Football Gets Arbitraged

To make the fantasy work, they decided to get real.

Mike Kerns and Jeff Ma wanted to create a fantasy sports game that reflected the nuances of team competition, rather than simple individual statistics such as points scored and yards gained.

The result was the upstart ProTrade.com, a Wall Street-style online trading network in which athletes are “bought” and “sold” like stocks.

The company, based in San Mateo, Calif., stands out in two major ways from fantasy leagues offered by ESPN, Yahoo Inc. and others.

First, ProTrade operates in an open-market format. Rather than a preseason draft followed by a season-long contest, ProTrade allows competitors to buy and sell players using pretend currency at any time during the season. Participants can constantly shuffle their “portfolios,” and can buy an athlete even if other participants in their contest already own him. (In traditional fantasy leagues, each athlete can be owned by only one team at a time.) Contests can be as short as a weekend or as long as a season.

Second, the games incorporate esoteric statistics -- ones that aren’t published in the box scores on the sports pages and are used by professional scouts and managers to evaluate how professional athletes help their teams.

To get this kind of inside knowledge, Kerns and Ma struck deals with prominent sports figures such as Jerry West and Bill Walsh to serve as advisors.

For example, West, a former Laker player, coach and executive, noted that assists in basketball weren’t all the same, even if they looked that way on paper. Official NBA stats include 20 shot types, and ProTrade uses those stats to rate the assists that precede the shots. A pass that leads to a surefire slam-dunk is more valuable than one that leads to a long-range jump shot, and under ProTrade’s system, it yields a higher “dividend” for the fantasy game player.

Walsh, former coach of the NFL’s San Francisco 49ers, helped validate ProTrade’s football scoring system, which ranks kickers among the most-prized players. A strong-legged kicker not only boots field goals to score points, but also nets his team almost 100 yards a game in field position through lengthy kickoffs, Walsh noted.

“We’re trying to quantify what guys like West and Walsh intuitively know,” Ma said. “We’re trying to make the fantasy game more reality than fantasy.”

Kerns, who graduated from UCLA with a history degree in 1999 and became an executive with a sports agency, was inspired by the book “Moneyball,” by Michael Lewis, a real-life account of how Oakland A’s General Manager Billy Beane used statistical analysis and bargain hunting to build a competitive baseball team on a tight budget.

“He buys low and sells high, finding athletes who will pay ‘dividends’ on the field,” Kerns said. “That’s really what our game is all about.”

Kerns and Ma launched ProTrade.com in September after raising $12 million in venture capital, and they say they have registered more than 10,000 users. Some games are free, but most require a participant to kick in an entry fee of $5 to $50.

Ma said that the company hoped to grow to 100,000 registered players within the next year and turn profitable in 2007, after another round of venture funding that would help it expand its offerings. The company has a licensing deal only with the NFL, but hopes to secure rights to use NBA basketball games and Major League Baseball contests in the next few months.

Mike McGuire, research director at consulting firm Gartner Inc. in San Jose, said he liked ProTrade’s technology, but was uncertain whether the company would be able to win enough registered participants to succeed.

“This is a very sophisticated tool for someone who’s gone beyond the office football pool,” he said. “It’s going to appeal to a segment of folks, but this is not for people who sit around casually watching the game while drinking beer and eating sandwiches.”

The potential audience is huge: Fantasy sports are played by an estimated 15 million U.S. adults, according to the St. Louis-based Fantasy Sports Trade Assn.

The industry generates in the ballpark of $150 million a year in revenue for a range of companies, said Greg Ambrosius, president of the trade group. Precise figures aren’t available, he said, because fantasy sports services are privately held or units of public companies.

The fantasy sports business includes firms that organize and run the games, like ProTrade, Yahoo and Viacom Inc.’s CBS Sportsline.com, as well as websites, magazines and broadcasters that sell advice, news and statistical services.

ProTrade, which has 35 employees, expects to make money from several streams, including fees from participants, and advertising on its website.

ProTrade offers two types of competitions. A series run by the company charges entry fees to players, offering cash and prizes to winners.

One prize currently up for grabs is Super Bowl seats alongside Troy Aikman, the ex-Dallas Cowboys quarterback and current pro football TV analyst who, like Walsh, is an investor in ProTrade.

Meanwhile, users can set up their own leagues at the site free, using ProTrade scoring. The free service is designed to attract players to the site.

Financial backers include Kevin Compton, a partner at Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers and the primary owner of the San Jose Sharks NHL hockey team. He became a ProTrade investor and director after a prospective initial backer asked his opinion of the business plan.

Other investors include Jeff Moorad, general partner of baseball’s Arizona Diamondbacks and Kerns’ former boss in the sports agency business. Like Compton, two other Kleiner Perkins partners, Doug Mackenzie and Will Hearst, have made personal investments in the venture.

Ma, a Massachusetts Institute of Technology graduate who gained notice several years ago for his blackjack prowess as the hero of the nonfiction bestseller “Bringing Down the House,” is the main force behind ProTrade’s proprietary scoring system.

“I was always a huge sports fan, the kind of kid who memorizes the backs of baseball cards,” he said.

Ma, 32, was kicking around ideas for a sports consulting business in 2003 when he met Kerns, 29, who was living in Newport Beach at the time. Ma liked Kerns’ idea of creating a kind of “Moneyball, the Home Game.” The pair persuaded Moorad to provide seed money.

ProTrade’s complex scoring system is one of the main ways the company differentiates itself.

Competitors assemble athlete portfolios aimed at earning the most dividends based on a computer program that is designed to reflect how much each player helps or hurts his real-life team in the context of the game.

“Running for a first down on a fourth and three yards to go situation at midfield with the score tied and two minutes to go in the game is far more valuable than running for a one-yard touchdown

Share prices are set by supply and demand as participants try to predict how much a pro player might pay in dividends, just as Wall Street investors might estimate a company’s profit potential. And, just like stocks, each athlete has a ticker symbol. (Pittsburgh Steeler running back Jerome “The Bus” Bettis trades as THEBUS.)

The website lists “price to earnings” ratios for each athlete, offering a snapshot of a player’s relative value. These ratios are calculated by dividing the share price by the dividends an athlete earned in the last year; as with stocks, bargain hunters consider lower ratios better.

Whoever assembles the portfolio that pays the most dividends wins each competition. Each participant starts with the same mythical budget, so pro players obtained at a bargain price can have a bigger payoff in dividends than superstars do because the same amount of ProTrade currency will buy more shares of a low-priced player than of a high-priced player.

One competitor could allocate 30% of his portfolio to shares in Peyton Manning, perhaps the NFL’s top quarterback, while a rival might devote only 5% to the Indianapolis Colt passer and instead load up on a cheaper player.

Compton, 48, who has been playing fantasy football for years with buddies from church, has high hopes for ProTrade’s idea of multi-sport challenges, in which players could assemble portfolios that might include, say, Manning and golf star Tiger Woods.

Aaron Roberts, 29, an investment consultant in San Francisco who has competed all this season but has yet to win a challenge, also plays in regular fantasy leagues.

“There’s a lot more skill involved with ProTrade,” he said. “For those true sports fans who want to be rewarded for their knowledge, they will play it.”

Compton, whose league moved to ProTrade this season, says he believes other fantasy players will be drawn there too.

“Fantasy isn’t broken, but it is stagnant,” said Compton, who admits to checking football scores on his hand-held Treo during lulls at Sunday morning church service.

Yet even on ProTrade’s platform, he said, some fantasy traditions never change, such as online “trash talk.”

The guy who loaded up on Cincinnati Bengal quarterback Carson Palmer, a Heisman Trophy winner while at USC, at a low price early in the season is running away with Compton’s league this year -- and regularly reminding his rivals via e-mail.

“He keeps saying stuff like, ‘Don’t believe the Heisman jinx,’ or, ‘You guys could’ve bought Palmer every day for the last 93 days but you didn’t, and you’re all idiots,’ ” Compton said. “The guy just won’t stop.”