Episode 112: Where Has The OSB Handle Gone?

Hello and a welcome Two Zero Late, the podcast from Eilas and Krychek Gaming. I'm your host, Brad Allen, and this episode is brought to you by Optimove, the creator of Positionless Marketing and the number one player engagement solution for eye gaming and sports betting. operators. Now my guest today is Tom Johnson, the founder and CEO of Hold Crunch. Uh kind of a mysterious name. But Tom, thanks for joining us. Uh what does Hold Crunch do and what do you do?

Thank you, Brad. Yeah, I'll try and unravel the mystery. Um, so yeah, I'm um a long time, I guess, industry veteran, maybe not a dinosaur, but I was at Flutter for ymwneud ymwneud ymwneud ymwneud ymwneud ymwneud ymwneud ymwneud. Whole crunch, uh, which I founded a couple of years ago, is a service for buy-side investors.

And we do two things. We do costly forecasting. We unravel um the state data, which interestingly at the moment, um needs to be unraveled, I think, particularly around sort of hold promo trends. Um so we help buy side investors understand um state data and performance dynamics between OSBs. And the second thing we do is we um look across volume handle product and price gaps uh for prediction market.

So we track Calchi Polymarket, um, FanGuel DraftKings, others, again, to help buy side investors understand um who's ahead, who's behind. Um and what the key dynamics are for progress.

So we will try and pick your brains on both of those things in the next twenty minutes. So start with the Q four data. Which you said uh needs needs unraveling. So there's I mean there's a there's a lot going on. I would say the the general trend after the recent reports in in Q four was handle was flattish or low. Um operators were generally giving out fewer promos, less bonuses. Uh holders really high. Which is part of the reason handle was down and then revenue was well up.

So a fair bit going on and then in the background you have prediction markets and a lot of people saying, Oh, is that the reason handle is down because there's cannibalization and then operators going, Nope, it's not the reason why, it's because we won too much money so people had no money left. So And then Flatter said, because we won so much money, we should have given more back, but we didn't, but we're gonna sort that out, so that's fine.

So it's it's easy there's a lot of moving parts and you do probably need to be an expert to to understand it. So Tom, what what are you seeing in there?

Yeah, so um let me try and unpick that. I'll go in reverse. So I'm gonna start with cannibalization. Um so when we look at Calci data, for example, we convert volume into OSB equivalent handle. We then trap Monday to Sunday against New York weekly data. So we're sort of neutralizing the sports schedule. And basically we've got a apples for apples comparison between what CalChey OSB handle is.

and what the OSB market is. And um what we've been seeing is that Calchi is very sizeable in college basketball. If we look at February and we look at Calci's OSB equivalent handle, then actually they're around ninety percent the size of the entire OSB market. So, um about one point one billion in um OSB equivalent handle on college basketball. And from the state data we estimate the OSB market is about one point two, one point three billion.

Now that sounds enormous. Um it is big, it's uh just over thirty percent of Calchi's OSB equivalent sports handle. On the other hand, Calci has a very large addressable market, so just over half the US. It's got all eighteen, nineteen, twenty year olds. Uh ninety seven percent of the OSB market is twenty one plus. So if you're ninety percent the size and you've got a bigger market, then there isn't necessarily any cannibaliz cannibalisation going on.

Um all of that big chunk of handle might actually be non OSB state. Um so yeah, obviously we've had the books confirming no cannibalization or minimal cannibalization. The data that we look at substantiates that. Um it could actually all be non-OSB states. Um the the second part is the the price gap. So

Calci, um after Calci's fees on a moneyline market, you'll get an average of around minus one oh seven. With the OSBs, the average odds would be about minus one hundred nine. There's not much of a difference there. So the combination of the handle data and the price gaps, I think it makes sense that cannibalization is is minimal. Um

So that yeah, that leads us to other factors. Um I think common to all books is an element of market maturity. And, you know, we've we've seen this in the UK, in other markets, that, you know, at some point it's a sort of when rather than if the the US market in light for like state is is going to slow down. And I think the guides were very interesting from Foundry and DraftKings. You know, they were they were quite modest.

And of course they're revenue guides and and that ultimately I think is an acknowledgement of some market maturity in uh light for light state. So um cannibalization I I'm not in the big cannibalization camp for a reason for handle. Market m maturity I think is is an element. Um and then the next one I go to is parimex. So for example with DraftKings, um DraftKings is growing pary mix

um very strongly and growing parli mix is a substantial downward pressure on handle. So we actually have a calculation where if DraftKings report four percent year on year handle. If their parley mix was the same year on year, that's more like plus twelve percent. So I think market maturity, uh parley mix, um We may see cannibalization and we'll be watching that number closely. You know, if we see Cal she get to 150%, two hundred percent.

you know, the size of the OSB market in any particular sport, then we'd have to go, you know, cannibalization is is far more likely. A lot to go into there. Um

W one thing so just on say flutter then. Uh you know, obviously what the m biggest thing they said was talking about generosity. I think they mentioned generosity forty seven times in the call. Um

And and uh the main thing was we won so much money that we should have given more back to customers. Um, as obviously as someone who's who worked there for a long time, w what did you kind of make of that explanation? Uh Because it well, my initial thought was sho was that not obvious that like well when you when you had I think they said like something like ten of eleven weeks they won more than expectation and they had multiple weeks over thirty percent.

Should at that point you go, We should probably give some money back here'cause no one's got any money left. Uh what what did you make of that explanation? Yeah, I'm sort of with you there. On the one hand it's logical, right? We know the recycling effects are true. The you know, the amount of spend as it were that you know, customers have is is finite. So um the the the short term recycling is is definitely true.

On the other hand, like you said, it's sort of peculiar, isn't it? And sort of really obvious. It's like, okay, well, you know, why why why didn't it happen? Um And so my my answer my answer to that, I mean, we're we're very much sort of Sherlock Holmes and we try and go and look at everything we possibly can. And um The big difference that we found in promo strategies was actually around injury insurance.

So um injury insurance, um if a player gets injured and doesn't return early in the game, um, then books um with injury insurance. can cover your bet. They can give you cash back or or bonus bets or they can void the parlay leg and the and the rest of the parlay stands. Um this is where we actually found very big differences in the strategies of the of of the books. So DraftKings and Fanatics. were the most generous. They gave you cash back if a player got injured um up to half time.

back if your player was injured in the first quarter. And then actually in the playoffs in January, uh FanJill didn't offer injury insurance. They were offering odds, boosts, and other um promos to compensate. So My my answer is um Yes, recycling effects handle, that's correct. Secondly, I think there's more to it than oh, we should have, you know, maybe been more generous. And I think the answer perhaps lies in just decisions around promo mix.

Um Fangelin DraftKings' overall promo budgets look very similar, so it It it's not as if one or other didn't spend, you know, more or less than than usual. I think they just made different choices. And perhaps um DraftKings made better choices which You know, if Peter Jackson is sort of intimated um and acknowledged in in some of the four Q commentary.

So I think it's I think it's it's promo mix differences rather than not doing something obvious. Um and and promo mix is is hard. I mean everyone's looking for you know, innovative promos that the customer perceives as having high value, but which cost the book as little as possible. You know, that's the the equation that you're constantly trying to find.

I guess following up then, is it an easy fix for FanDuel? Because I suppose Presenting it in that way or we didn't we didn't bonus enough, we weren't generous enough. It kind of presents it as if we fix that, we'll be back to normal, we'll be we'll be back to growth. Um whereas it might be a more complex issue than than that, I suspect. Yes, I think the um The the the complexity is um coming up with something different.

constantly um being smarter than the other guy constantly um in a product context where you know the sports books are largely quite similar. Um so yes, we can go and fix that.

Maybe if if if that was what went wrong and we we don't know exactly then yeah let's go and match DraftKings in intra insurance for example. You know, we can go and fix that. Um but the real battle is a a repeat of that episode is then okay, well how do we come up with something that is more innovative, that is perceived to be higher value to customers that cost us less?

And and how can we do that first? How can we do that, you know, for the NBA playoffs or for March Madness or or the baseball season, whatever it might be? And I think that is um that that's the real challenge. going forward and yeah, DraftKings may have pipped Fanjuel on that particular Q four episode. Anything else in those uh Q four results we should be thinking about competition wise? Well I th I think the main thing is be very careful when reading the state data.

So for example, um and uh this does correlate actually quite strongly to the different injury insurance premier strategies. DraftKings diverge from state data in terms of their hold rate. The hold rate was much higher than state data implies, and their promos were actually much higher than state data implies. Um fanatics were very generous with their injury insurance and if that is behind

the promo discrepancy, then when we look at fanatics promos in state data, we may be looking at um a number that's much lower than than reality. And likewise with hold, we may be look not looking at the right hold number. So um I think that's that's the a a big takeaway from you for and, you know, going into this year is that the state data really needs to be interpreted in a way that I I don't think it had to be, you know, we could have followed it much more closely in the past.

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I don't normally like to uh to talk too much stocks on this uh show given people's various involvements with companies and But uh earnings and more today that they were on Monday. They were covering uh the sixty percent sell off in flutter stock and sort of asking was it overdone? Whether it's just driven by prediction markets, um Or you know, what what what's your what's your view of that company and that stock right now?

I mean they they of course can turn it around. Um I think the growth In the market. is prediction markets, I mean, logically, right? It's the other fifty percent of the US. So I think um winning in prediction markets is of paramount importance, um, not just to FanDuel but to DraftKings for for others. And that's obviously assuming that prediction markets are here to stay in in some form.

And so I think FanJel needs to prove that they're going to do that. Um And and they might, you know, they um they they will have known you know, a year ago plus that the US market would mature at some point. You know, it's a sort of when rather than if. Um they would of course um have seen Calci in the early days um and seen it perhaps as an opportunity to go and compete, you know, with a US version of Betfair, for example, and to actually have a real lead and a real head start.

in winning prediction markets. So I think those those are things that they will have known and and will have thought about. And um You know, w we now need to see that strategy being delivered and we need we need to see it obviously being delivered as soon as possible before someone like Cauchy or someone else runs away with it.

So how how do you see that competitive environment with the the kind of two big prediction markets now, both looking for twenty billion valuations according to reports in the last few days, calcium poly market and then You've got the p the the OSBs now DraftKings fan your fanatics with their versions and now people like Underdog announced again on Monday that they're gonna have their own exchange, so they're they're going hard after this as well, abandoning sports betting entirely. So um

How do you kind of d I would I would say the the one of the key questions then is do you see do you see the fan doors and the DraftKings having success, able to close that gap that is, you know, they're they're a year behind or so at the minute. Yes, I they definitely can at the moment. Um I'm gonna argue for and against. So I'm gonna argue against um initially that the Calci data that we track is is very interesting because I think we're starting to see

some network effects kicking in for Calci. Um obviously I'm you know, go back to the beginning of Betfair. I was there six months before Betfair launched. And BetFair became highly defensible through network effects very, very quickly, really in a matter of six months. Um now but the reason I'm saying we're seeing I think some network effects in in Calci

is because we are seeing OSB equivalent handle. So that's the first thing we're translating from volume and and that's particularly misleading with with with parlays. But we are seeing their OSB equivalent handle rise more and more rapidly, um, despite actually their prices after fees.

being less competitive. Polymarket, for example, doesn't have fees. Um and basically when you when you start to see volumes handle rise sort of much more quickly week on week, despite the product being in a nascent state and despite price gaps. also existing, then it's likely that there is, oh, I want to bet here because I can get a bigger bet on. You know, that it's likely that there are some network effects kicking in.

And um we're seeing this particularly in college basketball, but we're also seeing it in in MBA. So um if I think about um a prediction market like Calci, you know, as an exchange with um network effect, Um I I think there are elements there that that should be concerning for for for Fanju and DraftKings and and others. Um on the other hand, when I look at the Calci product, so we do a naught to hundred scale of product quality. Um Calci is probably about twelve percent.

on on the way to a hundred percent of being, you know, the ideal um sports exchange, you know, prediction market product. And I'm I'm sure they they will know that. So what that means is someone like Fangelo DraftKings could could really leapfrog them. You know, if version one, version two in Q two of Fangelo DraftKings prediction market product is forty percent on our scale of naught to a hundred.

then um they could really compete hard, you know, w with Calchi. And the same goes for anyone else, so Robin Hood, Susquehanna, you know, any any other combination. So to To sum up the answer, it's definitely all to play for. I think there are it's it's definitely not gonna get easier for Fanjun Draft Kings. Um I think Cal she You know, three months ago I probably said it was Fanjels to win, you know, with with Betfair and and their advantages, I think it's probably Couch's to lose more now. Um

So yeah, but but but all all to play for. And and the data's changing week on week as well.

Let's talk market making quickly. Um, it seems like these sportsbooks specifically are kind of tooling up, building out market making teams. Um And seems just chatting to people around the industry. But kind of the easiest way forward for them would be, say your DraftKings, your market make on your own exchange.

You don't market make anywhere else, and if possible, you stop anyone else competing with you to market make on your own exchange. You make uh you make the terms ridiculous so that it's it's not appealing for anyone else and you're the only market maker, kinda like uh

What smarkets did in the UK, they were basically the sole market maker for their exchange. Uh and then you it's it's almost like a sports book, you win the money back and that's much better economics. Uh is that what you see happening? Yes, I the the way I look at this is um so I think there's two definitions of a market maker. One is the market maker uh defined as identical to a trading team.

um in a in a sports book. Um and I I'm not gonna go into I'm obviously DraftKings and FanJuel have tremendous experience in their trading teams and another market maker may not have that experience but Fundamentally they're the same in the sense you have a market maker that has a captive audience and is offering prices at a significant margin. Um, generosity is is is part of that offering.

And I think that is um Probably gonna be common to Cauchy, Polymarket, DraftKings, Fanjil, you know, anyone else. um when they're offering parlays combos. I think maybe spreads and totals as well. Um, spreads and totals are difficult uh for liquidity form on an exchange because there are two variables. There's the odds and the line moving. So I think definition number one of of a market maker.

is um basically a trading team, you know, that you're you are betting against an audience, you're you're the counterparty, just like you are on a on a sports book. And I think that would be common across um all of all of these production markets. Obviously I think Vander and DraftKings have have an advantage there. You know, Kalchi we know has an in house trading team and will have relationships with market makers.

And I'm sure they will try and match the DraftKings FanJuel capabilities over time. The the second, I think, definition of market maker, w which isn't really a market maker in my mind, is a professional proprietary trading outfit. And certainly if we look at, say, the moneyline markets and we look at BetFair or we look at moneyline markets on Calci, then a market maker under the first definition would very quickly find themselves at the back of the queue and not being mad.

Um, because they are offering bets at a margin and um the competition on the exchange in the moneyline straights market will mean that they will soon, you know, get get bumped. um back and and I think then we're into a different realm of maybe several hundred, you know, m maybe more professional proprietary trading outfit.

And how those guys are making money is essentially wafer thin margins and being better than anyone else in one particular aspect. So maybe in gay golf or you know, some some other sport or an and some particular strategy, whether it on market movements or something more fundamental in terms of the modelling. And this is only what we saw.

on on BetFair. So um just to take you back to the beginning, so I think there's two definitions of market makers. Um I think um For for DraftKings and FanJuel, I'm I'm assuming it's definition one, which is, you know, very much supporting their, you know, sort of parlays, you know, other bet times. Um but I think in the moneyline straight market I'm I'm not thinking Of Angel and DraftKings. are gonna become professional proprietary training outfits.

um, like some of the uh professionals that w that we've seen on Betfair. I mean th th th they might um But I think that is um that's something they will they will need to develop. And it's just just a different thing from from what they have done traditionally. Yep. It's uh more financial style algorithmic trading, looking at order flow and all that sort of thing, isn't it? Yes, exactly. It's um

you don't have a a a a captive audience and and a margin. You you have to be selective and you might combine a number of strategies in order to to be better than someone else. You you might find Your strategy clashes with someone else and then you have to change and and you might lose money over time as you experiment with a particular strategy. So it's yeah, it's it's a very different ballgame.

One thing I meant to ask you before I let you go, the um you talked about calci, I think at a twelve percent you said on your out of a hundred uh product quality score. What uh what does fifty percent look like? What does a hundred percent look like? Like what what are these apps currently missing? So I think there's two parts. Um so in the moneyline straights, bet type. Then I do think as an exchange there's a lot in Betfair.

that we can look to. So Betfair, once we strip away abstract terms, like Betfare, that's an abstract term, it's essentially a a single screen. P and L based trading experience. So any of us that that are familiar with Betfair, it's you know, I'm always on one screen, even in the app, I can see my profit and loss moving, I can cash out instantly, I can Go and request better prices. It it's this sort of single screen trading experience.

Um and what you see on Caushi is them taking small steps actually in in that direction. Um so for example in t some of their betslip process is now actually combined into a single screen rather than it being a sequential sort of UIUX click next page, next page. And I think the other part of their product improvement, which I alluded to earlier in the market making, risk taking conversation, is obviously they will want to get their combos parlays.

up to a level that is as good as a OSB UI UX parlay experience. Um And yeah, that that's a that's a big challenge. Um that is some of the most sophisticated and hardest product um to to copy. It's both the the UI UX um and also the interaction with the risk and trading team and the platform, the speed, particularly in game.

So yeah, that's the difference between twelve percent and fifty percent or or eighty percent. But it's very much, I think, in these two different product areas. The the moneyline straights as a trading product and then Parlay's combos as a more an o OSB equal experience.

Do you think they'll ever get to parity on the parlay side? Well, there's also the question of whether they want to get to parity, like for FanDuel, for example. Like, do you wanna that surely that then risks more cannibalization? If you make parlays on your prediction market say the equal experience is almost the exact same. Do you want to do that if you are

not making the same amount of money from them if you have, say, other market makers quoting then. Because if you're holding they held ninety percent on NFL this year, um, and say Say they're doing combos on prediction markets and holding less than that. Um do you risk customers I d I suppose not, because if they would just have if they're doing it like DraftKings, they'll just have different products in different states. Yes. Yes, exactly. Yeah, I think the

You would go for like any business, you want to optimize price in margins. And I think the model for Parlay's compos is to be the counterparty, is to offer the best customized experience. And the best model on the moneyline straights is

really I think the Betfair model where you have a captive audience, a totally differentiated trading experience, backed by network effects, highly defensible and and you're not you know you're not taking risks. So I think those are the those are the two roots for any company winning prediction. Yes. Right, Tom. That is just about all we have time for. Uh people can find you at Hole Crunch. Search that on LinkedIn or on Google. Thank you, Brad. Thank you.

And uh to our listeners, if you'd like to hear more about what we do at Ireland CryChek Gaming, please drop me a line on LinkedIn and I'll point you in the right direction. And thank you all for listening.