Is this the end of the Pinnacle model in regulated markets?

MustardBet shut its digital doors last month, closing the curtain on the latest, and perhaps last, effort to make a low-margin sportsbook model work in the UK. The brand initially relaunched in the UK back in 2017, pledging “tight margins, no account closures and re-betting just like on Pinnacle”.

The MustardBet product was built on its own unique platform with proprietary pricing and was a genuinely differentiated product the UK market, and thousands of restricted punters, were theoretically crying out for. Punters on social media have been hounding Pinnacle for years about a potential return to the UK, so why did a Pinnacle-style book not take root?

The obvious answer would be that the only people using MustardBet were the people who couldn’t get on elsewhere and were therefore simply not profitable customers. “In the very beginning of the low-margin approach, you will attract very unappealing liquidity because you attract sharp customers and advantage bettors, so it’s not an easy market to be in,” says Pinnacle head of trading Marco Blume.

MustardBet, however, claims beating these punters wasn’t an issue. It has of course been taking on the market at large for years via the exchanges and is widely respected for its pricing. “The actual betting wasn’t the problem,” MustardBet director Tom Rolfe tells EGR.

The problem was simply doing it at a big enough scale to overcome all the other costs of being a bookie in the UK that an exchange market-maker does not have to contend with. Things like data feeds for various sports, compliance costs, dev teams, and trading teams all need paying for, and it’s simply not feasible unless you are running an operation at scale. “It’s fair to say we underestimated how difficult it would be,” Rolfe adds.

Go big or go home

Scale. There’s a reason every operator’s results call is filled with the word, and it gets even more important when trading margins are as thin as they are on the low-margin model. Pinnacle can do it because it has built up a customer base for 20 years, is active in a myriad of markets around the world and doesn’t have the same type of regulatory costs imposed upon it.

“We could have made it work if we’d gone international, but then how big has your compliance team got to be?” says Rolfe. “It’s just more expenses.” In short, you can run a bookmaker at 3% trading margins if you have massive turnover. If you’re coming from a standing start and don’t have a seven-figure marketing budget, you probably can’t.

Mustard was uniquely suited for this type of challenge – the firm is one of the largest and most successful market-makers on the exchanges. Pricing, in other words, is not the problem. The cost of regulation was.

But what does this all mean for the US? The argument from many American commentators is that the ‘soft book’ model in the UK is ‘un-American’ and there is a gap in the market for a Pinnacle-style book. Is that idea under threat with the closure of Mustard?

Perhaps. If 50 states were taxed like New Jersey, it is feasible a low-margin book could prosper. Such a book would of course need massive start-up capital and no pressure to turn a profit for 8-10 years. But that’s not necessarily impossible in the US.

Uber, for instance, lost $5bn in its most recent quarter, is expected to be loss-making until at least 2022 and is still worth some $73bn. As with many tech start-ups, the idea is to build the audience first then work out how to really profit from it later. US investors have undoubtedly shown an appetite for the betting space and it’s feasible a low-margin sportsbook could get the funding it would need to get off the ground. If things like a stock market for sports and a secondary cash-out exchange can secure funding (as they have), why can’t a low-margin sportsbook?

“We could have made it work if we’d gone international, but then how big has your compliance team got to be? It’s just more expenses”

However, 50 states being taxed like New Jersey is already a pipe dream, and the various levels of taxations and hidden costs (server location, for instance) make the low-margin model a very long price to succeed in the US in the near term.

As Pinnacle head of trading Marco Blume puts it: “The Pinnacle model of pricing efficiency is not so easily done. The thing is they would need deep pockets,” Blume says. “I mean really deep pockets. We have been around since 1998 so we know what we are doing, we have huge volume and our models for the major sports are really tight.

“Anyone looking to replicate that would have to endure a long period of really expensive losses. They are going to bleed a lot, making expensive mistakes, and trying to gain traction and volume. So the question is how long could any wannabe rival survive in the shark-tank learning that we have built over 18 years?”

Reasons for optimism

There is one piece of evidence that suggests there is still hope for the low-margin model. Because, while Mustard in some ways was perfectly suited for the job, the group is at its heart a group of traders. Much of the funding for the MustardBet brand came from Mustard group’s trading activity, and when faced with the uphill struggle outlined already in this article, it’s much easier for that group to simply stick with doing what it does best – trading.

Mustard itself would tell you it never really got to the marketing phase for the brand – in part because the product still needed work from both the tech and trading side. Mustard had 10-man trading teams for golf and cricket (Mustard’s specialities), where the prices and breadth of offering was as good as any in the industry.

To build that same quality in other sports would be a very expensive endeavour. “We never even got to horseracing,” Rolfe say. “Because once you’ve paid for the feeds, the data and built a trading team, you’re looking at half a million quid just to turn racing on.”

On marketing too, the firm modelled out how much it would need to spend to properly make an impact (remember modelling is what Mustard does) and concluded that £100m might do the trick. “£10m would have just been pissing in the wind,” Rolfe says. Again, these are surmountable problems if you have a huge war chest of cash and resources. For Mustardbet in the UK, the juice simply wasn’t worth the squeeze.

Whether it will be for someone else in the US one day, that’s still up in the air. One final idea to consider; what’s to stop Mustard teaming up with several other pricing experts to form a bookmaking operation. Imagine for a second, ‘Globalbet’, with Mustard powering golf and cricket, Smartodds on football, and the Woods Group on racing. There’s a lot of reasons that will never happen of course – how profits would be divided and how much info each group is willing to share for starters – but it’s a tantalising thought and maybe not completely silly, given the way the industry is going.

Professional bettors will tell you limits are coming down across the globe and ways to really monetise their pricing IP are getting whittled down. Maybe, just maybe, the low-margin model isn’t dead yet.