Subscribe to JohnWallStreet

May 5, 2023

Editor Note: Adam Grossman takes the controls on Friday mornings. You will find his latest Revenue Above Replacement column is below. I'll be back on Monday. Have a great weekend.

Yahoo’s Bet on Wagr May Indicate Exchange Trading Gaining Influence in U.S. Market

Yahoo’s recent acquisition of Wagr may be indicative of exchange trading gaining influence in U.S. sports betting.Wagr defines itself as a “a peer-to-peer sports betting app focused on making gaming social and accessible.”However, peer-to-peer, is often a misnomer within the sports betting context. The seeming goal of peer-to-peer betting is to pit bettors against one another with the house retaining a percentage for facilitating the transaction. But that is not actually what happens on a peer-to-peer marketplace. The goal of companies like Wagr, Sporttrade and Prophet Exchange is to make peer-to-peer betting function like a financial exchange, in that it validates and finalizes transactions but two parties may never know each others' identity (think: NASDAQ, Coinbase, or Robinhood).There are regulatory reasons for why peer-to-peer exchanges operate in this manner. There is also a simpler dynamic at play. “People really hate losing money betting against their friends,” Chris Grove (co-founding partner, Acies Investments) said. Wagr, Sporttrade and Prophet Exchange are still counterparties to bets in the exchange model, no different than a traditional sportsbook would be. The difference is how those transactions are priced. “What makes sports betting exchanges peer-to-peer is that [the traders] set [their] own prices rather than sportsbooks,” Alex Kane (CEO, Sporttrade) said.Exchanges let market makers set prices on transactions based on bid and offer prices of wager deal flows.Allowing the market to set prices directly addresses one of the most expensive challenges sportsbook operators face–trying to create the most advantageous betting lines possible for their businesses.As a result, they can afford to offer lower prices on bets than sportsbooks.“This is the cheapest form of sports betting there is,” Kane said.For perspective, Sporttrade takes a 2% commission on trades. Sportsbooks will often take 10% or more on transactions. Companies like Wagr, Sporttrade and Prophet Exchange also address the sophisticated bettor problem that plagues traditional peer-to-peer games (think: poker, DFS) and sports betting operators.Regulators and sportsbook operators do not want sharps constantly take advantage of casual bettors. So, they take steps to mitigate the issue. In some cases, books will limit or outright ban sophisticated bettors from making wagers. But bettors do not face those issues with a peer-to-peer exchange. Sharps can set whatever prices they like for bets. At the same time, they are forced to compete in an open marketplace and deal with pricing and wagers from other sharp bettors. Kane still believes the sharps will perform better than casual bettors over the long-haul, no different than the hedge funds who outperform casual investors. But the competitive deal flow dynamic in an exchange limits should improve casual bettors' chances of winning since they can more easily find someone offering better odds.It's premature to suggest peer-to-peer is going to overtake traditional sports betting. Grove noted that marketplaces have been tried internationally and only account for a small portion of bets. They have historically struggled to generate mass adoption amongst casual bettors.Integrating in-game betting into a peer-to-peer marketplace, as Sporttrade has done, should help increase demand. Fishing where the fish are is another wise approach. Yahoo has tens of millions of fantasy sports players on its platforms. Combining Wagr’s native social design with Yahoo’s existing user base makes for compelling acquisition logic.But there are still reasons to be skeptical of any potential gaming success Yahoo may have with Wagr given that the latter shut down its app in the fourth quarter of 2022. It's also not certain Yahoo is focused on sports betting with the acquisition. The company may be trying to create an enhanced fantasy sports offering using Wagr’s peer-to-peer technology to increases overall engagement. However, Yahoo’s acquisition of Wagr specifically and peer-to-peer marketplaces generally should be watched closely as the market matures.

“[Exchanges] can get rid of the BS that sportsbooks can use to prevent you from winning,” Kane said. 

About the Author: Adam Grossman is the Vice President of Business Insights & Analytics at Excel Sports Management. He works with companies, sports properties, media rights holders, athletes, agencies, and events to determine the value of their most important assets. Grossman is also a professor at Northwestern University Master’s In Sports Administration program and the co-author of The Sports Strategist: Developing Leaders for a High-Performance Industry. You can find him at [email protected].