How Pinnacle is evolving in a world of homogenised pricing and shrinking limits

There are no real bookmakers left,” has become a popular mantra among certain sections of the betting public. “They’re all just marketing companies nowadays,” is a popular follow-up, often thrown out on social media by a punter whose moody each-way bet on the 3:30 at Thirsk hasn’t been accepted in full. Regardless, it’s undeniable the trend in regulated markets in recent years has been towards the low-stakes recreational model, with the steadier profits and healthier margins far more attractive for listed companies and private investors alike.

But, of course, there are exceptions to every rule, and Pinnacle, based out in Curaçao, has long been lauded for its “winners welcome” policy and nosebleed limits. “Any professional punter worth his salt will have access to Pinnacle somehow, no matter where they’re based,” said one high-stakes bettor, speaking to EGR recently.

Paris Smith has been CEO of Pinnacle since 2006

The company, like many of its Caribbean-based brethren, is notoriously tight-lipped about its practices and financials, which in turn has only fuelled the mystique around the company. However, Pinnacle has opened its books to the EGR Power 50 number crunchers the last few years and landed at 19th on the list. This year, it climbed three spots to number 16, suggesting a business in rude health. While those numbers remain under an NDA, Pinnacle ranked one spot below Fortuna Entertainment Group, which reported 2017 group gross win of just over €300m.

Given the Power 50 criteria penalises companies for exposure to grey markets, it’s likely Pinnacle’s numbers are far chunkier. And its turnover is likely to be astronomical, given the business model where football matches are routinely bet to 102% over-round, and the presence of winning bettors likely means the hold could be less than 1%.

The times they are a-changing

In recent months, however, there have been growing whispers that even Pinnacle has lost some of its appetite for the low-margin, high-stakes tightrope walk. “Pinnacle is not what it used to be years ago,” tweeted well-known Las Vegas professional bettor Bill Krackomberger recently. “They are not the first to put lines up anymore and are last to put up first-half lines in NFL for some reason. Limits are a fraction of what they used to be, and juice is double what it was a few years ago.”

There are also reports of significantly lower limits on sports like college basketball and even early baseball lines. So what’s going on? Part of the problem is the aforementioned move to recreational bookmaking across the world. A key part of the Pinnacle business model is welcoming arbitrage – where someone bets both sides of a market with different bookmakers to lock in a profit. The theory is that the Pinnacle price is the correct price and the other bookmaker is wrong, so the customer will gradually lose money to Pinnacle while winning money on the other side of the arb.

“The main story for us has been the explosive growth of esports. We took our first bet in 2010, and we’ve had triple-digit YoY growth since then” – Paris Smith

However, as these arbers lose accounts and get restricted, Pinnacle’s volume and subsequent profit is also impacted. “If you think of Pinnacle as one massive punter, they’re having their accounts closed around the world,” says former odds compiler and syndicate member Matthew Trenhaile. “The arbers have also become value bettors – they’re not bothering to lock in the arb with Pinnacle, they’re just picking off bet365, so their odds, which is their really valuable IP, are becoming somewhat devalued.”

The other core part of the business model, as Trenhaile alludes to, is using customers’ bets as information to be utilised and profited from in turn. That’s why soccer limits have remained rock solid and the highest in the industry, as that money can be more easily passed on into Asian markets. “Something like college football and basketball totals, though, it’s hard to pass that money on and get on themselves,” Trenhaile says. “Some casino operators in the US have told European providers they want college totals with limits of $100. So Pinnacle is pressured into matching that.”

When pressed on whether limits were coming down at Pinnacle, CEO Paris Smith tells EGR Intel: “I don’t think it’s accurate to say that as a broad statement whatsoever. We always aim to set high betting limits, but not all sports have the same public interest, and public interest changes over time. So through that lens, some sports might see a decrease in limits and other sports see the opposite.”

A sporting chance

Football, as mentioned, is still king, but the big growth area for the operator is esports, which had €100 limits when Pinnacle first started taking bets on it in 2010. But there are now regularly €10,000+ limits for normal esports events, and in some cases, such as The International last August, they were as high as €250,000.

How many esports players and bettors can actually make use of those limits is up for debate, given they tend to be millennials, but Smith promises that “high limits remains one of our core brand promises”. The limits are, of course, a proxy for interest and it will come as no surprise to anyone following Pinnacle in recent years that Smith is keen to bang the esports drum. When asked about the bookmaker’s biggest growth opportunities, esports is one of her two responses, with the category now a top-five sport for the business.

“I think the main story for us in recent years has been the explosive growth of esports,” Smith says. “We took our first esports bet in 2010, and we’ve had triple-digit year-on-year growth since then. We are working on some major projects this year that will help us continue this growth, including the development of a new esports betting site, sponsorship of esports events, and an improved B2B esports product.”

Pinnacle won Esports Operator of the Year at the EGR Operator Awards 2018

The ‘sport’ does pose some unique problems, though, not least its vulnerability to fixing where a single player can throw matches and participants are by no means financially secure, making them easier to pay off, in theory. Pinnacle trading director Marco Blume said on a recent podcast the bookmaker was “stuck between a rock and a hard place” when it came to dealing with match-fixing, in esports specifically.

“Everybody says you are responsible for finding fixed matches, which we take very seriously. We have traders and algorithms working on it, but if we flag something as suspicious and void bets, clients want proof because they think we do this frivolously,” Blume said. “This is insanity to me. They think we do this [void bets] because we lost a lot of money on something. We have hundreds of thousands of matches a day. Why would we cancel a small esports game to make our balance look better? It doesn’t make sense. We are trying to protect the customers’ wagers because it’s no fun to be involved accidentally in a fixed match.”

Blume said the firm instructs traders to err on the side of overreporting any irregularities, while there is a dedicated team in place to review games and report on them to licensees and major integrity organisations. Smith, for her part, says the integrity angle is getting easier as esports grows as a sports and business, and organisations like the Esports Integrity Coalition gain influence.

Changing lanes

But it’s Smith’s second answer to the question about Pinnacle’s biggest growth opportunities that is arguably more interesting: the B2B business. Pinnacle Solution was launched last year and framed as a way for other firms to take advantage of the operator’s world-renowned odds and risk management. The two initial products on the B2B platform are an iFrame API and turnkey solution, and while the operator has only announced one official partner (Asian BGE took an esports skin and risk-management services), it says it has signed up “a number of customers globally” and has been “very encouraged” by the early response.

The salient question is: can a B2C firm set up shop in a space already populated by a number of well-established providers with rich trading heritages of their own? On the surface, it’s a logical route for Pinnacle as licensing out that riskmanagement and pricing expertise is one way to monetise the IP that is otherwise being diminished, as already noted.

Pinnacle management can also take some learnings from Sporting Solutions, owned by Pinnacle owner Magnus Hedman and known for its own pricing prowess, albeit in very different sports. “Magnus shares a vision and brings considerable B2B experience, which is a new area that we are eager to explore,” Smith said when Hedman took over the business in 2015. Hedman, who has a history in the financial industry, also owns B2B firm Touchbet.

There are, of course, challenges in carrying out the pivot to B2B. For starters, Pinnacle broadly sticks to more mainstream products like football and US sports, which are already simpler to risk manage. There’s a reason there’s no Pinnacle horseracing product and no plans for one anytime soon – it’s simply too difficult to trade with very low margins.

Pinnacle’s odds were also historically easy to scrape from its site, making licensing them out tricky, but as part of the launch of Pinnacle Solution, IT teams have taken measures to restrict access to prices to help minimise any cannibalisation of the B2B offering. Certain API partners have also been cut off if found to be using the odds for pricing rather than betting. The esports product is probably the best angle for growth again, with Pinnacle very much at the forefront of pricing and trading in the young sector. “Esports is certainly one product they can bring to market that is unique,” suggests Trenhaile.

Chris Grove, an analyst at Eilers & Krejcik Gaming, is also relatively bullish on the chances of building a supplier offering from scratch, saying: “I think the strength of the Pinnacle model creates a strong foundation for a B2B business. There’s a lot of space between that and a successful B2B operation, but it’s hard to bet against Pinnacle given their starting point.”

Pastures new

Back on the B2C side, Smith also points to Latin America as a growth opportunity. “We see tremendous opportunity to introduce the Pinnacle brand and product to it, and we are doing lots of work internally to localise the product to resonate with players in those specific markets,” she says. However, conspicuous by their absence from her targets for growth are the UK and the US.

The UK is probably the simpler place to start, where the firm called time on its multi-year effort to get a licence this year. Some questioned whether it simply had too much grey market exposure, but the firm said it preferred to focus its efforts on the nascent B2B business. And Smith confirms the UK will remain firmly on the backburner for now.

“We would never say never, but it’s not a priority for the business this year,” she adds. “For as saturated as the UK market is, there is still a gap that we are very eager to fill. Withdrawing our UK licence application was very unfortunate as we heard loud and clear from UK bettors that they wanted to bet with Pinnacle, and, of course, we wanted to serve them. But we had to take a step back and review our UK strategy.”

Smith is somewhat non-committal when asked about Pinnacle’s approach to regulated markets as a whole, saying the bookmaker evaluates each market on a case-by-case basis. “There are lots of regulated markets that we would be very excited to enter, and there are plenty that we are happy to leave for others to serve, so it does continue to be part of the strategy when the opportunity makes sense for us,” she explains.

Land of opportunity?

The elephant in the room, of course, is the US, the bedrock of Pinnacle’s revenues in the early 2000s before it was forced to depart in January 2007. That triggered the shift to the current business model with the focus on football and, latterly, esports. Yet the US sports heritage remains intact, with the brand still revered among serious US bettors.

Earlier this year, Smith was bullish about a potential return to the US at the Betting on Football conference in London, telling the audience the firm was evaluating the best way to enter the market, with B2B a consideration. “We have a pretty strong foothold in a lot of markets where US sports are very popular, so we have the experience and knowhow to provide those services,” Smith said at the conference.

The obvious drawback is licensing, given Pinnacle’s US history and grey market activity, and to date no announcements have been made about a US entrance. Smith also seems somewhat more conservative when asked about plans today.

“We’ve chosen to take a wait-and-see approach to the US market,” she reveals. “That said, we have been very active at US industry events over the past year, and especially since the repeal of PASPA. Regardless of what our strategy might be to enter the US market, the one thing we know is that we need to work on building relationships with state regulators. We undoubtedly have more work to do in this area, but so far I have been very appreciative of the willingness by various regulators to engage in discussions.”

Despite the lack of progress so far, Grove refuses to rule out an eventual return to the US for Pinnacle. “People should be careful about making broad assumptions about the US from a regulatory point of view,” he says. “Each state is going to address questions of suitability and market access in its own unique way.

“How New Jersey handles things may well differ from how tribes in Oklahoma handle things and differ again from how Massachusetts handles things. That dynamic makes handicapping Pinnacle’s chances in the US market especially complex. But it also suggests that a failure to find a way into one state doesn’t necessarily mean the door will be shut on all state markets.”

Other industry sources point out that other firms with plenty of grey revenues on the books have made licensing headway in New Jersey and New York. Asked for her opinion on how the US will shape up as a market, Smith predicts it will look like any other Western market with several established customer segments and different operators serving each segment. “There are lots of opinions on this, but nobody really knows the answer at this point,” she adds.

Closer to home

As part of this very gradual shift towards more regulated opportunities, the company is taking steps to make sure its products are up to scratch. Pinnacle is currently rolling out a new website known internally as Future View, which will be the first time that Pinnacle customers have had a consistent experience across desktop, mobile and native apps. It is also launching a new casino product as part of a wider plan to “modernise” all of its products.

Of course, Pinnacle combines those programmes with some of its more traditional renegade qualities like offering €250,000 limits on an esports event. So is the policy of “winners welcome” feasible for years to come? “It’s been feasible for 20 years now, so if it was going to be proven infeasible, it would have happened already,” says Smith.

“We are very confident in our trading and risk-management capabilities, and because of this, we will continue to welcome winners. This is almost the exact opposite of what we’re seeing in the industry right now with the rampant restricting of winning players, particularly in European markets.”

Pinnacle is aiming to bolster its B2B business to drive future company growth

It’s also worth pointing out that restrictions elsewhere can play into the Pinnacle model as these customers have to go somewhere. Smith continues: “My goal as CEO is to protect our position as one of the only bookmakers in the world that has the model we do at the scale we have.” She adds: “That mindset puts us in a good spot as start-ups and new entrants try to capture a piece of the pie.

“For example, we’ve seen a growing number of them in the past couple of years who are banking on mass adoption of blockchain technology to unseat Pinnacle as the low-margin bookmaker of choice. I do not discount their ambition but, at the same time, I take a lot of comfort in the fact that we have 20 years of accumulated experience to help defend our position and mitigate competitive threats.”

Pinnacle then, acts as something of a rebuttal for those worried that bookmakers are going the way of the dodo. In a changing industry, it is taking steps to futureproof the business by modernising its product offering and branching out into new areas like B2B, while also sticking to the core proposition of low margins and high limits that made its name.

Serious punters will continue to benchmark their prowess against its traders, and start-up bookmakers will continue to invoke its name as a sign that the recreational way isn’t the only way. Just don’t ask it to price up horseracing.