This not only delivers near immediate payouts but also minimises operational expenses for crypto wagering businesses.
Players benefit from rapid and efficient deposits and withdrawals, as well as anonymity, security and data privacy when betting online.
Operators like Stake.com and BitStarz Casino have already developed a superior user experience (UX) to online fiat operators.
Online crypto operators are focused incessantly on the customer and are now leading the industry with respect to UX, whilst legacy operators have generally been slower to adapt.
For example, Stake.com regularly develops new slots games, while maintaining its own ‘Stake Originals’ in-house games.
Customers of crypto wagering operators benefit from far larger bonuses/offers and superior odds because operators pass on some of their several cost savings, such as lower deposit/withdrawal transaction costs and lower product fees compared to fiat operators.
The below selection of Trustpilot scores demonstrates players’ preference for newer crypto operators over mature fiat operators.
New age wagering platforms
Within the crypto wagering segment, there is a unique opportunity for cutting edge back-end platforms for crypto wagering operators.
While there are numerous existing platforms for fiat operators (such as Kambi, SBTech, Entain, OpenBet, Amelco and Aspire Global), there are just a handful of platforms built for crypto operators.
Having assessed these platforms, we believe that several gaps remain in their functionality.
We have summarised the core capabilities that we would expect in cutting-edge wagering platforms here.
Most existing platform providers are built on legacy technology and require significant development work for any changes to be made to the platform.
Modern platforms should offer racing, sports, and gaming, while seamlessly integrating payment options in both cryptocurrency and traditional fiat currencies.
New platforms should incorporate cryptocurrency as an integral part of their technological framework, rather than treating it as an afterthought.
One of the benefits of investing in a wagering platform is the diversification of revenue across a global client base of operators.
Platforms typically charge an integration fee as well as up to 25% of gross gaming revenue (GGR) depending on the number/type of services provided. Some platforms also charge out developers for optional ongoing development costs.
By taking a share of revenue from numerous operators, crypto wagering platforms are leveraged to the growth of the entire segment rather than facing the operational risk of one crypto wagering business.
Sanco Technology
An essential part of Waterhouse VC’s strategy is identifying management teams with substantial domain expertise.
In this case, we have looked for teams with expertise in constructing and managing successful wagering platforms operating in highly competitive markets.
One such team has launched Sanco Technology, a private company currently raising money for its platform build.
Sanco’s platform will be set up to have “plug & play” crypto integration functionality and will serve a global client base, with a particular focus on emerging crypto wagering operators.
The platform will be built in a modular fashion to allow for self-customisation from all operator clients.
Sanco Technology is one of several exciting crypto wagering opportunities that Waterhouse VC is participating in.
Media
On 21 and 22 June, our portfolio manager Peter Stevens will be speaking at iGaming NEXT Valletta on the topic “State of play: Can the economic crisis yield unique opportunities?”.
The conference attracts 4,000+ senior delegates for two days of high level networking, world-class content and great hospitality. Register for the conference here.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,860% through to 31 March 2023.
In collaboration with iGaming NEXT, the April edition of Waterhouse VC looks at the complexity of professional punting and syndicate betting.
Are you feeling lucky?
David Walsh and Zeljko Ranogajec (business partners) are professional bettors, whose syndicate bets about $10bn per annum across horse racing, sports betting and lotteries, according to the AFR.
Walsh spent $75m to re-open Hobart’s Museum of Old and New Art (Mona) in 2011.
“Finding a system that works and is stable and works for a long time is extremely difficult. If you’ve had a system that works for 20 years, it’s not as a result of skill. You acquire the system that worked by luck, then once it worked, it might keep working.”
David Walsh
In our December newsletter, we discussed the niche but highly lucrative field of professional betting.
Betting successfully is incredibly challenging, with other market participants always trying to take your ‘edge’. This dynamic means that betting strategies must be adjusted all the time.
Rebating the competition away
The large betting syndicates receive generous rebates from pari-mutuel/tote betting for providing liquidity.
This gives them a significant edge (varies depending on pool/jurisdiction) over other participants.
To receive this rebate, bettors need to turnover vast sums of money. For example, US totes typically only offer rebates to bettors who wager over $5m per year (Sports Trading Network).
The largest pari-mutuel markets are in the US, Australia, Singapore, Japan, Hong Kong and France.
It is incredibly difficult for new entrants to compete with the handful that currently dominate because they are already behind.
The compounding of their rebate advantage has generated incredibly lucrative profits for the largest syndicates.
Data is competitive and costly
Alan Woods (deceased) and Bill Benter are other examples of successful professional bettors focused on racing.
Benter grew up in Pittsburgh and studied physics at university before taking on Las Vegas casinos at blackjack.
Woods grew up in Murwillumbah, a small Australian town. Woods was an actuary, who became a gambler with particular horse racing expertise.
After being banned from casinos, Woods and Benter partnered in 1984 to bet on horse racing in Hong Kong.
Their system developed an edge by betting on overlays but it was several years before they were generating significant profits.
In the first two years, they lost most of their $150,000 starting bankroll.
After a split from Woods, Benter started his own model using only 16 factors.
Over several years, the number of factors used in the model grew to over 100 and complex data began to play an increasingly important role.
Today, syndicates have large teams of statisticians and data analysts assessing 100s of unique factors.
For example, analysts of horse racing assess factors related to each horse, the racecourse, turf conditions, the trainer, the jockey and track configuration.
While the largest syndicates would win without the rebates from the totes, the rebates effectively provide further funding for their investments into data analysis capabilities, strengthening their competitive advantage.
This ‘rebate / data investment’ flywheel makes it extremely difficult for newcomers to break into professional betting.
Furthermore, in our discussions with professional betting syndicates, they told us that you usually need up to 5000 individual events to work out whether you have a real betting advantage that meets expectations, with lower advantages requiring more individual events.
For example, sports betting models require more events, given their typically lower advantages than horse racing models.
As Benter and Woods experienced early on in their racing betting, unfortunate luck in these first few thousand individual events easily bankrupts hopeful syndicates.
As shown by the deviations of the red line (cumulative result of actual dice rolls) above and below the blue line (expected value of dice rolls), it takes many events to determine the actual advantage (in this example, there are 6000 events and it is still unclear if there is an advantage).
Artificial Intelligence in betting
There has never been more data and technology applied to professional betting as there is today.
The increasing power and prevalence of artificial intelligence (AI) is the latest wave of technological disruption, which presents opportunities and threats to existing and emerging betting syndicates.
As discussed above, incumbent syndicates are best funded to further strengthen their dominance through investing in AI capabilities.
AI could improve the speed and efficiency of a syndicate’s automated betting processes, ultimately bringing down the cost of placing bets.
Consequently, the speed of bet placement is likely to become even more competitive.
From the bookmaker’s perspective, AI can identify new patterns and insights from betting data to ultimately make better predictions, adjust odds and minimise their losses to professional bettors.
For casual bettors, AI allows bookmakers to personalise each user’s experience according to their betting data.
In November last year, Walsh said that he was focusing his time on finding methods to protect his syndicate’s income from AI, with the belief that having data sets with unique observations could favourably impact his syndicate’s betting results.
Some of the world’s largest global investment firms are applying their expertise to professional betting.
For example, Susquehanna International Group (SIG) was founded in 1987 and has grown to around 2000 staff and $1bn of annual revenue primarily through trading in financial markets.
SIG established Dublin-based Nellie Analytics in 2017 to focus on sports betting.
In 2022, SIG took a 12.8% equity stake in PointsBet, which gave Nellie Analytics the opportunity to explore a partnership to provide sports analytics and quantitative modelling services to PointsBet.
Betting on tennis betting
Again in December, we discussed Tom Dry’s professional betting syndicate, which is focussed on tennis. Dry has been professionally betting on tennis since January 2020.
He has prior experience working for Tony Bloom (owner of Brighton Football Club), both as a data scientist and as a football analyst.
Through his experience working for Bloom, who is widely viewed as the world’s best football bettor, Dry developed both the analytical and operational skills required to build a professional betting business.
Dry’s operational metrics are very impressive and we believe that he has the ability to further scale the team, increase liquidity in tennis and also expand into other sports.
Despite the challenges of breaking into professional betting, Dry has built specialism in a unique sport, which is much easier to leverage than multiple sports.
We believe that Dry’s edge in tennis betting would be difficult to replicate due to the quantity of proprietary historical data he possesses and the proprietary factors that he applies to his model.
On 1 July 2023, Waterhouse VC will make an investment in the syndicate.
For bettors who are driven to put in the work and apply the latest innovations in technology, there are significant potential rewards.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,859% through to 28 February 2023.
In collaboration with iGaming NEXT, the February edition of Waterhouse VC takes a deep dive into the prospects of real-money gambling in India.
Spreading to the subcontinent
India’s online wagering market is growing at a rate of over 20% annually (Sportskeeda) and has become an attractive market for global operators and B2B suppliers due to the country’s rapid development (GDP per capita has doubled since 2009) and the presence of more than 370 million bettors (MyBetting India).
The Indian cricket wagering industry alone is estimated to already be worth $150bn, with around 85% of Indian bettors wagering on the sport (GiiResearch). In India, cricket’s major wagering events are the Indian Premier League and ICC Men’s T20.
One example of a dominant fantasy sports business is Dream11, which offers fantasy cricket, football, basketball and hockey, among numerous other sports. With a staggering 160 million active users, the company’s valuation reached an impressive $8bn in November 2021, earning the title of India’s first fantasy sports unicorn in 2019.
Dream11 was founded in 2008 and had just 2 million active users in 2016. The company’s exponential growth to 160 million users underscores the tremendous potential of the Indian market.
There are only three Indian states that have officially legalised wagering: Daman, Goa, Sikkim. Since the Information Technology Act (2000) does not cover online wagering activities and India’s original wagering legislation, the Public Gaming Act (1867), predates online wagering by over 100 years, the legal status of wagering in India remains grey.
However, the government has recognised the potential tax revenue that the burgeoning middle class’ interest in wagering represents and is considering a new gaming bill to replace the Public Gaming Act.
Junglee Games
Popular casino games in India include traditional games like Blackjack, Poker, Roulette, and Slots, as well as two local games: Teen Patti and Andar Bahar. Some of the largest operators have developed businesses in India, including Bet365 and Betway (owned by Super Group).
Global operators are keen to cater to popular local games, and in 2021, Flutter invested in Junglee Games, an Indian gaming business focused on rummy, a card game that has been played in India for over 400 years.
Junglee Games, which is 57.3% owned by Flutter, operates market-leading skill games across desktop and mobile in India, with its flagship product, Junglee Rummy, one of the largest rummy brands in the world.
In 2022, Junglee grew its average monthly players by 78% to over 50 million players and Flutter sees potential in leveraging its global scale and operational expertise to expand the company’s product offering, including its recently launched DFS (daily fantasy sports) product. Flutter has an option to buy all of Junglee Games by 2025.
Junglee exemplifies Flutter’s broader strategy of building international leadership positions both organically and through acquisition. Flutter’s other recent acquisitions include Adjarabet (2019), leading operator in Georgia, with a strong presence in Armenia, Sisal (2022) – largest operator in Italy and Tombola (2022) – premier UK online bingo operator.
Back to B2B business
We believe that an operator’s profitability is highly dependent on their CAC (customer acquisition cost) and a handful of scale operators earn the majority of profits in most markets because they have the lowest CAC and the best operational efficiencies.
Flutter is our only publicly listed B2C investment and has strongly outperformed its peer group over the past 12 months (+64% performance compared to -19.5% median performance of peers), up to 3 March 2023.
In spite of the growth potential in the Indian wagering industry, there are also several challenges that operators will need to navigate. One major challenge is the lack of regulatory clarity in the market, which creates uncertainty for operators and investors.
The Indian government’s new gaming bill creates a risk that operators could face regulatory crackdowns or changes in the regulatory environment that could impact their business. Despite this uncertainty, the Indian wagering industry represents a significant opportunity for operators and B2B suppliers able to navigate the market successfully.
With a population of over 1.3 billion people and a rapidly growing middle class, there is significant demand for online wagering and gaming services.
As the Indian government moves towards regulating the industry, there will be even greater opportunities for operators and suppliers to establish themselves in the market and capture a share of the growing revenue opportunity.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,849% through to 31 January 2023.
In collaboration with iGaming NEXT, the February edition of Waterhouse VC takes a deep dive into US barriers to entry and Flutter’s US listing prospects:
US regulation and taxation pushing away volume
On a recent trip to the US, we spoke with many US bettors who are incredibly frustrated with both the US online wagering experience and the US taxation system (regarding the treatment of winnings).
Due to KYC/AML requirements, it is very cumbersome to set up and fund an online betting account. We do not envision this changing any time soon. If anything, this initial barrier to entry is likely to become more challenging for consumers.
Furthermore, according to the IRS’ website, wagering winnings are fully taxable and a bettor must report winnings as income on their tax return. Gambling spans lotteries, raffles, horse races, online sports betting and iGaming, as well as land-based sports betting and casinos.
An operator is required to issue bettors with a ‘Form W-2G, Certain Gambling Winnings’ if they receive certain gambling winnings.
While gambling losses may be deducted from income for tax purposes, the losses are only deductible off gambling winnings. This taxation system means that every US gambler is effectively forced to track their betting wins and losses to avoid being taxed on winnings.
For example, if a bettor wins $1,000 and then loses $600, they must track this series of bets in order to only pay tax on the $400 of net winnings. If a bettor places 10 bets per week, an Excel with over 500 rows would likely be required to track the net result.
In addition, if more than $5,000 is won on a wager and the pay-out is at least 300x the amount wagered, the IRS requires the operator to withhold 24% of winnings for income taxes. Unique withholding rules apply to slot machines, keno, poker tournaments and bingo winnings.
These hurdles are pushing volume to unregulated operators, such as those operating in Costa Rica. There is not any specific online wagering legislation in Costa Rica so there are no barriers to establishing an operator in the country.
Unregulated wagering websites are restricted from marketing directly to residents in heavily regulated countries, such as the UK and Australia. We have heard stories of US bettors regularly placing US$50,000+ wagers through Costa Rican bookmakers.
According to Costa Rican law, the physical location of an online wagering operator’s server is not where gambling actually takes place. Consequently, it’s legal for Costa Rican operators to offer online wagering services from Costa Rica so long as they do not offer them to residents of the region.
Undoubtedly, the US will try to clamp down on Americans betting through unregulated operators in Costa Rica and other jurisdictions. However, this will be no easy feat for US regulators, who already have to deal with the circa 40 domestic US operators.
Regulated operators, such as Flutter-owned FanDuel, are able to develop strong brand awareness in the US through marketing channels unavailable to unregulated operators. FanDuel has market-leading brand awareness and user engagement.
The company’s third quarter results illustrated their market leadership, with 18% market share of gross gaming revenue for iGaming and 42% share of online sports betting.
Unregulated operators carry a significant investment risk as they could lose a large portion of their customer base at any moment, while it is also increasingly challenging to effectively market them.
Tax-paying regulated operators can help to form the general direction of regulation and lobby regulators. For example, we see many unregulated operators negotiating promotional/affiliate deals with celebrities (such as UFC fighters, rappers, ex-football players, etc.).
FanDuel and other US operators could lobby regulators and state governments to ban celebrities from accepting such deals. If this occurs, unregulated operators would lose a crucial customer acquisition channel.
Regulated operators like FanDuel are well-positioned to compete with unregulated operators because they have larger marketing budgets, decades of experience and many customer acquisition channels, among several other key advantages. One of these advantages is the relatively easy access to capital from public markets.
Fluttering with a US listing
We have discussed Flutter in several prior newsletters. It has been a core portfolio holding since September 2019.
Flutter has long been listed in the UK and is the 27th largest company by market capitalisation. The company’s logic behind a US dual listing is three-pronged:
The US is now the firm’s largest revenue contributor.
A US listing improves access to US capital pools and makes it easier to offer share incentives to American employees.
US equities have long been valued at a premium P/E ratio compared to other global equity markets. Flutter’s shareholders would benefit from this uplift in P/E ratio, while the company could take advantage of a premium valuation to raise further capital.
The table below shows the P/E ratios of the largest global markets, calculated using the benchmark equity index of each stock market.
As shown in the table, many global markets trade at a >20% discount to the US market, while the UK (most relevant to Flutter) trades at a 25% discount.
Over the last three years, as interest rates have risen globally, P/E ratios have compressed an average of 27%. In comparison, the P/E ratio of the US market has compressed just 15%.
Flutter is certainly making marketing waves in the US, with a $7m Super Bowl commercial offering $10m of free bets. A vote on the US listing would require a 75% approval rate at Flutter’s April annual meeting.
We view Flutter’s US listing aspirations as another example of their genuine commitment to remaining the market leader in US wagering. As at 20 February, Flutter is up +20% this calendar year to date.
Tom Waterhouse will be speaking at iGaming NEXT New York on March 7-9th about ‘Trends Driving M&A Activity in US Sports Betting + iGaming’. Register here.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,837% through to 31 December 2022.
In collaboration with iGaming NEXT, the January edition of Waterhouse VC takes a deep dive into crypto wagering:
Crypto wagering
In May, we discussed the significant opportunity in crypto wagering, which is currently growing gross gaming revenue (GGR) at 36.6% per annum according to iGaming solutions supplier SOFTSWISS.
Online crypto operators, such as Stake.com and Sportsbet.io, have a similar user experience to online fiat operators, and are already recording extraordinary turnover.
White label platform solutions for crypto operators are leveraged to the growth of crypto wagering as a whole, rather than being exposed to the operational and regulatory risk of a single crypto wagering business.
Existing wagering platforms
Many fiat operators rely on white label sportsbook and iGaming platform solutions, such as Kambi, OpenBet and SBTech.
However, our research concludes that many existing platform solutions have been built without all core internal needs across marketing, trading, operations, customer service and compliance.
Some do not have customisation and changes typically require further costly development. The customer profiling and risk configurations result in suboptimal customer experiences for highly profitable customers and deeper losses to negative value customers.
Some platforms are unable to keep up with customer demands or provide segmented customer experience. All of the above existing platforms were founded over 12 years ago and some continue to rely on legacy technology.
Technical debt compounds over time and is a key challenge for platforms, as well as technology companies more broadly.
Future of wagering platforms
There is a significant opportunity to develop a new breed of wagering platform that combines racing, sports and gaming with both crypto and fiat payment capabilities. Key core platform capabilities are summarised below.
We are seeing opportunities emerging to invest in the next generation of wagering platforms, leveraging new technology and embedding modern third party integrations.
These platforms will integrate crypto at the technology layer rather than as an afterthought. Considering the continued growth of crypto wagering globally, as well as all online wagering in the US, we are very excited by the possible opportunities.
A key element of our approach will be to identify management teams that have significant experience in the direct build and operation of successful platforms in competitive markets.
For wholesale investors interested in following wagering and gaming industry news and trends, please follow our updates on Twitter (@waterhousevc) or through our website at WaterhouseVC.com.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,847% through to 30 November 2022.
In collaboration with iGaming NEXT, the December edition of Waterhouse VC takes a deep dive into the “highly cash generative” world of professional betting:
Winning at wagering
In the first century, Pliny the Elder wrote: “We are so much at the mercy of chance that chance is our god.”
Before the Renaissance, chance was associated with religion and fate rather than being a well studied area of science. During the Renaissance, mathematicians developed the field of probability, the foundation of risk management used by bookmakers and professional bettors.
Whilst professional betting is a rarely discussed and underinvested part of the wagering industry, it is hugely important and highly cash generative.
The world’s largest betting syndicates wager billions of dollars each year by exploiting a unique ‘edge’ across sports and horse racing. Based on publicly available information, some of the largest professional bettors are detailed below:
Tony Bloom (Starlizard)
Starlizard bets on many sports, with particular expertise in football/soccer. Bloom is the owner and chairman of Premier League football club, Brighton & Hove Albion, and is a majority owner of Belgian First Division A team, Royale Union Saint-Gilloise.
Matthew Benham (Smartodds)
Smartodds bets on many sports, whilst also selling statistical research and sports modelling to other professional bettors. Benham is the owner of English Premier League club, Brentford FC, and Denmark’s FC Midtjylland.
David Walsh and Zeljko Ranogajec
Walsh and Ranogajec developed a betting system focused on horse racing and other sports. Zeljko resides in the world’s most expensive apartment complex – One Hyde Park, London. Walsh spent $75 million to re-open the Museum of Old and New Art (MONA).
Walsh was made an Officer of the Order of Australia (AO) for “distinguished service to the visual arts through the establishment of MONA, and as a supporter of cultural, charitable, sporting and education groups.”
Billy Walters
Walters is widely regarded as among the most successful sports bettors in Las Vegas. Walters had just one losing year over a period of 39 years. He is a well-known philanthropist and has donated to Opportunity Village, a Las Vegas nonprofit for people with intellectual disabilities.
Alan Woods
Woods focused on blackjack and horse racing and also worked with Zeljko for a period. With Bill Benter, he pioneered quantitative analysis in betting on horse racing in Hong Kong.
Bill Benter
With a degree in Physics, Bill started off as a professional blackjack player in Las Vegas before meeting Alan Woods and building a large Hong Kong horse racing betting operation. Benter is known for his philanthropic activities and contributions to several political and charity groups.
Game, set, match
Most professional betting syndicates are relatively mature and are closed to external investment. Due to the natural compounding of betting capital, the only opportunity to invest in betting syndicates is generally towards their beginning.
However, there are several emerging syndicates across both sports and horse racing. One such racing-focused syndicate is led by Dominic Catsaras and another syndicate focused on tennis is led by Tom Dry.
Tom Dry has been professionally betting on tennis since January 2020. He has prior experience working for Tony Bloom (Starlizard), both as a football analyst and as a data scientist.
Through his experience working for Tony Bloom, Tom developed both the analytical and operational skills required to build a professional betting business.
Tom grew up in Portsmouth, UK, and is 28 years old. As a child he played, studied and followed almost every sport: football, cricket, tennis, athletics, F1, snooker, darts, etc.
This obsessive, historical, and first-hand knowledge of sport has given Tom a rare understanding of the ‘deep nature’ of different sports, which has subsequently proven to be highly lucrative.
Tom is a completely self-taught coder and statistician. Whilst at Starlizard, he built a snooker model in his spare time.
Tom sourced and modelled ever more predictive proprietary data, culminating in a computer vision model which could extract the coordinates of the balls on the table and evaluate the difficulty of the position for the player.
Tom’s major focus at the moment is tennis, where he has developed a highly profitable model.
In the grand slams, and latter stages of the biggest tennis tournaments, where there is the greatest liquidity, Tom can bet much larger volume than he does currently, with minimal effect on price/return. By finding more high-level betting partners, he will be able to increase volumes across the board, from Grand Slams down to Challengers.
Each month, Australian bookmaking legend Tom Waterhouse publishes a newsletter from Waterhouse VC, his gaming and wagering-focused venture capital fund.
Since inception in August 2019, the fund has achieved a gross total return of 1,851% through to 31 October 2022.
In collaboration with iGaming NEXT, the November edition of Waterhouse VC takes a deep dive into US market leader FanDuel:
Don’t count FanDuel out of iGaming
In October, the total iGaming revenue in North America was a record $446m (+26% year-on-year and +10% month-on-month).
iGaming is a significant growth opportunity for FanDuel. The company currently has 18% market share in iGaming, lagging third behind BetMGM and DraftKings, which have 29.8% and 22.8% market share respectively.
While FanDuel’s sportsbook is their primary customer acquisition channel, around 41% of sportsbook customers are cross-sold into iGaming within 30 days.
FanDuel is committed to improving its range of iGaming product offerings and developing effective promotion tools to retain and monetise players.
Taking a large slice of a large pie
There are many views on the potential revenue of US online sports betting at maturity. BetMGM and DraftKings estimate it to be $14.1bn and $22bn respectively (Legal Sports Report), while FanDuel estimates it to be $22.6bn (Flutter Entertainment).
At the moment, FanDuel has 42% market share and expects to generate around $2bn of sportsbook revenue this year. If the potential revenue opportunity is $19.5bn (taking the average of the three operators’ estimates) and FanDuel’s market share falls to 30%, FanDuel’s implied online sports betting revenue at maturity is $5.9bn, which is around 3x higher than this year.
If FanDuel’s market share remains at 42%, revenue would be around 4x higher.
Flutter’s Australian brand Sportsbet has an EBITDA margin of 34%. Flutter aims for FanDuel to achieve long-term EBITDA margins comparable to their other divisions (including Sportsbet).
If FanDuel achieves a mature EBITDA margin of 25%, the sportsbook business alone could generate higher EBITDA than Flutter’s entire business generated in 2021. This excludes any contribution from iGaming.
Waterhouse VC has been invested in Flutter since September 2019. While its initial investment has appreciated 70% over the past three years, it remains particularly optimistic about the growth profile of the company’s US operations.