The Sorry Story of Football Index and What it Means for Other Platforms

Anyone involved with Football Index will no doubt have seen the news announced on Friday night and reported in the Guardian yesterday. 

Sadly the once-very promising platform announced it was in financial difficulty and was having to cut dividends by what appears to be over 60%. Customers’ portfolio values crashed overnight and are now only worth a fraction of what they were previously.

This is obviously very disappointing news and was greeted with understandable anger across social media.

Below we take a look at what we think this means not just for Football Index but the other new trading/betting/investing platforms that have sprung up recently. Was this just a case of a badly managed platform or is the business model fundamentally flawed? What can we – and these other platforms – learn from what happened at Football Index? We will take a look at these questions and other issues that come out of this sorry turn of events.

 

What It Means for Football Index

There is no beating around the bush on this, the future for Football Index (we will use FI for short in the remainder of the article) looks very bleak. First and foremost because this course of action has utterly destroyed their reputation and any trust they had left with the FI community. The depth of feeling on Twitter is extremely strong – and understandably so. With the media now reporting what has happened, negative reviews on Trust Pilot and so on their reputation is in tatters and it will be very tough to attract new users in such an environment.

Secondly because they must be in a very sorry financial position to have cut dividends by as much as they did – which from analyses by informed commentators appears to amount to over 60% in real terms. A 20-30% cut we could have understood and would have perhaps been palatable. But this is a whopping reduction and can only be interpreted as a signal that they simply cannot afford to pay out any more this.

Thirdly, and perhaps fatally, because doing this actually destroys their own business model. FI’s primary source of revenue is through the minting of shares. Now they will only be able to mint shares at a fraction of the price they were minting them at previously – so a huge loss of revenue. It also very much reduces the possibility that they could raise dividends again in the future, certainly to the level they have been up until now, because it could mean they end up having to pay out more in dividends than they have made on minting the share. Football Index may hope of course this is only temporary and would affect a small number of shares, but for the reasons above any form of recovery seems unlikely. 

It also means the other source of revenue for FI – commissions on the trading of shares – will be greatly reduced. So it really begs the question of how much longer they can keep going with very little revenue coming in. 

In our view the best hope now is for a buyout, a complete rebrand and restructure and much more competent new owners who can set up a sustainable business model – but more on that below.

Other than that we would say the best hope for customers is that the Gambling Commission step in and force FI to refund whatever is left of customers’ net deposits – although sadly we would amazed given the statements FI have made if this amounts to more than 20-30%, if anything at all. Again we will look at the issue of net deposits and the “prize pool” of platforms like FI further below however.

 

What Should Customers of Football Index Do Now?

There is no doubt that the behaviour of Football Index management has been shocking. We would recommend reading this post by Football MDJ, a respected member of the community who doesn’t mince her words about the wrongdoings of FI.

We also think it is worth recognising Betfair trader and YouTube personality Caan Berry at this point, who warned of some of the risks of FI in a YouTube video just a few months ago, something he got a lot of stick for but has very much been vindicated about now. We wonder how many of those who attacked him will now be apologising to him…

In any event, we believe it is certainly worth customers contacting the Gambling Commission and asking them to investigate what has happened. There have been what appear to been misleading statements made by FI, most notably an announcement five months ago stating they had never been in a better financial position.

We have also seen discussions on social media of involving lawyers under a class action lawsuit. Whilst we are not legal experts and cannot comment on any potential criminality that may have occurred, we think it is worth at least asking for a legal opinion on this and seeing if there is a case to be made. 

As we say we are not experts in such matters so we will leave it to the authorities such as the Gambling Commission and possibly the courts to determine any repercussions here.

In terms of the platform itself, it goes without saying that we would not recommend anyone deposit more funds now. Existing customers could sell their existing holdings but would have to take a very large loss in most cases, so will have to decide for themselves if this is something they wish to do. 

 

What Went Wrong – Was This Always Doomed to Fail?

One of the main issues we have been pondering since the announcement was made is whether what has happened was simply the result of an inept management and a series of missteps or whether Football Index’s business model was fundamentally flawed from the start.

FI clearly made some huge missteps including most obviously:

  • Introducing a new system for trading shares (called “order books”) without properly beta testing it or ensuring there would be enough liquidity to support it;
  • Relatedly – issuing shares on far too many footballers so that liquidity was spread too thin;
  • Promising things that were never delivered like Nasdaq integration, expansion into new countries and the introduction of major liquidity providers;
  • A series of PR own-goals that affected trust with their customer base;
  • And increasing dividends when it now seems clear they did not have funds to sustainably support them in the long term and may have been relying on bringing in new customers to do so.

However, as bad these errors were (and they were!) we want to delve more deeply into FI’s business model to see whether in more competent hands this could have succeeded.

This is important not just for any potential takeover/new version of FI, but for the array of new football-related trading platforms that have arisen in the last few years such as Footstock, Sorare (which we have featured just recently on this site) and SportStack.

The answer is complex but we think it is essential to explore the long-term viability of these platforms to ascertain if they have a chance of surviving long-term and becoming a genuine alternative to the bookies. 

 

The Football Index Model – Fixed Dividends Based on Fluctuating Share Prices

The Football Index business model was founded on the idea that they could mint “virtual shares” in footballers and then pay dividends on these shares based on players’ performances and media attention. The idea was that those dividends would always be just a fraction of the price the share was minted at, thus meaning FI would always have enough money to pay dividends out. 

The problem here though is that if you have a fixed dividend price – which on the best “gold days” was 28p per share for a top performance (including the “star man” award), but a fluctuating share price, you cannot know what percentage that dividend will actually be of the share price. 

To give one recent example, shares in Gareth Bale had fallen as low as 30p after a slow start to his career back at Spurs. He then turned in a great performance, taking the full dividend award, plus some media dividends on top. Thus there were people on Twitter boasting about how they had made the cost of the share back in one go and you could understand their delight. 

However, on FI’s side this clearly wasn’t good. To counter such an eventuality, previously they had a policy of only minting new shares at or above a player’s all-time high (ATH) price. The problem with this of course is that FI had presented themselves with a converse problem: what happens in a downward market? They would not be able to mint new shares and would be cutting off their major source of income. 

So they scrapped the policy recently and allowed themselves to mint new shares at any price. The issue being however that they were saddled with the first problem again – not knowing how much they would have to issue in dividends as a percentage of the share price and the possibility it could be close to, or over, 100%, which would obviously be unprofitable for them.

So whichever way they ran it, fundamentally this method of providing dividends as a fixed amount (in pence) whilst not knowing what share prices would be, versus as a percentage of something (we will suggest below a prize pool) was setting themselves up for problems. It would work okay in a bull market, and probably even in a stable market, but would surely run into problems in a downmarket, as of course it did.

 

A “Prize Pool” Model is Better

If FI or a similar platform want to pay dividends, perhaps a better model would be to have them as a percentage of a prize pool. So for example rather than having a fixed pence per share model which as we have discussed has some serious issues, they could set it as a percentage of shares minted over a previous period, whether it be day, week, month, or whatever was deemed appropriate. 

So they could say “star man gets 5% of the previous week’s prize pool, top forward gets 3%” and so on. They would obviously have to do the maths to work out what is feasible in terms of the percentages, but the principle would mean they know for sure they can only ever pay out a certain percentage of what they have collected in the previous day, week, month or whatever it is. They would not be in a position of having to pay out a fixed amount even if share prices crashed. In this sense we think a percentage and “prize pool” model is a much better one.  

The drawback of this of course is that there would be fluctuating dividends and at some point those dividends are going to fall compared to a previous period. But users would know that from the outset and would become accustomed to it. It would be the price to pay for having a more sustainable business model that users could believe in.

Ultimately no business can be assured of success whatever model they use but we believe this is a more sound one and we note that platforms like Sorare and Footstock have something more akin to this than FI’s pence-per-share dividend model.

 

Ringfencing Funds is Essential

Even saying all of this, share prices on FI were still high enough in many cases to give the impression that FI would have enough funds to cover dividend payouts under their fixed dividend structure, on the face of it at least. Prices on the top players were over £7 before Friday’s announcement and had been as high as £15 at one point, whilst annual dividend payouts on the top players were still at a level it appeared FI could afford, bearing in mind shares expired after three years.

There were still only a few of the top players who would come close to returning their value in dividends in three years and there were many players who were returning much less than that. And there were some who had returned nothing in dividends – essentially a free ride for FI. After all, there were only a maximum of five players who could win dividends on any given day out of hundreds of players listed on the platform. 

So considering FI were also making money from commission on trades, how on earth could it now be the case – as we are assuming from their statements but would love to be proved wrong about – that they only have a fraction of customer deposits left (if any at all)? 

This leads us onto a key issue with FI and is one we feel is essential to the success of any similar platform and that is that the “prize pool” as it were – which in the case of FI was the money they minted from shares – is ringfenced and only ever used to pay out the prizes (or dividends). 

Leaving aside the morality of it, purely from a cold hard business perspective, if the company starts delving into that pool to fund its operations, marketing, etc then there is a significant risk that the pool will have to be reduced at some stage and customer confidence will collapse.

The company should be in such a position that it can fund its operations from separate income streams. In FI’s case this could have for example been commissions on trading, which was approximately 3% of trading volume. In better days a few months ago FI was seeing trading volume of over £1m per day, meaning income for them of £30,000 per day, so close to £1m per month. In theory that should have been more than enough to fund ongoing operations.

In terms of marketing costs, we would expect in the early days for this to be funded through equity, for example in FI’s case the money they raised on Seedrs and through other angel investors. Then once they have reached a certain size this money can come from their various income streams, but not the prize pool.

But any platform like this has to give its customers full confidence and transparency that it is not going to be using the prize pool to pay for its own costs like salaries etc. That money needs to be ringfenced and untouchable by the business. If Football Index had done this, we expect they would not be in the position they are now of having to radically cut dividends and – as we suspect is the case – having very little (if anything) left of customers’ deposits. 

 

How Other Platforms Can Manage Payouts to Give Users Confidence 

For example a fantasy football-style business could say its fee for entry is £1. If there are 100,000 entries and the company says it will pay out 50% of entry fees as prizes, that means there is a “prize pool” of £50,000 to be paid out. The company cannot touch this money or use it for anything else. 

In terms of the other platforms such as Sorare, the money they are receiving at the moment from minting cards is substantial – around $400,000 per day currently, due to the recent explosion of the platform. The amount they are paying out in prizes is only a fraction of this though, as it was established before this explosion when their revenues were much smaller. 

That is good and we hope they learn from FI and do not increase payouts too much. That may sound like a strange thing to say from a user of the platform but we think there is a lesson to be learned here. Only pay out what you can sustainably afford to at current levels and don’t rely on future user growth to be able to pay rewards/dividends. 

At current levels, Sorare could really build a substantial “war chest” of funds from which to pay rewards for a long time to come. That will give users much more confidence in the long term stability of the platform, which in turn should encourage more adoption. It can become a virtuous cycle.  

Sorare have said they would like to keep the payouts at 40% of revenues. We would say they could actually be lower than this, but whatever figure they settle on we would suggest this to them: make it an amount that is sustainable for the long term and then ringfence those funds and do not use them for operations. If possible build up a warchest of a prize pool so even if you have a drop in revenues you can still pay out the same level of rewards for a good period of time.  And give transparency about this, which should be easier given the blockchain and the fact that sites like Soraredata already record daily auction volumes.

Sorare are also in a strong position due to the $50m they recently raised in capital, which they can use to undertake marketing, build an app etc rather than using funds from the sale of cards. Used wisely this could allow them to grow substantially and hopefully not repeat FI’s mistakes.  

The same goes for the other platforms. We haven’t joined Footstock or SportStack or looked into them in any depth so can’t comment on their business models but the same would go for them if they want to succeed and not be tarnished with the same brush as Football Index. Be transparent about how funds are used and don’t give away rewards that are too generous to be affordable without bringing onboard lots of new users.

 

Final Thoughts and What We Can Learn

These are just our initial thoughts on the Football Index debacle and what other platforms can learn from Football Index’s mistakes, apart from just the obvious. No doubt much will be written and probably some very sophisticated analyses will emerge.

And any FI takeover consortium or future FI-style platform will hopefully give these points due consideration and structure any such platform more sustainably in future.

As for us as users, it should be a lesson to us all to be very vigilant about what companies say about their financial health and not to take their word for it. It appears users were lied to and that is appalling if it was the case, but we also need to watch very carefully for any warning signs of trouble. To be fair a few were there and credit to the likes of Caan Berry for pointing them out, despite the stick he got for it.

As ever we always advise people to only risk an amount they can afford to lose on these platforms, just as you would set aside a betting bank for following a tipster or betting system and be prepared to lose it all if there is a really bad losing run. In this case, be prepared to lose it all if the platform goes bust. 

So if you are thinking of putting some money into Sorare, Footstock or anything similar, please do so with your eyes open and consider that you could lose all your funds. And try and withdraw your initial stake as soon as you can, so you are only playing “with the house’s money” as it were. For our part we are going to be even more vigilant about how we scrutinise such platforms, as if we are being frank we probably should have asked harder questions about FI and we apologise for not doing that.

Ultimately this experience should make us all look at anything that pays a generous dividend or passive income stream and say “where is that money coming from?” “can they sustain it?” and “what happens if they stop bringing in new users?” Is the business model sustainable in a “steady-state” mode or does it need to keep on growing to work? These are all important questions and ones we should all ask of any trading/investment opportunity.

At the end of the day, as the old saying goes “if something seems too good to be true, it probably is.”

 

 

 

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