Cashout is at interesting times: Post #G2E.

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looks like cashout

I wrote a piece a few weeks ago on cashout.

I still have to do a final follow up piece on the potential size of a) the cashout market for Operators in the US and b) some of the risks associated with not licensing relevant IP – but post initial article & #G2E, I’ve had some interesting conversations around this space that I thought I’d share.

Aggregation movement by IP / patent owners.

This is interesting. A number of sources have indicated to me that there were meetings & conversations during G2E between entities that have various claims on cashout-focused IP.  Not all, mind you, just the ones that have been advised that they have the strongest claims, in particular backed by “first to file” and USPTO prior art filings.

This is (I understand) a move to consider rolling up of cashout-related IP into a single entity.

I can see this making sense as it takes an approach of:

  1. strengthening any overall IP portfolio to cover as many cashout related options as possible
  2. allowing a single high profile & experienced law firm to represent all relevant parties under a single entity and
  3. ultimately, make it easier for Operators & software providers to do a deal with an entity that is taking (and this is a direct quote from a source)

“…a pragmatic & partnership-led approach that we hope will make it simple & clear for people that are using cashout to de-risk any potential IP infringement and clear up any concerns about the wider impact of significant costs, over and above simply licensing cashout relevant IP.”

My translation of the quote in c) (and it’s just my opinion) – is that there’s deals that could be done probably a lot more cheaply in terms of IP licensing, in advance of both the Operator & Software Provider “wait and see” approach being trumped by “cease & desists” that focus on the wider business benefits that cashout accrues (to those operating cashout).

The current noise and contractual challenges around the access to, and use of, “official league data”, as well as high profile partnerships – are sucking up much of the Legal & Commercial bandwidth for many of the US-focused Operators & suppliers. If something (eg: a general IP issue, and specifically like Cashout) can be punted further down the road….well, why not?

So – what do I think is happening?

Operators are taking a “wait & see” + “let the lawyers deal with it…” approach (to cashout IP claims).

This is understandable. The current US state by state land grab that’s going on, is eating up time, resources & deal-making bandwidth, like no time since UIGEA dropped. A particular source at a T1 operator told me that “…if it’s not an enterprise media deal, a go to market plan, or a staffing issue – it’s a low priority in the US right now. We’re so stretched in terms of the fear factor around what (we think) we need to spend to get market-share – that that’s the number 1 priority.”

There has also been questions around the “real” veracity of various claims. The physical cashout of tickets (via machines & terminals) etc is (in some ways) an easier “business method” for both legal teams & operators to both get & understand.

Where it gets more subjective is when/where the IP claims move into the virtual realm – as a) this is where real differences between the USPTO VS EU treatment of IP is different and b) there is a lot less experience in new (gaming experienced) Legal teams in dealing with the USPTO type treatment of GUI type IP and c) cashout hasn’t taken hold yet in the same way it does in the EU – so defined customer experiences aren’t still 100% clear.

(I think that there’s a chance that the more dynamic European operators will move on (re: the virtual realm) sooner than others and this will possibly preempt the industry’s current “wait and see” internal counsel approach).

 The US sportsbetting numbers are beating growth expectations & there’s a long way to go. 

Legal Sports Report recently described an “eye-popping” set of numbers out of NJ alone, that included a “hold” of 8.5%. (Hold = revenue or margin from total amount bet).

The table below is taken from Legal Sports Report.

NJ blended sportsbetting numbers

Legal Sport Report also recently published an overview of all-state sportsbetting handle (betting turnover) and other financials. Link here.

This is super-interesting because the September numbers (based on my own experience) give a really good indication as to how the whole Football (NFL) season is going to go for Operators.

Why? Last two weeks of Aug and first two of September are when customers return, fund their accounts, and start betting NFL again. If you (as an Operator) can grab share of wallet (ie: people choose you to bet with) at the start of the season, and tick hygiene factors around good customer experience and offers – you will keep many of those customers for the whole season….

NOTE: Numbers below are from June 2018 >> October 10th 2019.

all state sportsbetting figures - october 2019 - from Legal Sports Report

How do these numbers relate to cashout?

If cashout takes hold (as people believe it will) in a manner similar to EU penetration, it could be next on the list, past NFL, College Football, March Madness – and then Cashout (4th) in terms of betting volume (handle). There is a belief (but little confirmed hard data) that cashout is the 4th biggest “sport” in sportsbetting in the EU (UK in particular).

If the numbers above aggregate NFL, March Madness & College Football – and then other sports follow up from a “long-tail” perspective AND assuming that the ability to cashout is included over everything (ie: all sports) – that assumes (using an EU rough comparison) that cashout could (have been, if available) – as much as…a big number guess at best. (Sorry!)

Without specific sports based granular numbers, and in particular, what parlays (accumulator bets) looked like (in terms of pricing & volume) at any point in time AND without seeing / understanding customer profiling and behaviours – it’s very difficult to get to an educated number as to what the actual volume of handle that cashout could have been out of the 10.7BN wagered (bet) since June 2018.

If I had to make a guess – that was based on my early-career experience of the North American market + the penetration & popularity of cashout in a mature market in the UK – I’d peg a guess as cashout could have been applied across as much as 1.5 – 1.8BN of the measured volume since June 2018. This may be conservative – this may be way off. It’s a guess, but an educated one.

The reason that I’m making these guesses is that whilst infringing on cashout IP could be correlated to a number (customers went through an experience cashing out, and the amount cashed out was XXXXX), where it gets murky (and possibly a bit scary for Operators & Software providers) is that cashout tends not to be a simple binary or stand alone action.

It offers a two-sided marketplace where there are benefits to both parties. (Three sided if you include the volume-based cut of a software provider). The customers gets to lock in a “win” at (in theory) +EV to their original bet OR save a % of a losing bet. The operator gets to lock in guaranteed margin from a bet AND create new betting opportunities that (the cashed out volume) can be used again, against. As a feature – it;s a no-brainer win/win to offer.

Where it gets even more interesting in the context of cashout IP + any infringement – is how any judicial view is constructed around the wider benefits to a business that is operating cashout – and by extension, generating further enterprise value (for the business) by offering cashout. Does it attract more customers? Do they spend more money? Does it keep customers interested longer? Does it (in simple terms) create more enterprise value by being available?

In the conversations that I’ve had with those that own cashout IP, one of the takeaways is that “remedy costs” can include a calculation based on on the revenues generated (by the feature / the business method / the “thing”) and the value added to the business by infringement use. Value is not necessarily the revenues generated by each individual click (in the case of cashout) but value added as applied to the overall all beneficial impact on the business from infringing.

The “click-based” experience is where the long-term game around the importance & value of cashout will really be won or lost. Online is where the hockey stick growth by state is expected – and the opportunity cost to those states with online/app access, of scaling online (product) – is far less than physical machines.

Owning the IP around that online cashout experience is where the most significant battles (and costs) have the potential to be transformative – for both businesses that show/get/license – or own, that IP.

For example, Colossusbets recently announced a deal to license their patent portfolio to bet365 in the US. bet 365 is a marquee name for any provider to have above the door but (in my opinion) it’s not necessarily clear what specific parts of the proven (EU) cashout sportsbetting experiences the (Colossus) licensing  covers. We’ll have to wait and see.

Get Out Ahead LLC is another firm claiming cashout IP. My reading is that its primarily offline / machine focused – but does include some interesting online processes under the IP claims.

For example: (As part of the exchange of %’s of tickets & counter-offers…this is included…) You can see the IP claim here.

Step 2—Bidder clicks on Counter Offer button and a sliding scale appears. The sliding scale will offer Bidder a range from $600 to $999 (minimum bid is 60% of ticket list price).

I still find the claims Marketmaker to be the most interesting, even if it’s purely based on a) prior art dates (2007) & the fact that they are b) referenced by the likes of  Winview and others in terms of other patent filings. “First to file” and prior art are the two most significant factors in how the USPTO makes decisions around whether / how someone “owns” a business method of process – and Marketmaker seem to be pretty strong here. The USPTO treatment of business methods (as referenced in previous article) is very different from the EU – and this is why ownership (and patenting) of cashout, is such a potential issue in the US market.

Finally – one of the most famous US federal court cases, (that’s cited as case law by US IP lawyers) around point of damages assessment – is very interesting as it potentially relates to the wider “remedy” piece that may impact in US-facing sportsbook operators & providers that infringe on any IP.

The  case related to a sit-on lawn mower machine with patent infringing baffles (underneath) for routing grass quicker (out the back) which effectively made the motor and engine run smoother and more efficiently in heavy wet grass.

The guys who designed the baffles, sued the lawn–mower machine manufacturer that added (the baffles) without licensing them. The court decided that the value-add (the infringing baffles) was so important to the overall machine’s increased performance, that damages were awarded as a % of the entire revenues from the infringing lawnmower machine company. This is a case that they teach as a basics of IP infringement law in the US.

This is where the really big impact could be, in terms of impact on those companies that infringe in (sportsbetting) IP in the US. It’s an area that is at early stages. It’s an area that if the relevant companies are relying on a) their experience of the EU market and b) not retained experienced external US IP-focused counsel – and c) don’t think that the different US treatment of IP (and business methods) is going to have any impact on their US businesses – that this will be a saga worth watching from the sidelines.

Cashout is at interesting times. I’ve said it twice now. I hope that some people are listening. It could very expensive, otherwise.

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