The rapid development of US sports betting has been astounding. Currently some 32 states have legalised some form of sports betting and of this number, 28 provide either mobile or online access.
Within the 32, there are five states where tribal operators provide the only betting option. To date the markets have been characterised by a hierarchy of operators that have gained access primarily via partnerships with land-based casino operators, both tribal and commercial.
A further eight states are considering the issue, and could pass legislation in the coming year. Beyond these is a disparate group of states that have been resistant to passing sports betting legislation – although some have been actively considering the issue.
Among these are three powerhouses of tribal gaming; Minnesota, Oklahoma (with its proximity to Texas) and the behemoth of California. Trouble, however, is on the horizon.
It is now common knowledge that the massive growth in sports wagering has been driven by the intense competition among operators. This has been manifested in the huge sign-up bonuses offered new players, often in the thousands, which has driven CPA to astronomical levels often exceeding $1,000.
This has resulted in a troubling absence of profitability among major sports book operators. For example, DraftKings lost $1.5bn in 2021 (having lost over $1bn in 2020).
Caesars Interactive reported an EBITDA loss of $476m in 2021, followed by a $576m EBITA loss in Q1 2022, which CEO Tom Reeg was a high watermark that would reduce going forward. Flutter Entertainment’s US division had a negative EBITDA of over $320m, though CEO Peter Jackson insisted there was no need to reduce spend following its Q1 2022 update. These losses are not sustainable.
These companies largely recognise this, and tend to justify these losses as part of a predesigned strategy to capture market share in the early years of market entry. The general aim is to pin future profits on a retraction of CPA costs, and maintenance of the market share through heightened brand recognition that they have been able to induce.
Others, among the lower tier operators such as Wynn Resorts, Las Vegas Sands, Churchill Downs/Twinspires, lacking deep pockets, have either pulled out of the sports betting market, or have curtailed their efforts. Many observers have suggested that, under these pressures, consolidation is inevitable.
The US sports betting sector is a muddled and frantic market that has been developing at pace. To gain a perspective of the overall market, it is helpful to address the sports betting market from the perspective of tiers, as each is subject to differing influences.
The following is a rough characterisation of the tiers that sports betting operators fall into. It is by no means complete but does provide a structure from which to view the entirety of the US sports betting market.
Tier one: DFS Kings (DraftKings and FanDuel)
These operators started out in daily fantasy sports (DFS), before pivoting into sportsbook, then into multi-product betting and gaming operators, evolved over nearly a decade of saturation brand-name media buys.
These are leaders in the market and expend huge sums on advertising and in customer acquisition. They will be under increasing pressure to rationalise their business. These operators have fully embraced the ‘market share now at any cost’ approach. Together, these two companies account for over 60% of the US sports betting market.
Tier two: PLC challengers (BetMGM, Barstool/Penn National Gaming, Bally’s)
These operators are looking to secure top five status, everywhere. They are under the same pressures as the DFS Kings to rationalise their business. Of these Bet MGM, by virtue of being a JV with Entain and its sportsbook prowess, is the frontrunner to punch into the top tier. Should more states legalise other online gaming verticals they would be in a position to benefit the most. They are seeking market share now.
Tier three: Omnichannel converters (Caesars, Golden Nugget, Resorts, Hard Rock, Rush Street)
These operators are associated with their own land-based casinos or with land-based partners through whom they have gained market access. They experience similar pressures to the tiers above, though with a reduced ability to compete in terms of CPA. They are focused on ”conversion” and omnichannel success. They are not de facto sportsbook brands, but should the jurisdiction expand to online gaming, they would be well positioned to take advantage and gain market share overall.
Tier four: The newcomers (PointsBet, Kindred, Bet 365, PlayUp)
European and Australian brands entering America and boosting their ex-US share prices. Most have a patchwork quilt approach and are largely unknown as brands to American consumers. Of these, only Bet365 has the ability, given its cash resources and rich, tested product line to become an operator of scale while it adopts a “wait and see” strategy.
A move to legalise other iGaming verticals could induce greater investment and commitment from these operators. How long can they effectively sit on the sidelines while waiting for expansion of igaming as competitors gain market share in the sports betting realm and heighten their brand recognition?
Tier five: The Land-based operators (Tribal and commercial, mostly single property with locally recognisable brands but with limited national reach)
Some of the more significant operators in this category include Mohegan Sun and Foxwoods. Overall, these are focused on “conversion” and driving business to their land-based facilities.
Highly localised but driven to be in the market and to gain knowledge and capability, while acting as a conduit for market access to other higher tier operators. These operators cannot compete on a CPA basis with other tiers, and must deliver positive results for their land-based components. This will be one of the most interesting tiers to watch as it is among this group that innovative marketing will be developed to avoid the high CPA crunch and maximise the omnichannel impact.
Tier six: The ghost tier
The black market cannot be ignored, particularly in sports betting where “high rollers” have had decades long relationships with these operators. With the advantage of operating in an untaxed environment they can offer better odds and savvy bettors will recognise this and continue their longstanding relationships.
It takes only a Google search in any state to prove the pervasiveness of this tier, and it is unlikely to evaporate simply because sports betting has been legalised. This should be a concern for legal operators and regulators alike.
For the legal operator, this tier siphons off potential revenue. For regulators and legislators, it reduces the potential tax benefits from sports betting. On top of these negative impacts, it exposes more of the population to the harms that effect some bettors, and in this unregulated portion of the market there are no consumer protections and criminality is rife.
Illustrative of the pervasive presence of this tier, a recent Tweet from a disappointed punter regarding the delayed launch of a mobile app from an Arkansas operator stated: “Well, this got botched I guess Bovada and BetOnline will have to do.”
Regulators have taken no action to effectively protect their markets and few companies are even addressing this issue. Startup Atropos Intelligence, with its Yield Sec product, appears to be the only company developing a ‘market protection’ system that would effectively achieve this.
The increased advertising since 2018 accompanying legalisation has created more interest in betting and gaming, whether on- or offshore. All ships rise on the same tide – even pirate ships. For operators that have paid licence fees, pay taxes and fees to partners, and are faced with huge marketing costs, this should be a front of mind issue.
Prepare for turbulence
Four areas of turbulence can be predicted in the US sports betting market.
- The massive losses experienced by the major companies (tiers one and two), because of profligate spending on bonusing and advertising, simply cannot be sustained. These must be rationalised. This will open the door for other competitors (three to four) to make gains based on the quality of their product and innovations in marketing. There simply has to be a return to sustainable marketing practices, discipline on CPA costs, and an increased focus on ROI. This will provide opportunity for companies focused on novel marketing approaches that have as their core DNA a focus on efficient CPA and ROI in what will likely prove to be a rapidly expanding segment.
- As the sports betting market looks to further its penetration of the tribal gaming market (Tier 5) there are some troubling signs ahead for major sports betting operators in higher tiers seeking market access through tribal gaming operations. Arkansas sports betting just launched, and includes a 51% revenue share for the licence holder (land-based operators) compared to the 5%-15% typical for the brick-and-mortar venue that provides market access for sportsbooks elsewhere. This will further exacerbate the quest for profitability. Of the four land-based gaming licenses in Arkansas, two were for existing racetracks (Oaklawn Racing Casino Resort in Hot Springs and Southland Gaming & Racing in West Memphis) and two were for tribal casinos (The Saracen casino, and Legends Resort Casino which is under development). Not surprisingly, both BetMGM and DraftKings opposed the 51% share. While it could be argued that this was the result of a local decision, there are strong indications that the revenue provided to land-based partners for granting access in the tribal market will be under much greater scrutiny. A recent statement from NIGC presaged this:
“Generally, if a contract requires or permits the performance of any management activity with respect to all or any part of a gaming operation, the contract is a management contract within the meaning of IGRA and requires the chair’s approval.
Any action by a third party that constitutes ‘planning, organising, directing, coordinating, or controlling’ all or any portion of a sports book can trigger concerns about whether the third party is managing the sportsbook operations.
The NIGC will continue to monitor this area as the industry matures to ensure that compensation paid to sports book vendors is commensurate with the services rendered. As the NIGC has found in the past, a high fee coupled with a long term or provisions that give the vendor or consultant control indicates a sole proprietary interest violation.”National Indian Gaming Commission
This could signal problems ahead for sportsbook operators in tribal country especially as they look to expand into primarily tribal gaming states such as Minnesota, Oklahoma, and California. This bears close watching, as the major tribal gaming states such as Oklahoma, Minnesota and California move to legalise sports betting.
- The relatively anaemic generation of tax revenue from sports betting in comparison to igaming in general, will prove a disappointment for state legislators (particularly in those states where only retail = betting was approved). For example, in both New Jersey and Pennsylvania igaming related tax revenue is more than double that of sports betting (online and retail combined) and retail sports betting alone is minuscule in comparison. Faced with the pressures of balancing a budget, history suggests that legislators will look to expand both mobile sports betting (where they don’t already have it) and igaming options. The latter will benefit a lot of the smaller companies that are outside the Tier 1 DFS related companies and that have a stronger brand and product in the broader igaming segment. For these cross marketing of products will become critical.
- As budgetary pressures increase on legislators, and as operators look to maximise returns from their marketing spends and seek to return to profitability, coupled with concerns about gambling harm, there should be a focus on the black market. Simply legalising and regulating licensed operators, especially in sports betting where black market operators have the advantage of decades long relationships, effective ownership of key search terms, and a lack of a tax burden, is insufficient. This confluence of self interest from operators, regulators, legislators and gambling harm advocates should lead to greater emphasis on “market protection”. Achieving this will be a challenge, but ultimately could lead to market disruption for the black market. This would benefit all stakeholders.
Paul Girvan is CEO of PKC Gaming & Leisure Consultancy and COO of A GAME ABOVE (agameabove.com), a company that operates across betting, gaming and lottery products, innovating and creating unique campaigns, stories and solutions that give audiences meaningful engagement and experiences to make them loyal customers.