Dominating the market: a golden goose, or a false promise? By Ken Adams, CDC Gaming Reports March 1, 2020 at 10:00 pm In September 2015, I was visiting my sister in Illinois. She had recently become a football fan via a sports pool among her friends, coworkers and some other family members. Every week, she eagerly filled out her entry and would then watch a game or two. Even though it was not generally part of our relationship, we watched that week’s Monday Night Football game between the Minnesota Vikings and the San Francisco 49ers. The game was good enough to keep us entertained on its own, but the real story of that game was the advertising: DraftKings and FanDuel were battling it out during every commercial break. It was part of America’s introduction to big-time fantasy sports. At the time, of course, sports betting was illegal, except in Nevada, Oregon and Delaware. But the fantasy sports companies thought they’d found a way around the law. That September, they tested their model and stretched their budgets, each spending roughly $20 million a week on television advertising. In one week, DraftKings claimed to have signed up 1 million players. The campaign caught the attention of sports fans, but it also caught the attention of law enforcement agencies around the country. The average American district attorney, it seemed, tended not to agree with the two companies about the legality of their business model. The legal battles lasted a long time, but both companies were finally rescued when the Supreme Court struck down the federal law prohibiting sports betting. In the wake of that decision, dozens of states rushed to take advantage of the opportunity. And, along with the states’ interested in legalized sports betting, came the English betting companies – and FanDuel and DraftKings. The sports legalization trends are not easy to characterize. There are simply too many moving parts. Sports leagues and sports media, casinos and casino corporations, data analysis companies and sports betting entities all have separate and important roles to play. However, as we approach the second anniversary of the Supreme Court decision, a couple of clear trends are beginning to emerge. Mobile or online betting outpaces bricks and mortar wagering by a factor of three or four to one in states that allow it. And companies with the strongest public awareness have an advantage roughly equal to the mobile wagering advantage. DraftKings and FanDuel are winning the fans’ awareness poll. One recent survey concluded that 65 percent of potential bettors recognize those two names and are more likely to place a bet with them than with unfamiliar bookies. And, in the states where they operate, they are getting the largest share of the market. In other words, the money they spent in the 2015 season is now bearing fruit in 2020. That may be one of the less talked about risks of sports betting in general: the lag time between investment and return on investment. In 2015, those two companies were involved in a kind of pyramid scheme strategy. Money from new signups was spent on advertising to get more new signups, and then that money would be poured back into advertising to attract more new signups. The current expansion is somewhat like that. The money made from current wagering in one state must be invested in new jurisdictions; in turn, that revenue will be invested in another jurisdiction, until there are no new opportunities left. There is not much short-term profit potential in that model, but the major bookmakers are hellbent on expanding and don’t have time to think about profit. If they don’t move quickly, the opportunity will slip away. In the long term, the winners will be those will the largest base of gamblers, and those providers with the greatest name recognition will have the largest base. Thus, the bookmaking companies ideally want to be in every jurisdiction, and to be associated with the largest casino companies. Buying into every jurisdiction is going to be expensive: expensive, complicated, and time-consuming. Part of the problem is the nature of the gaming industry in this country. Except for a very broad Indian gaming law, there are no national gaming laws or regulations. The industry in the United States is fragmented by jurisdiction. There are fifty states in the union. Alaska, Hawaii and Utah have virtually no legal gambling, but every other state has some form, and from where we stand today most of those gaming states will be adding sports wagering sooner or later. Whether it is sports betting or commercial gaming, though, the laws, regulation, taxation and licensing are different for each state. An individual company, be it William Hill, FanDuel, MGM or Caesars, must go through a completely separate licensing process in each state. Some states, like Pennsylvania, have large upfront license fees; other state have a small fee, or none at all. But all states have a thorough, lengthy and expensive licensing process, and, while license and licensing sound the same, they are not. A license is a permit to operate. Licensing is a vetting process to ascertain whether the company and all key individuals are capable and suited to operate a gaming enterprise. Sports betting is the most significant gaming opportunity to have hit the country. It is uniquely a national trend. Other gaming expansions have, in one way or another, fit into a national narrative, but they haven’t shared a common storyline. Sports betting has a single storyline: betting on sports. There are many other storylines withing the overall narrative, but all are clearly connected to the main storyline. That means there is national attention on each jurisdiction and national excitement about the subject in general. Sports is a category of entertainment on its own. It is more popular, and generates more total revenue, than commercial gaming. That excitement and market size also excites investors and betting companies. It is far from clear at this point which companies will succeed. The size of the wagering market is even less obvious because of its fragmentation. For the companies that do end up with the lion’s share of the market, like FanDuel and DraftKings have in Pennsylvania, the potential profitability is uncertain. Before any those companies begin to be profitable, the expansion process will have to end and the cost of investment recovered. Airbnb, Uber, Amazon, Tesla and Facebook used a similar, pyramid-like business model. Each of those now-monoliths used every dollar of cash flow to grow and attract attention. Sometimes, that model works. If it works out, at some point the company becomes not just successful and profitable, but dominant. That could happen for the bookmakers. They would then own the Golden Goose. It could also turn out that the potential revenue stream is not large enough to justify the investment. It will be a long time before we know whether sports betting is truly a golden goose or just false promise for the bookies. In the meantime, it is fascinating to watch.