FanDuel’s Latest Crossroads: Digital Card Rips
Card ripping platforms, where people pay for a randomly selected trading card backed by a real-life physical equivalent, are the latest red-hot betting-like product not subject to gambling laws or taxes.
Multiple startups have raised money at valuations in the tens of millions, and well-known gambling and financial technology firms are now embracing the concept as an exciting source of new revenue. Top collectibles companies, meanwhile, are seeing multifaceted investments around trading card infrastructure pay dividends.
FanDuel, which runs the most popular online sportsbook in the U.S., doesn’t seem to be in a rush to cash in despite shares of parent company Flutter Entertainment dipping 60% year-over-year amid investor concerns over its adaptability.
FanDuel is merely “tracking” rips, Flutter CEO Dan Taylor told Barron’s Wednesday, by sending frequent sportsbook bettors free credits to use on Arena Club, an unaffiliated card-ripping app. FanDuel is not actively launching its own rips vertical.
Competitors including Fanatics, Underdog and PrizePicks are already offering their own digital card rips nationwide. DraftKings doesn’t possess a proprietary rips product, but its independent venture arm Drive is invested in Rips by Triumph, a popular card-ripping platform.
In recent years, FanDuel has been more cautious than many of its peers regarding regulatory gray areas, wary of risking backlash from states and tribal groups where online betting has not been legalized. This strategy has sometimes backfired.
Prediction markets caught FanDuel flat-footed last year, and the company continues to trail its rivals after it eventually launched a prediction market app through a joint venture with CME Group.
Taylor acknowledged in a letter to shareholders published Wednesday that Flutter is not making the most of its brand cache as it looks to expand into new areas and must “move faster.”
It remains unclear, however, whether that will lead to FanDuel shedding its risk-averse reputation.
FanDuel declined to comment. Flutter did not respond to a request for comment.
Why rips are an appealing business
The app mechanics of rips are relatively straightforward and come with built-in profit margins.
Users pay upfront for a digital trading card randomly picked from a curated collection, such as a set composed of NBA rookies. The digital card is tied to a real-life trading card available for physical delivery upon request. Typically, though, people accept instant sell-now offers—and often use the proceeds to open more packs.
Customers are usually given a sense of the average value of each pack—typically between 5% to 15% below the entry fee, with appraisals based on historic card sale numbers. Despite the expected financial loss, the faint chance of a “grail” hit—one worth far more than the price of admission—helps retain users.
Some apps, including Fanatics Collect, allow people to “vault” their cards indefinitely instead of asking them to choose between selling or shipping within 24 hours, catering to long-term collectors. But even those companies likely see more sellbacks, which look like betting cashouts, than shipments or long-term storages. Sellbacks help companies mitigate inventory depletion.
Companies that offer card ripping point to the existence of the physical cards underpinning their product and the ability to ship the cards to the winner as proof that rips are not gambling. They claim rips are more akin to collecting cards directly from packs bought at brick-and-mortar stores, a hobby that’s been around for generations.
The extent to which companies encourage people to obtain their physical cards rather than sell them back right away varies, however, with Barron’s reporting that some have instant sell rates of up to 98%.
No state has challenged whether rips constitute gambling as they have with prediction markets. An executive source at a company offering rips told Sportico most regulators are likely still unaware of what’s going on.
“It is an inherently high-margin product given the underlying mechanics: repeatedly selling and discounting the repurchase of the same digitized assets,” said Davis Catlin, managing partner investment firm Discerning Capital. “While it’s regulated differently, it’s effectively a slot machine without gambling taxes.”
Underdog, PrizePicks, OG and Coinbase have already announced or launched rips integrations for their apps this fall. These newcomers, who are also involved with prediction markets, will compete with startups specifically dedicated to rips that have gained significant market share, such as DraftKings-linked Rips by Triumph and Courtyard IO, as well as veterans of the collectibles industry.
Fanatics holds an edge among gaming powerhouses after launching rips more than a year ago through its standalone collectibles vertical; Michael Rubin’s company also owns card maker Topps, manages a trove of physical cards in an Oregon facility and runs an online collectibles auction house. Arena Club, the company set to receive referrals from FanDuel’s rewards program, similarly orchestrates rips and oversees an online collectibles auction house.
Collectors Holdings Inc. is another entrenched force, with its subsidiary Professional Sports Authenticator (PSA) introducing rips in a joint venture with GameStop that began in April. Collectors Holdings owns Card Ladder, the valuation system most rips companies lean on to appraise cards.
Owning multiple components of the trading card industry, such as a card-maker or a grading service, gives companies the upside of compounding downstream returns. Baseball and basketball trading cards are selling at all-time highs this year, according to Card Ladder indices for each sport, while football is approaching its COVID-19 era peak.
Analysts see more room for explosive growth from rips and related services.
“Adoption is still very low, and we think it’s the tip of the spear for broader ‘blind box’ e-commerce,” Catlin said.
FanDuel’s predicament
FanDuel originated as a gambling workaround, using daily fantasy sports (DFS) to become a household name in the early 2010s. But the company has been hesitant to take re
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