It was considered the “golden goose” when the Professional and Amateur Sports Protection Act was repealed by the Supreme Court in 2018. Sports betting was the street paved in gold, and all you had to do was start up a company and you’d be rolling in riches.
Any casino operator, however, knew that wasn’t the case. For decades, legal sports betting in Nevada was considered just an amenity—something that might lead to table play or slot machine madness but certainly delivers non-gaming revenue. The sports betting margins were razor thin, and the books themselves often lost money on an active weekend.
So where was all this enthusiasm coming from when sports betting suddenly became legal? States were promised hundreds of millions in tax revenue. Analysts upgraded gaming companies that were in the space or about to enter. Sports leagues, once fiercely opposed to sports betting, suddenly were fans.
So where is that golden goose? Where is that city with golden streets? Not on the bottom line, that’s for sure.
According to analysts, the only companies making money on sports betting these days are the suppliers. And there are many suppliers to satisfy the technology, compliance and integrity of sports betting—platform providers to “skin” holders, data compilers, payment processors, geolocators, ticket writers and many more. They each get a piece of the revenue before the operator sees a penny.
So when can we expect operators to get their piece of the pie?
Eilers & Krejcik Gaming put out a report recently that showed new online sportsbooks can expect to lose money—not much, only 2 cents on the dollar—until the market matures. But when the market matures and the survivors are determined, profits can reach almost 20 percent.
But that’s a long way off, according to Joe Asher, the CEO of William Hill US. He says investments into new jurisdictions will eat up profits for most companies the foreseeable future.
“We’re lucky in that we have had our Nevada operations in place for years and we’re able to use the profits there to fund some of our expansion in other states,” he says. “But you also have to remember we’re in the early days of this industry, and it’s going to take some time to establish yourself.”
The EKG report shows why. A startup sportsbook will use more than 60 percent of its available revenue on bonusing, marketing and taxes.
According to Chris Grove, a partner in EKG, that’s a problem.
“The headline really is that operators are unlikely to generate meaningful bottom-line revenue from sports betting for the near- to midterm,” he says. “This is going to be a business that is all about reinvestment. And the relatively tight margins are going to be driven by pretty intense competition.”
According to John English, a partner with Global Market Advisors, it will be a while because of these ancillary costs.
“We hear it’s a $40 billion- to $50 billion-a-year industry,” he explains. “But by the time we get all the taxes, fees and suppliers taken care of, it’s down to $11 billion in all the U.S. That’s for everyone to split from every state. So it’s still a narrow-margin business.”
For Dermot Smurfit, the CEO of technology provider GAN, sports betting is going to take a while to become profitable—multiple years.
“I don’t think it’s six to 12 months,” he says. “It’s a much longer investment side, but is that a decade, is that five years, is that longer? But it won’t be until they are operating at very significant scale.”
According to the EKG report, suppliers eat up a smaller percentage of the revenue than expected, particularly in a mature market—a little less than 25 percent. In a mature market, that percentage slides to around 20 percent.
Dave McDowell, the CEO of FSB, a leading full-service sportsbook provider, says his company can help create profitability.
“Our proprietary technology allows us to do two things better,” he explains. “First, we can drastically reduce the operating costs, which leaves more money to be recycled into marketing. Second, we use our technology advantage to help our partners to differentiate their offering in a way that allows them to successfully acquire and retain customers. Each operator is different, and each operator is targeting a different customer segment, and that is where our flexible implementation options come into play.”
Driving profitability can vary according to the operator involved, according to Matteo Carli, IGT senior vice president of global PlaySports, poker and ETG, who is in charge of IGT’s PlaySports betting platform.
“The manner in which we drive our customers’ profitability varies for each customer based on their business model,” Carli says. “For example, for FanDuel, time-to-market is absolutely critical. When entering a new market, customer acquisition is a cornerstone to a large B2C brand’s success, so helping FanDuel quickly establish their presence in a new state will support their growth efforts.
“In the case of our regional turnkey customers who use the IGT in-house trading and risk management services, IGT is directly involved in a sportsbook’s day-to-day profitability. Our highly knowledgeable, U.S.-based trading team takes a ‘portfolio-based approach’ in supplying non-stop market monitoring and providing competitive pricing based on bespoke risk profiles, taking into account a multitude of variables such as player analysis, market conditions, injuries, public perception, weather and more. Then, the PlaySports platform’s integrated PAM enables us to help our customers to create customized player offers and promotions that drive customer acquisition and retention.”
Smurfit says the operator and supplier grow together.
“So even though we insist on pretty skinny revenue shares, as a general rule, it’s a business model that’s positioned for profitability,” he says. “Once you get your costs covered setting up a new client, then you launch the client. Then you grow with the client and you can share in their business as a small, absolute percentage.”
In states where casinos and/or racetracks are the only entities licensed to conduct sports betting, they frequently are permitted to sub-license “skins”—a separate and distinct brand—for a fee. English says that’s where profitability lies for the casinos.
“Casinos get something like 5 percent of their profits for doing nothing,” he says. “They’re leaving everything to the operators, and then the operators pay a percentage back. They’ve got nothing to lose.”
The biggest costs of operating an online sportsbook are marketing and bonusing. And it’s the level that a sportsbook operator is willing to invest that may determine profitability.
Grove says that your target market can also determine how quickly you become profitable. He points out that many books today have limits that discourage “sharp” bettors—the sports betting high rollers—from participating.
“The implications of that strategy are probably lower volume, better margins and maybe worse lines ultimately, because sharp action is a good way to hone your line,” he says. “I think ultimately sports betting is a mass-market product. And the absence of that sharp action is probably not going to make a huge difference to the industry at large. I also suspect you’ll see, at least through the medium term, a book that may be willing to take more of that sharp action as a way to differentiate themselves in a crowded field. So I think that will paper over the difference for the industry at large, for a while, but ultimately sharp action is a non-profitable segment.”
Taxes eat into profitability, particularly in states that set them too high. But according to Smurfit, outside of Pennsylvania, most states have a reasonable rate. And even in Pennsylvania, there’s a silver lining.
“Pennsylvania, where the effective rate is 41 cents on every dollar, along with a $10 million license fee, would have been prohibitive if it wasn’t for online gaming,” Smurfit says. “CEOs of the larger companies who have spoken publicly about it say, ‘Thank goodness we have online casino, because that’s the only way we can make money today.’”
English believes that there will be some repercussions from such a high tax bill.
“Do you pass that on to the customer here?” he asks. “Do you do a -120 instead of -110? I don’t think customers will go for that. I don’t think that customers will go offshore, but they might go across the river, and you’ll lose business. They’re not going to pay the extra juice if they don’t have to, so I think it has to be absorbed.”
Grove says Pennsylvania is a bit of an outlier, and that the tax rate really hasn’t resulted in any measurable impact on operations or the odds offered to the players.
“What we’ve seen is maybe a slightly depressed promotional climate, a slightly depressed acquisition environment, or maybe you’re not seeing operators be as willing to take the blank check approach with some of their Pennsylvania competitors. But honestly, no one is really that concerned about making money now that you already have the sunk the cost of the $10 million license fee.
“I don’t know that there’s a massive difference at this stage between how a 20 percent tax rate market and a 36 percent tax rate market are are going to behave. I think the difference will be on the margins, and then once market share settles, you’ll start to see more significant distinctions emerge between the high-tax and the low-tax markets.”
Asher is more realistic about tax rates, whatever they are.
“Tax rates are one of the costs of doing business,” he points out, “and that includes the federal excise tax on wagers. It clearly affects the amount you can afford to invest in a given state.”
He also believes that Pennsylvania isn’t the model other states are following.
“Most states have come in with a level of taxation that allows companies to access the market,” he says. “It creates jobs and helps to establish a foundation under the industry.”
McDowell echoes that sentiment and explains what happened in the U.K. when the government imposed a tax rate on businesses that previously paid almost nothing at all.
“Nobody likes to pay high taxes, but we all know that positive regulation opens up the market and provides better consumer protections,” he says. “If the taxes are too high then operators need to respond with worse pricing, and it becomes more difficult to shut down the black market.
“When the U.K. market implemented point of consumption taxation in 2015, gaming duty went from next to nothing to 15 percent. This kicked off a huge wave of consolidation and closures, and less efficient operators simply could not compete without scale to offset their huge operating costs. By using modern technology to keep operating costs to a minimum and better differentiate new brands in the market, FSB has helped independent operators to compete and steal market share from the larger, legacy operators.”
The economics of sports betting dictate that more profits come when more money is wagered. And one of the fastest growing segments of sports wagering is in-play or in-game betting. McDowell explains how it worked when it was introduced in Europe.
“In-play wagering fundamentally changed the European betting industry almost 15 years ago, and there is no doubt in my mind that the U.S. consumer will embrace in-play wagering, including cash-out functionality,” he explains.
“Today, consumers are still grappling with the concept of even having a place to bet legally, but they will very quickly come to expect the ability to wager on the outcome of the next drive or the next player to step up to the plate. In-play betting drives consumer engagement, and that increases turnover. So regardless of how much cash is taken pre-game, increasing turnover with more in-play options will lead to increased profits.”
Smurfit agrees that in-play wagering will be additive to the industry.
“It’s really important,” he says. “Let’s skip back two years ago when in-play was only about 12 percent of total sports bets placed. The majority of sports bets at that time were pregame. But it’s been growing steadily. Today it’s well in excess of 20 percent heading to 25 percent and 30 percent. So the difference with in-running sports gambling is that it transforms sports betting from a pistol into an assault rifle. It’s where the high-margin revenues arrive. It’s making between 7 percent and 10 percent margin because they tend to be more emotional when they bet in-game versus pre-game. We believe that in-running betting is actually incredibly important for the profitability signature.”
Asher agrees that in-play betting is important, but it’s already established, and will play only a small role in increased profitability.
“In-play wagering has been a significant part of the betting in Nevada and other states for a number of years,” he explains. “Most of the in-play bets are made on the outcome of the game—who’s going to win the game. The subsets of a game—inning by inning in a baseball game or set by set in tennis—are a different dynamic. In-play is already a big part of U.S. sports betting.”
Grove agrees with Asher’s assessment, even in Europe today where in-place amounts to more than 50 percent of the handle.
“There’s also something of a mythology that’s sprung up around in-play betting, but the reality is the most in-play betting in Europe is on who’s going to win and by how much,” he says. “It’s not these crazy micro-markets like will the next pitch be a strike or a ball or will they run or pass on the next play.”
“I don’t necessarily view more in-play betting as a one-for-one path to more profits,” notes IGT’s Carli. “What more in-play wagering will do, however, is increase engagement, which often leads to increased wagering, and ultimately more liquidity.
“In segments such as sports betting where there is inherent risk, increased liquidity reduces the risk of the overall enterprise over time by containing volatility. This notion of engagement driving profits and growth is true in most forms of entertainment, retail and mobile, and I believe it reasonably applies to sports betting.”
“All the capacity is there in the U.S. right now,” says Grove. “And I think it’s just a matter of the market continuing to mature, and operators continuing to roll out a full product.”
During the heady days of gaming’s expansion in the 1980s and ’90s, dozens of gaming operators were born. It didn’t take long for the strong to survive and the weak to succumb. Will that be the case with the online sports betting businesses?
Asher, whose company has a purchase agreement from Caesars Entertainment, believes consolidation will happen but the timeline is still a little hazy.
“We have all these new states opening up and people are busy positioning themselves,” he says. “No one is thinking about consolidation right now, but clearly it will come.”
Grove agrees it’s coming but unsure how quickly.
“I think that you will see the status quo persists for probably a couple of more years,” he says, “because there will still be enough future ahead and still enough uncertainty that even if someone isn’t gaining share today, they can still tell a story about how they might gain share tomorrow. But eventually we’re going to run out of tomorrows.”
He also sees a problem in consolidation in that it may not be accretive to the purchaser.
“If I have 50 percent of the market and you’re a struggling sportsbook in state X with maybe 5 percent of the market, well, how much of your 5 percent is really additive to the players I already have? We probably have overlap of at a minimum 30 percent and a maximum 80 percent or 90 percent. So there’s a tough question about whether consolidation makes sense.”
English says consolidation is already happening.
“There’s going to be consolidation, no doubt about it,” he says. “You can already smell it in the air. It’s already starting to happen. Sportsbooks are already talking to sportsbooks about buying each other. It’s, ‘Do we start from scratch or do we buy somebody?’ I’m going to venture to guess in states like Iowa and Colorado, with very competitive markets and only so many customers to go around, there’s only so much you can give away for incentives. So I think we’re going to see some markets consolidate sooner than others, and that will be a good thing.”
Smurfit disagrees. He thinks no one will consider consolidation until the U.S. is a mature market, and that is many years away.
“I don’t see any B2C operators combining forces with anybody else, anytime soon,” he states. “The simple reason is there’s a ton of growth in the U.S., so any of the major U.S. operators, why would they buy a competing online operator?”
The real golden goose and pot at the end of the rainbow, according to Smurfit, is the online casino most always connected to an online sportsbook.
“That is the gift that keeps on giving, and that’s what’s powered European sports and online casino operators for years,” he says. “And the same will be true here in United States.”