The “Innovator’s Dilemma” states that natural market forces and economic incentives encourage market leaders and incumbent companies to divert focus away from in-house innovation. This effect is especially pronounced in the US sports betting industry, owing to the customer acquisition landscape, regulatory framework, and other barriers to entry. At the same time, consumers in the industry demand user experiences and technological capabilities commensurate with the status quo they have acclimated to in other areas of consumption.
This combination of factors results in a massively robust opportunity for startups to drive the innovation that forms the foundation of the next generation of sports betting products. It also signals a continued increase in merger and acquisition activity, which represents the primary conduit through which the disruptive and transformative product innovations will gain mainstream adoption.
These dynamics are increasingly catching the attention of the most sophisticated entrepreneurs, engineers, and investors in the country. Anecdotal reports suggest a dramatic and sustained rise in the number of Harvard grads, Wharton MBAs, and Goldman Sachs analysts foregoing lucrative, reliable careers in order to pursue a startup opportunity in the sports betting space.
While the US market is currently focused primarily on new state legislation and tax policy amid a global pandemic and economic crisis, what will soon follow is a rapid mainstream adoption of innovative products and technological solutions, some of which are slightly different from those offered today and others which are utterly unrecognizable. The forward-thinking regulatory bodies that can not only anticipate but facilitate this innovation will be the ones who can simultaneously instantiate a maximally pro-consumer and pro-business environment, while also driving tax revenue for their state government.
The Innovator’s Dilemma
Harvard Professor Clayton Christenson introduced the Innovator's Dilemma in a book by the same title, published in 1997. It draws on two key aspects of the purported conundrum.
First, Christenson points out that the amount of value a company derives per increment of innovation follows an S-curve over its lifetime.
This is because it often takes many iterations to improve a product, and early iterations typically provide minimal value to consumers. In time, however, the incremental value created will start to grow exponentially as vast improvements are made and important features are added and then refined. Eventually, the value per iteration will trail off and grow progressively smaller.
Second, the incumbent company benefits from its large user base but is also constrained by expectations of leveraging that user base to generate consistently high (and, preferably increasing) revenue figures. On the other hand, new entrants are generally free of such sales expectations and thus have more flexibility to hit their innovative stride and jump into the upward sloping portion of the S-curve.
Within the US sports betting ecosystem, the customer acquisition landscape is the one that most closely resembles a gold rush, with many operators spending as much on marketing and promotions as they generate in revenue. Each state has an addressable market with varying psychographic and demographic distributions. The relative prominence of collegiate sports as compared to professional sports, for example, varies dramatically based on geography. This serves to compound the complexity of acquiring and retaining sportsbook customers.
Additionally, each state has a unique regulatory framework, licensing process, and tax code that must be strictly complied with. Gaining licensure and compliance can be both time-consuming and costly, diverting focus and resources away from product innovation.
Most market leaders are also reliant on legacy platforms that have accrued levels of technical debt which don’t necessarily (but may) compromise operational efficiency today, yet certainly make it difficult to innovate too far outside of the business’s core competencies down the road.
Demand & Case for Innovation
None of these factors, however, mitigate consumer demands. While sports betting products and technology have, on the whole, remained relatively stagnant over the last decade, other consumer-facing industries have advanced rapidly. Autonomous vehicles, portable DNA tests, smart homes, virtual reality goggles, and 3D printers are all available for purchase by the masses. Yet, user interfaces that handle billions of dollars in sports wagers are often described as “clunky,” “confusing,” and “intimidating” by new customers. Companies like Robinhood, Square, and Stripe have all proven that product innovations and intuitive user interfaces can lead to seismic shifts in entire industries, not to mention reconstitutions of customer segments.
In the post-COVID world, technology will allow sports to play an increasingly fundamental role in people’s lives as vehicles for social connection. The business case for innovation within sports betting is especially strong. With astronomical customer acquisition costs, long-term retention is critical. Social functionalities, gamification, experience tokenization, and personalization all create stickier user experiences and drive sustainable engagement.
As much progress has been made in the two years following the overturning of the Professional and Amateur Sports Protection Act (PASPA), the market has still yet to see a streamlined formalization and digitization of the principal ways in which many Americans have been betting on sports for decades - casually, among friends, and primarily for the sake of competition and bragging rights. This is not so much an impugning of the viability of the legacy B2C business model as an indication that at least a portion of the market will be demanding radically different products, some of which may present regulatory challenges.
One of the many such challenges is that of simultaneously establishing controls that are effective in today’s market while also fostering innovation and protections in the future. A more comprehensive understanding of the work being done in the startup space is a stepping stone toward succeeding on this front.
We stand on the precipice of a fan engagement revolution in which the entire sports entertainment ecosystem accelerates toward a point of complete integration through the fusion of betting, content, commentary, analysis, technology, gaming, and social networks.
Sports betting has, historically, been one of the most highly regulated industries on earth, and often for good reason. The amount of money flowing through the system requires proper controls to protect good-faith consumers and operators from the ill-effects of stakeholders with more nefarious dispositions.
Thoughtful, dynamic regulation can be one of the most effective tools in maintaining the integrity of an industry that relies so heavily on trust to operate. It can also ensure that consumers and businesses are treated fairly in such a way that is profit-maximizing for all parties over the long-term.
That said, poor regulation is most certainly the enemy of both investment and innovation. The US presents a unique dynamic in which neighboring states, between which residents freely move back and forth, end up with dramatically different climates for the development of sports betting within their borders.
Striking the proper balance between protecting constituents and fostering innovation will be a great challenge, but one offering substantial rewards for those who approach it properly.
Lloyd Danzig is the CEO of Sharp Alpha Advisors, a boutique sports gaming advisory firm with focus on companies deploying cutting-edge technology. Lloyd is also the Chairman and Founder of the International Consortium for the Ehtical Development of Artifical Intelligence [ICED(AI)].
Lloyd is an alumnus of both the Wharton School of Business and Columbia University. He has been a featured guest speaker and panelist at numerous prestigious institutions including Stanford, Columbia, Wharton, and UCLA. His experience managing institutional portfolios for BlackRock, data science initiatives for Samsung, and Machine Learning engines for SimpleBet, along with a lifelong passion for entrepreneurship and innovation have placed him at the center of the discussion surrounding ethical dilemmas in the field.