November 15, 2021 Sports Betting

This Town's Not Big Enough For The Three Of Us

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Gaming America contributor and Senior Analyst at Third Bridge, Harry Barnick, analyses the race for market share in the US. Out of industry behemoths, DraftKings, Flutter and Entain, who comes out on top?

Breaking into America

Flutter CEO Peter Jackson recently said: “The expansion of the US market represents the single most exciting opportunity for Flutter today.” With Amy Howe now at FanDuel’s helm and DraftKings initially exploring a $22bn offer for Entain, this article looks at how big gaming companies are attempting to break into America.

 

So how big is the market? 

Everyone seems to have an opinion on the total addressable market (TAM) potential for the US gaming market. It’s obviously huge, but how big? Sadly without a crystal ball with which to forecast which states are going to legalise online gambling, we have to accept it will range somewhere between $20-25bn in the next 5-7 years. There are also some important variables to consider; for instance, the extent to which sports betting and random-number-based games such as roulette, slot machines and blackjack become legal.

At present, key lobbyists are prioritizing the legalization of sports betting. It is an easier sell to legislators who want to be seen to be tackling the already pervasive black market for sportbooks. Although operators such as Entain argue that iGaming has huge potential, our experts strike a more conservative tone. It is equally important to consider which states are likely to legalise sports betting. Here, there are four big geographic questions.

Firstly, California. This large and populous state with nearly 40 million people presents an exciting opportunity, not least because many of its inhabitants enjoy relatively high disposable incomes. However, there’s a catch. Given the number of stakeholders involved, ranging from Native American tribes to powerful political forces, agreeing on legislation looks unlikely. It is a longer-term dream rather than an imminent reality. Our experts say regulation is unlikely to pass before 2025.  If it does, the state could be extremely lucrative with a TAM of up to $4bn.

Secondly, Texas. Similar to California, the size of the state makes it an attractive opportunity. Unfortunately, there is no legislation in place and, with the Assembly only meeting every 2-3 years, our experts suggest that operators will have to wait until at least 2022-2023 before the state begins to open up to sports betting.

Thirdly, Florida. Equally big, equally problematic. At the moment a draft agreement is with the Seminole Tribe, which has special status. It is talking to the Governor of the State of Florida about a negotiated compact, but people close to the matter say an agreement is far from certain.

Finally, we have New York. The state has given early 2022 as a timeline, although a delay in this schedule could be expected, given the amount of time it takes to collect and respond to applications before selecting partners. Our experts suggest a TAM of $1-1.5bn in revenue for this state.

Beyond geography it is also important to consider what is included in TAM. Many operators and the media include free bets, but this can be misleading. Doing so inflates the number we see thanks to the attractive deals present in the market.

For instance, Caesars has offered customers a $5,000 risk-free bet. This brings us to the next big question in the US: how to improve profitability and customer acquisition costs.

 

How to improve profitability?

With cost per acquisition (CPA) as high as $300, operators are struggling to improve profitability. A push to reduce this cost by up to 25-50% would leave operators in a better position, though doing so would require a lot of discipline around how they spend their money. We are hearing their focus should shift away from free bets into affiliate marketing and better user experiences. Similar to more mature markets, marketing spend should reduce to 30-35% if operators are to improve their margins in the US.

Tax rates are also crucial to profitability. Most states range between 10-20%. However, New York has implemented a 50% tax rate, limiting the profit potential for operators in the sector. As more states open up, operators will hope for taxation rates of 20% or less.

 

Who will win in this context?

The important factors that determine which operators will be granted a licence or skin from a state are relatively straightforward. Legislators will look at whether an operator is fit and proper, financially stable, and what sort of experience each party brings to the table. The largest companies should shine during this process. Beyond this, what do we see from some of the largest operators?

DraftKings – Customer acquisition and analytics has been this company’s forte since it established itself in the market. The daily fantasy sports platform also presents a huge advantage. The company’s name is already well established in the US market and less money has to be spent improving credibility in the eyes of the sports betting customer. That being said, DraftKings has less history operating in mature markets, which gives experienced operators like Flutter Entertainment and FanDuel an opportunity to take market share.

Flutter – Flutter is achieving strong market share gains in the US for three reasons. It has recognizable brands (in FanDuel, Fox Bet and PokerStars), its technology is strong, and it has a wealth of experience in online gambling and online sportsbooks. Flutter also has deep pockets funded by its diversified geographical footprint, where mature markets generate positive free cash flow.

Entain – Entain is breaking into the US via its BetMGM brand. Its key differentiator is proprietary technology. It allows the company to grow share of wallet with existing customers, enticing them with new attractive bets and improving the lifetime value of the customer. Its customer loyalty programme is also integrated with the MGM Resorts platform, allowing customers to redeem their points across multiple sites. All of this improves the customer journey and consequently improves retention. Unfortunately, branding continues to hold back the BetMGM partnership in the US.

 

What about consolidation?

As the fight to the top rages on, scale continues to be an advantage. In this context, we have seen a wave of consolidation across the sector, from Caesars’ acquisition of William Hill to DraftKings’ recent bid for Entain. While the outcome of the latter deal remains unclear, more consolidation is expected as operators seek to combine forces in an increasingly competitive and complex sports betting landscape.

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