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“Skillz offers one of the most compelling business models we have seen in over 20 years of equity research, with a substantial technological advantage over its better capitalized competitors forming a competitive moat that should allow it to grow rapidly for the balance of this decade.” - Wedbush Analyst on Skillz, Jan 2020

Introduction

To fully comprehend the power of the Skillz platform, we need to look at the core of what drives the continued growth of the platform. At the core of it lies two acquisition funnels and a userbase that can be thought of as a pyramid with varying skill levels with the apex layer representing the most skilled gamers who are also most engaged. The selection efficiency of the funnels and the not so easy task of keeping users in all layers of the pyramid engaged dynamically is ensured by Skillz’s patented AI algorithms using billions of data-points generated by the games on the platform.

Out of the two acquisition funnels, one is the classic user acquisition funnel for the Skillz games driven by their sales and marketing spend. However the second acquisition funnel makes Skillz unique as a mobile gaming company versus other game development companies. The second funnel is for adding mobile competitive games from qualified third party developer on the Skillz platform and then progressively nurturing the growth of the high potential ones. This funnel can be operated by Skillz at a low variable cost because the cost of development of games and the burden of creativity in making the games engaging lies with the game developer and not Skillz. Also, as we will see later in the article, this funnel offers some unique advantages to Skillz where they can identify a potential hit game in the early stages of its adoption cycle by gamers and then invest selectively in those specific games, thereby creating a funnel progression effect where the better performing games come out of the funnel as the Top Skillz Games like Solitaire Cube, Blackout Bingo, Pool PayDay etc. By this process of nurture and evolution, the top games become large enough to drive majority of Skillz revenues while the games that are yet to show the early promise continue to operate with a much smaller userbase while trying to innovate and experiment till they reach their potential and demonstrate above average metrics like Customer LTV ( Life Time Value) , low customer acquisition cost and high level of user engagement. The two funnels ( user acquisition and game evolution) work in tandem with each other fostering a environment where Skillz can achieve a industry leading high Customer Life Time Value greater than 4 for its games enabling it to continue increasing its spend on user acquisition and ultimately driving high revenue growth at 95% gross margins.

Lastly the pyramid shaped user ecosystem is created with super users who have achieved a high game skill level at the top of the pyramid and the newer players at the bottom layer of the pyramid. The middle layer of the pyramid are engaged paying users that are trying to move upwards in their skill levels and trying to improve the win rates. Skillz uses patented player matching algorithms for gameplay and along with player fraud prevention, both are critical to ensure the userbase at all layers of the pyramid remain engaged in the games and find the system fair and acceptable for them to make cash bets for their competitive games. The algorithms ( fine tuned over years of machine learning from game data) are key to maintain this balance across various layers of the pyramid, because players will churn fast if they keep losing due to wrong matching with another more skilled player. The dynamics of keeping all layers of the pyramid engaged, avoiding unfair and fraudulent play and not letting super skilled users win all the money from other lesser skilled players is key here for user retention and driving the frequency of games per user . Skillz has perfected these algorithms over time with usage of more and more gaming data from competitions on their platform. This is one reason why Skillz has been so hard to beat over longer periods of time by any company that has tried to emulate their model till now.

But before we dive into core competitive aspects of the model let us understand Skillz as a company better

A. What is Skillz?

Skillz was founded with the belief that everyone loves to compete. The broad vision of Skillz is to build the competition layer of the internet by re-inventing competitive mobile gaming. To achieve that vision, Skillz has built a proprietary patent protected skill based mobile gaming platform that enables third party mobile game developers to integrate their respective games with the Skillz platform features that enables competitive gaming that is fair, fun and rewarding. Skillz has developed this eSports platform connecting game developers with game users through multiplayer competition that enables monetization for the developers while letting users win monetary rewards based on competition outcome.

Developing Skillz Games

Skillz provides a Software Development Kit (SDK) that game developers can integrate with their games to enable the features provided by Skillz platform. This software integration is fairly simple and based on some reports, it can be accomplished in a day or two. These games that are developed using Skillz begin as “Free to Play” games but once they meet certain well defined criteria, the games can provide “Prize” competitions to the users where each user can wager a certain amount of money for each competitive game and win a certain reward ( monetary or otherwise) based on outcome of the competition. These competitive tournaments can be one to one or may involve several players competing for a reward.

The criteria that a Skillz game needs to meet before it can host Prize based tournaments featuring player entry fees on the Skillz platform are as follows -

Competition must be skill based and this is determined by Skillz patented algorithm. ( US Patent Number : US9446315B2). The use of patented algorithm reduces the randomness in the Skillz games and ensures that the game is compliant with the regulations that allow skill based cash tournaments.

Game should be free of glitches.

Game should have at least 4-Star and above average rating in the relevant App Store

Game should have at least a 100 or more Daily Active Users

Once the game meets all the above criteria, it can host the tournaments that allow players to compete after paying a fee for each game and then win rewards based on the outcome of the competition. This then allows both Skillz and the game developer to share a part of cash raised from player fees and thus monetize the game.

Is it Gambling?

Skillz offers only skill-based games in its paid entry fee games and do not provide games whose outcome (win or lose) depends on chance ( like a Slot Machine). The broad definition of whether a game constitutes gambling involves three criteria:

a Prize

Paid-in consideration

An outcome determined by chance

If ALL of the above three criteria are not met, then it is usually not considered gambling. For Skillz, the third criteria is not met as Skillz game focuses on making the outcome skill based and the patented algorithm is used to minimize the randomness in the game.

In US, each State decides whether to allow skill based cash reward games and also decide what types of games require a gambling license. Skillz offers the skill based cash tournaments only in states that allow these games to be played. 41 U.S. states and the District of Columbia allow such types of skill based cash reward games, which account for roughly 90% of the U.S. population on a combined basis.The states in which Skillz does not offer cash prizes are Arizona, Arkansas, Connecticut, Delaware, Louisiana, Montana, South Carolina, South Dakota, and Tennessee.