Igaming Focus: DraftKings moves on from Hindenburg report claims By Jake Pollard, CDC Gaming Reports June 22, 2021 at 10:00 am So far the claims made in the Hindenburg report about SBTech’s business set-up in black markets don’t seem to have done much damage to DraftKings. The fact that the allegations are now public is probably the biggest service the report has done. It is never a good look to be too blasé or cynical about business, but there was little that surprised industry executives when the Hindenburg Research group published its report into alleged black market/illegal activities by SBTech, the sports betting platform that merged with DraftKings as part of its SPAC listing at the start of 2020. The level of detail the short sellers at Hindenburg supplied was impressive, but it’s the fact that the claims, which have been circulating around industry circles for many years, are now public and in such an eye-catching manner that is one of the more alluring aspects of the story. Although of course it does not diminish the seriousness of the allegations, nor Hindenburg’s sole objective of driving down DraftKings’ share price. But first a disclaimer. I worked at SBTech for around nine months and left pretty unhappy at my treatment (even if much relieved). This is the first time I have written about the company in a public forum and my only aim is to provide some context thanks to the knowledge I acquired during my time there. Back to the Hindenburg report. It had a limited impact on DraftKings shares; they were down 10% as trading opened and down just 4% by close of business. In addition, the reaction of industry analysts was relaxed on the whole; most backed DraftKings and minimized any potential investor or regulatory backlash. So far, they have been correct in their assessments. The most serious allegations of illegal activities, and of DraftKings drawing financial gain from them, centre on SBTech’s alleged operations in China and the Middle East. The report states that a number of third-party resellers connected to SBTech are working in those markets and estimates that around “50% of SBTech’s revenue continues to come from markets where gambling is banned.” Impact assessment Hindenburg states that DraftKings is knowingly benefiting from these illicit operations and that group “insiders aggressively cash out amidst the market froth.” DraftKings issued a statement denying this. When it comes to DraftKings’ U.S. business, Hindenburg adds that industry contacts have questioned its “model of aggressively burning cash on promotion and marketing to acquire customers in the near term, despite a lack of evidence of long-term customer brand loyalty.” Analysing the report’s claims, Truist Securities said SBTech’s B2B business wasn’t a big enough contributor to DraftKings’ revenues and that “absent ongoing DKNG/SBTech black market business (which we do not see as likely)”, the risks were “more limited to reputation and market sentiment.” Importantly, it added that “multiple competitors licensed across the U.S. have unregulated grey market exposure across Europe and Asia.” The team at Jefferies echoed this point, saying “gray market exposure (by SBTech) in the past is besides the point in our view, as this aspect is inherent in numerous global markets.” However, the allegations could have a calming effect on efforts to pass betting regulations in other states as “regulators could possibly feel compelled to examine digital gaming companies’ exposure to gray markets more closely going forward”. This “could have an impact on the value of our TAM if a change in the timing of market activation were to become longer, not just for DKNG but for all prospective operators,” added Jefferies. The potential for longer term regulatory pushback from U.S. jurisdictions remains on the cards, even if it seems unlikely. Had regulators (or commercial partners) really wanted to, it would surely have already happened in the three years since the repeal of PASPA and would have prevented SBTech signing a number of high-profile U.S. brands prior to its deal with DraftKings. In addition, this didn’t happen despite intense lobbying from competitors. B2C focus Credit Suisse for its part described it as “reaction overdone,” and while the report states that SBTech represented 25% of DraftKings revenues at the time of listing, CS estimates for 2021 put the figure at 10% of revenue and 8.6% for 2022. The number could be as low as 5% but for the fact that SBTech is integrated into DraftKings, “implicitly making the portion of revenue ‘at risk’ even smaller as a percentage of total.” In a worst-case scenario, regulatory issues linked to SBTech would mean DraftKings continuing to operate on the Kambi platform, the analysts at CS said. Whether DraftKings benefits from those alleged illegal revenues to an extent is irrelevant. It has always been clear that its focus is on the B2C side of its activities and industry observers expect it to sever many of the B2B deals it inherited from SBTech. Indeed, many operators currently running SBTech are in talks with other platform providers eager for their business. Not that this will come as much of a consolation to Sweden’s or Finland’s national operators Svenska Spel and Veikkaus, who, after signing with SBTech, had to wait nearly 18 months before going live at the start of this year. Still, they may end up as one of the select brands retained by DraftKings’ B2B teams. One of the other striking aspects of the Hindenburg report is that the veracity of the claims, that SBTech operated in those black markets using those corporate structures, was not contested. In fact, DraftKings’ main line of defence is that it doesn’t draw revenues from the alleged activities. In the end, the damage to DraftKings is mainly reputational and it will suffer more from a failed migration to the SBTech platform, poor platform performance or a slowdown of U.S. betting regulations in new jurisdictions than from any damage the Hindenburg report might have inflicted. To be fair, SBTech is like other suppliers or operators who were active in so-called black markets that are now working in the U.S. It has just been much quicker to pivot and gone on to enter the biggest market in the world with the one of its biggest brands—which, one has to admit, is some feat. An added irony is that there are so many other outrageous and darkly funny stories that could be written about SBTech and its business practices, but instead they will be recounted in private or during business lunches. At least the Hindenburg report has lanced that particular boil.