Earlier in this issue, our columnists from Dickinson Wright wrote: “Due to the thin margins associated with sports wagering, sportsbooks are offered almost as an amenity to casinos, to draw customers in to play their much more profitable slots and table games.” They provided the context of Nevada casinos offering sports wagering as part of their “resort experience,” while pointing out smaller operators might not survive on sports betting’s thinner margins. Referencing payouts ranging from 4% to 6% annually, the Dickinson Wright lawyers also factored in various other taxes and expenses. It begs the question: With all the excitement surrounding US sports betting right now, is its main benefit simply getting new customers through the door to spend on other things?
Indeed, while sports betting is an activity many can partake in, that can be marketed across multiple platforms and be combined with numerous other activities, its margins are undeniably lower than other verticals. In January, New Jersey saw $958.7m in sports betting handle. This translated to $82.6m in revenue – less than 10% win. If a casino, or online sportsbook, has to give back on average over $90 for every $100 it receives in sports bets, is every dollar it receives from other revenues arguably worth more? Online slots and physical table games provide far higher margins, while every $100 spent on food, drinks or attending a show, for example, is money a land-based casino doesn’t have to give back.
How important is cross-sell?
With this in mind, how does sports betting actually fit into a casino’s strategy? The Innovation Group president Michael Soll tells Gaming America that sports betting has become an important amenity within the bricks-and-mortar environment, where it is implemented ahead of online sports wagering in many jurisdictions. He explains: “Outside of Nevada, sports betting came to the market late, just behind online casino wagering, which has emerged over the last decade. When offered online or via mobile devices, sports betting behaves a lot like other forms of online gaming, in the sense that player relationships are less personal and more intertwined in the digital marketing environment. The value of new marketing channels for online gaming had been so compelling that social sites arrived ahead of ‘for money’ play to establish player relationships and build databases. With sports betting, the marketing channels are blown wide open incorporating media companies and – now less controversially in the US – sports leagues, teams and even players themselves. Much of the value of the offering exists outside of the wagering itself.
“But live sports betting in casinos differentiates itself from online wagering as it becomes more active and more social. While not particularly lucrative relative to slot and table operations on a pure revenue basis, sports betting attractions diversify the casino visit and add to the myriad of restaurants and entertainment options available on site.”
As an added amenity and a new form of gaming, sports wagering can keep some players and parties on site longer, whether a family or a couple who may be interested in different experiences in the casino. For Soll, this helps build a casino into more of a “complete package.” Historically, this was already attempted by the casino industry with pari-mutuel racetracks. As it turned out, the crossover between a slot player and horse bettor wasn’t as high as originally anticipated. Sports betting, however, appears to be more value-added.
“Sports betting can keep players on site for a while if they’re interested,” Soll says. “But there’s also a nuance. Sports betting venues also have always had an ‘easy in, easy out’ opportunity. Up until the most recently designed Las Vegas properties, there’s generally been a place where bettors can park the car, go in and make a bet, and get back into the car. This all precedes wireless and online availability, but it tells you something about the mentality of the player. There are players who aren’t looking for the social experience, they’re just looking to place a bet. I would say that is a little bit of a different player.
“What has been fascinating, though, is witnessing the relationship side of the business develop, which has really seen momentum across the US in recent months."
This involves the marketing channels, the flexibility of the leagues to find ways in, opening up the dialogue around integrity fees and media companies who perhaps own distribution channels for sporting leagues. Partnerships like that of Bally’s with Sinclair Broadcast Group, MGM Resorts International with Yahoo, and the involvement of ESPN, Fox Bet and various other media/sports betting crossovers are all noteworthy.
Whereas the UK, for example, is now infamous for its barrage of sports betting ads and sponsorships, the US is arguably taking this a step further with shows and channels dedicated to sports betting. Odds are as integral to some broadcasts as a coach’s pre and post-match interviews. All of these factors, according to Soll, provide a rich and
up-to-date way of taking data and customer relationships to the next level. He adds: “At the end, there are companies who make quite a bit of their income on sports betting because they’re focused on it. But there aren’t many markets whose dominant source of revenue is sports betting revenue.”
The digital view
In this sense, it’s easy to see the excitement around sports betting in land-based casinos in Atlantic City, Las Vegas or Mississippi, where, for instance, there is a strong correlation between sports betting and food and beverage, or other entertainment amenities. During a table game experience, a player is focused on that one game. In a sportsbook, or in a sports bar with a terminal, there can be several things going on at once: a player can have a meal while they watch sports they’re not betting on, and at the same time, watch sports they are betting on. Does this model hold up when sports betting is offered off-site, online?
“It’s in its infancy in terms of trying to draw lines between the two types of play,” states Soll. “When you look at enabling legislation, it was very tempting as we started looking at new markets to offer online out of the box; however, a more conservative approach beginning with bricks and mortar seems to be prevailing in most emerging markets. But the anticipation is that over time online will be offered, whether exclusively by bricks-and-mortar operators or by opening up the market with more competitive tax rates and letting more companies operate competitively.”
Online expansion will not necessarily undermine bricks and mortar or even a more widely distributed retail product. Suzo Happ’s Tim Kennedy recently told the GI Huddle there will always be a place for retail sports betting, especially in the US. While land-based revenue is currently the dominant force, many are projecting online will offer the bulk of gaming revenue in the long term. That, however, would still leave a large chunk of earnings to be had at physical casinos and sportsbooks, so there’s a balance between not missing out on online and still capitalizing on retail. As far as online is concerned, The Innovation Group doesn’t simply see sports betting as a gateway to other forms of gaming. Crucially, Soll concludes: “Sports betting stands up on its own and it’s driven by a different player.”
Cannibalization
So far, we’ve established that sports betting serves multiple purposes. And if it does stand up on its own, that is perhaps reason enough to pursue it as a vertical. Still, its revenue totals are smaller, tax rates are higher and margins are lower, so as a consequence, could there be a downside to offering sports betting? Could this lower-margin vertical, for example, cannibalize revenue from slots, blackjack or roulette?
“If we take online in general, we’ve been trying to measure cannibalization for about a decade now,” Soll explains, widening the topic beyond sports betting to add some initial background. “When it hits a market, online gaming and accessibility in general – not just sports betting – there was quite a bit of fear there would be significant cannibalization. But even from the early days, it never really hit the double digits. It was always high single digits or lower. And if you really carefully look at net across all revenue centres, in many cases it was mitigated by other areas in the property or other online channels. So you’ve got less of an impact than intuitively people thought it might be.
“Enter sports betting and I’ve not seen a great deal of statistics yet. As most of the sports betting markets have started to ramp up, other than New Jersey, we ended up in the middle of COVID-19 and lost the ability to see what’s happening on site. If you look at New Jersey, it was also still influenced by people entering from other states. But Atlantic City’s recovery, for example (as we explored in the last issue of Gaming America) has occurred with growing sports betting revenue and online revenue.” We may start to see more shifts in cannibalization when there are four or five neighbouring states offering legal sports wagering, Soll adds, with no imported income. But for now, the data certainly suggests sports betting has co-existed well with its counterparts – both online and at bricks-and-mortar properties.
The future and M&A
Sports betting margins are lower, yes, but as Soll has explained, “it has become a game changer amenity for casinos that want to offer the ‘next big thing.’" In that sense, it may well be considered as much a marketing tool as a revenue generator. But if the media and entertainment relationships in sports betting significantly influence the makeup of the sector, Soll feels sports wagering may have the power to change the shape of the industry altogether.
“How much do single-channel or product operators in gaming become the dominant companies in the space going forward?” he wonders. “Is there going to be M&A activity in the industry driven by massive media companies having a hand in sports betting? We’ve already seen sports betting companies being cross-pollinated with traditional gaming companies, looking at the examples of Penn National and MGM Resorts. I think it’s interesting, if you dial back to before the entry of online, the dominance among gaming-centric companies was borne out between casino operators, slot manufacturers, route operators and the like. Now the lines between casino operators, online operators and sports betting operators are blurring.
“Still, the gaming industry remains dominated by companies offering gaming. Large cap operators have not become competitive as stand-alone resorts or entertainment companies, or been absorbed by them. The question with sports betting is will there be a shift in dominance to a different industry that starts to overwhelm what we think of as the gaming industry now? Look at the massive companies who have now taken an interest in sports betting.
We think about it in terms of what makes up the ecosystem of the industry and how does that picture change over time. Sports betting could have a role because it’s so involved in media, which is such a powerful industry.” This is a concept The Innovation Group is not alone in exploring, with Joe Kustelski, co-founder of Chalkline Sports, recentlytelling Gaming America the future of sports betting is intertwined with media companies.
So perhaps the next time you read about the latest state to legalize sports betting, or the latest NFL team to partner with a sports betting operator, it’s worth comprehending the buzz for the wider interests it represents. From a pure revenue point of view, sports betting has been vital in helping revitalize New Jersey and generate invaluable tax revenue in states across the US. But it’s still a relatively small earner, while its relationship with the rest of the gaming industry is a complex one. Perhaps we can conclude it is not gaming’s main course for now, but nor is it just a free appetizer to get customers spending elsewhere. Sports betting is a low-margin, high-impact business, one that affects all other parts of the ecosystem, and one that could some day completely transform that ecosystem itself.
