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Yahoo’s Next Big Bet

Yahoo’s legacy business segments lack growth potential, thus they should look to fuel future growth through their fantasy sports platform.

Making a Fantasy, a Reality

Fantasy sports have grown to become wildly popular in North America, with over 56.8 millions players, and 2015 revenues of $26B. Fantasy sports revenue is also expected to continue to grow by 41% over the next five years. This massive growth has been driven by rising disposable income, greater accessibility to the internet and mobile devices, and a higher level of engagement with sports – from improved highlights to increased interactions with players through social media platforms. Currently, the fantasy sports market is dominated by platforms hosted by three companies: Yahoo, CBS, and ESPN. These three companies have already begun to monetize their services through taking percentage cuts off of each user’s entry price; however, there is an untapped opportunity to capture a large and unprecedented revenue stream within the industry. If one of the three platforms can effectively implement microtransactions, a surging business model within the mobile world, they can come to dominate the market. Yahoo Sports, CBS, and ESPN operate platforms which offer a diverse range of fantasy sports services. In order to remain successful, these platforms must be user friendly, feature a simple and attractive interface, and offer in-depth support. Users also expect live scoring that displays statistics immediately, as well as informative and entertaining articles produced by a dedicated team of professional fantasy writers. Furthermore, a dynamic user experience also plays a large part in platform selection with customization being valued highly by players.

Making Micro Moves

micro - 2Microtransactions are small fees that users can pay to purchase virtual goods or services, typically within mobile applications. Users can buy anything from a better sword in a game, to a dashboard skin in order to enhance their online experience. These transactions have grown to become a core source of profitability for mobile apps. In 2014, they made up over 79% of combined revenue within the US Google Play and iOS App stores, a substantial increase from 46% in 2012. Microtransactions help compensate for the large upfront investments required to develop software applications and help the developer breakeven. Furthermore, they enhance profitability by providing stable, high margin revenues beyond direct sales. However, microtransactions have also been a source of skepticism, as they allow developers to manipulate users into either paying to be successful, or overpaying for features that should already be provided. Although the potential to drive high revenues exists, not all microtransactions foster equity and poor implementation can result in disastrous implications for a company’s revenues and brand image.

There are three underlying similarities that have been observed in successful microtransaction business models. First, the supplementary features must be priced appropriately while adding adequate value to persuade users to make the purchase. Second, the microtransactions must not unbalance the game for non-paying users. Although the purchase will provide an incremental benefit or feature, the benefit must not be so great as to deter non-paying users from participating as a whole. Finally, the features must evoke a level of competition or jealousy from other users to incentivize the purchase of the microtransaction. If all three criteria are satisfied, the company will be able to improve profitability and expand their user base to more casual players who seek to gain any advantage they can.

Yahoo’s Entrance

Yahoo Sports’ portfolio of services currently includes fantasy sports, editorial reporting, real-time scores, breaking news, and coverage of large events and premium college sports. Yahoo launched a fantasy sports app in 2014 that has helped propel them to market leadership, with 18% of the total fantasy sports market. Additionally in July 2015, they introduced a daily fantasy sports alternative that brought real cash payouts, competing with DraftKings and Fanduel. Although the daily fantasy sports market has been lucrative, recent regulatory opposition from the US government labelling them as illegal gambling sources threatens the longevity of this market. This regulatory hurdle reinforces the need for Yahoo to maintain market leadership by seeking alternative revenue opportunities within the traditional seasonal fantasy sports industry, rather than placing their attention on the daily fantasy sports market. Microtransactions will not only increase per user spending, but will also help mitigate the loss of revenue from the daily fantasy segment. Additionally, Yahoo already has the mobile expertise to successfully implement microtransactions on their fantasy platforms.

Unlocking the Game

Similar to the microtransactions currently used in gaming and social media applications, fantasy sports microtransactions can be characterized as either product or service-based, both of which behave similarly. A user purchases in-house currency or tokens from Yahoo which can be spent at their leisure throughout the various sporting seasons.

First, Yahoo should provide the option to purchase an automatic bench-setting service. Typical fantasy sports platforms require users to continually swap players in and out of their starting lineups according to a weekly matchup, as well as sporadically to account for injuries and suspensions. The current system requires regular user upkeep, the absence of which leads to inactive rosters positions and the loss of matches. With automatic bench-setting, players will spend their currency to have Yahoo automatically correct these oversights before they occur.

Next, Yahoo should also offer more in-depth analyses, such as by incorporating simulated game results and more strategic match-up details to attract users. Extensive game analyses are available online; however, in depth research is either time consuming to find or costly for users who utilize subscription-based websites. Yahoo should delegate a portion of its current writing staff to focus solely on microtransaction-enabled content. Alternatively, Yahoo can consolidate information from free websites scattered throughout the internet for the convenience of users. In a manner similar to the website Kayak displaying competitive airfares, Yahoo can display competing viewpoints from different professionals and sporting websites. This content would be accessible in part, or for a limited time frame, through microtransactions.

Finally, Yahoo should supplement its drafting system by providing additional insight beyond traditional pre-season rankings. In this scenario, tokens would be used to improve the user’s team at the beginning of the season, by providing insights tailored to their preferences. Normally, players are ranked by position regardless of an individual’s drafting strategy. Yahoo can therefore capitalize on the consumer spending on “draft kits”, which are comprehensive primers containing analyst rankings and projections that aim to aid users in the drafting process.

micro - 3Alternatively, Yahoo could also implement microtransactions by providing access to on-demand, personalized advice from fantasy sports professionals through a partnership with Rotowire, or by contracting top performing fantasy users from their own platform. Rotowire is a subscription-based website which charges $79.99 for an annual premium subscription to their fantasy database. Although in-house management of this option is not recommended due to high human capital requirements, a partnership with Rotowire could produce an attractive service-based microtransaction. Alternatively, Yahoo can outsource the advice from league leaders on their own platform. Users would spend tokens to ask the highest ranked fantasy players for advice, the advisors would receive payment, with Yahoo capturing from a transaction fee.In this scenario, tokens would be used to improve the user’s team at the beginning of the season, by providing in sights tailored to their preferences. Normally, players are ranked by position regardless of an individual’s drafting strategy. Yahoo can therefore capitalize on the consumer spending on “draft kits”, which are comprehensive primers containing analyst rankings and projections that aim to aid users in the drafting process.

These recommendations align with the necessary criteria to create successful microtransactions, including: appropriate pricing, performance equality amongst players and adding to the element of competition. Foremostly, the features are desirable as they increase the user’s perceived ability to improve their overall fantasy performance. However, positive results are not guaranteed and thus equality is maintained, and tokens can be sold at a price that balances supply and demand.

Adopting a Micro Strategy

Microtransactions give Yahoo an opportunity to obtain a first mover advantage and capitalize on the rapid growth in the mobile and fantasy sports industry. Because these payments are so small, they are especially tempting for users, as they do not feel the risk associated with larger investments in subscription-based websites.

Currently, it is forecast that the average fantasy player above 18 years of age will spend approximately $45 annually on fantasy draft kits and informational databases. Taking into account the spending pattern differences throughout North America, it is predicted that a total of 24 million players will pay for fantasy tools each year, producing a total fantasy sports ancillary products industry revenue of $1.1B. With Yahoo Sports’ current 18% market share, the endeavor should result in an increase in revenue between $44 and $111M dollars annually. Assuming a profit margin of 50%, similar to microtransactions in the gaming industry, Yahoo Sports can potentially realize an increase in yearly steady-state profits of between $22 and $55M. Considering that Yahoo had a net loss in 2015, microtransactions is a worthwhile endeavour

Microtransactions are also cost efficient for Yahoo. The direct variable costs associated with selling a virtual good is miniscule, the majority of which comes from the cost of billing. The largest cost that Yahoo would bear is the upfront costs in software design as well as setup costs for infrastructure and transaction data storage. Fortunately, Yahoo’s size and established online infrastructure should be sufficient to handle the increased data and transaction information that this strategy requires and therefore it is negligible. Development costs on the other hand could be significant and are harder to estimate. However, the proposed strategies would be add-on features as opposed to outright application development. For this reason, the costs are predicted to be small in comparison to the realizable returns from the project as a whole.

Levelling the Playing Field

If microtransactions are successful on Yahoo’s fantasy platform, there is potential that CBS, ESPN or another competitor will attempt a similar model. This highlights the importance of a first mover advantage for a number of reasons.

First, if Yahoo is able to secure an exclusive contract or partnership with Rotowire, it would be difficult for competitors to directly emulate this strategy as Rotowire is the only major fantasy subscription service database. Alternatively, if Yahoo can incentivize their own users to act as advisors on microtransactions, users from other platforms will switch to Yahoo to take advantage not only of microtransaction products, but also the potential lucrative opportunities. Furthermore, there will be increased disincentive to leave Yahoo once they become users because the tokens purchased or earned through Yahoo would not be transferable to ESPN and CBS.

Continuing the Fantasy

Despite Yahoo’s current position as a leading fantasy sports platform, they have yet to fully capitalize on the rapidly growing industry. A new opportunity for Yahoo, in the form of microtransactions, can change the way the fantasy sports industry operates. Microtransactions will allow Yahoo to bolster their revenue streams in addition to solidifying their status as the leading innovator in fantasy sports. Yahoo’s new monetization strategy will serve as a defensible competitive advantage and prove that good things really do come in micro-sized packages.micro - 1