Conversion corner: The rise of horse racing in customer cross-sell

The challenges of acquiring customers for online gaming companies in the US are changing. Mass media strategies, while still being used by some, are making way and digital marketing spend has already shrunk. This is in addition to the reduced cost of bonus monies that has been inflating the sports betting handle numbers in many states. This should increase the number of affiliates and their abilities to acquire customers on the operator’s behalf on a cost per acquisition (CPA) or revenue-share cost basis, a solution which seems far more palatable for operators, I am sure.

Some operators are still looking at adjacent industries like horse racing for new sources of customers at a cheaper rate than those they have currently acquired. BetMGM, Caesars, and DraftKings all had key partnerships inside the horse racing industry as we had the Triple Crown in Q2 2023. The significance of the horse racing industry compared to all the other quarters clearly piqued the interest of the major operators enough for them to look to horse racing bettors to find potential sports bettors and igaming players.

All the major listed operators reported increases in marketing spend in their year-end results, which they deemed to have been justified by the consequential increase in their respective revenue. With over $1bn in marketing spend each for DraftKings and FanDuel during 2022, and DraftKings increasing its marketing spend by 20% from Q1 2022 to Q1 2023, clearly the marketing spend isn’t slowing down as new states open. I have discussed this previously, but the additional line item to investigate is the cost of revenue, which typically includes the bonus spend major operators are using that isn’t included in the marketing spend. Cost of revenue as a percentage of revenue has only marginally decreased from Q1 2022 to Q1 2023 from 75% to 68%, respectively.

Despite the growth of marketing spend for the top two, we are seeing a slowdown in digital marketing as costs simply aren’t justified. Recently, Eilers & Krejcik released information on the slowdown in digital ad impressions by market in Q1 versus the previous quarters. 

Granted, changes in social media ad impressions may simply have lost their luster and ability to convert so operators are simply slowing down spend on them, but it’s probably an indicator that marketing spend is slowing down. In research by digital advertising platform Epom, when operators were asked which digital ad channels were the highest performing, of these:

• 76.5% were from affiliates

• 76.5% were paid search ads

• 41.2% were Twitter and any social media other than Facebook/Instagram and TikTok

• 35.3% were Google Display ads

• 35.3% were programmatic ads

Clearly the money spent on affiliate marketing and paid search is popular and it must be converting for operators in terms of first-time depositor (FTDs) numbers. The worst-performing channels in the digital marketing mix for operators highlighted by the research included Facebook/Instagram, Google Display, TikTok ads as well as other forms of social media.

These results are an indication of past spend and the lack of FTDs achieved by the operators in the US on these channels. While plenty of media companies are sharing how much engagement/views their social media channels are getting, it simply isn’t converting viewers into bettors as well as other channels are doing. As budgets tighten, we will start to see operators provide a harder look at each dollar spent on these channels and we may start to see more data on additional marketing channels. 

The affiliate market

Affiliates in the US have had great success since the turn of PASPA in 2018 with both sports and online casino. Money spent with an affiliate is relatively low risk as affiliates aren’t paid unless there is a deposit and a bet placed. I’ve heard that, in some cases, getting people to place that bet in a timely manner for the affiliate to qualify for the CPA or revenue-share agreement has been difficult. The major pure affiliates in the US market are Better Collective, Catena Media, and Gambling.com. There are a few others gaining traction but most of the affiliate revenue is being earned by these top three.

Better Collective and its focus on sports betting in the US via both M&A efforts, partnerships, and organic growth has already proven to be worthwhile, with its North America business achieving $100m in revenue in 2022, double that of 2021. Catena Media had an incredible 2022 but has seen its growth slow a bit in the first part of 2023. Catena is completely transparent in its numbers in the US, fortunately earning $29m in Q1 2023 off of 91,000 FTDs, which was a decline from Q1 2022 where they had 94,000 users. In contrast, Gambling.com Group has seen revenue grow from $7.5m in North America revenue in 2021 to a whopping $36m in 2022, and are already on track to better their 2022 figures with $14m in revenue for Q1 2023.

Needless to say, there is so much more growth in the US affiliate industry while digital marketing growth may be reduced. While affiliates in the US are performing exceptionally well, it is still such a small amount of money that the operators are spending on affiliates as a percentage of their marketing spend.  

The cross-sell potential

Considering it’s the second quarter in the US, it’s worth mentioning the theory that horse racing bettors are also sports bettors has been put to the test. Associating to and offering horse racing wagering is a way to increase customers and customer engagement. DraftKings is the most recent company to enter the horse racing industry to add to their entertainment bouquet and to increase customers they can cross-sell their sports and online casino products to. In addition, other companies such as Caesars and BetMGM have also launched racebooks.

While the Kentucky Derby reported a record $188m in handle, the Preakness Stakes, which followed later in May, had a three-year low in respect of overall handle. Elsewhere, the Belmont Stakes had a record year outside of having a Triple Crown potential running. Online horse racing wagers peaked in 2020 ($6.6bn) and 2021 ($6.6bn) while 2022 was down 3%, however the first quarter of 2023 saw a 1% year-on-year increase over Q1 2022 and seems to be rebounding a bit. This makes sense as more sports betting operators are getting involved in horse racing, thus increasing the number of people exposed to these events.

FanDuel easily transferred marketing funds from its sports betting product to horse racing and back again, and these types of products increase the cross-promotion of horse racing.

In summary, customer acquisition is difficult and marketing dollars will be getting tighter for most operators. While the two big operators are increasing spend on marketing and bonuses to acquire customers, elsewhere there has been an increasingly critical look at digital marketing spend and the effectiveness of the various digital channels. While affiliate and paid search budgets won’t be affected by the tightening of marketing spend, the social media channels have already and will see fewer sports betting operators spend. Affiliates’ effectiveness has led to major growth in the affiliate industry in the US, with Nasdaq-listed affiliate numbers expanding to unprecedented levels since sports betting legalization in 2018.

Horse racing’s Triple Crown has generated interest in sports betting operators with DraftKings, BetMGM, and Caesars all rolling out horse racing wagering products to complement their sports betting platforms. The expansion of operators in horse racing has increased the handle over 2022 but it will be difficult to achieve the high levels of 2020 and 2021. While I think the crossover from sports to horses isn’t as significant and will take time, it’s another longer-term play that operators are starting to explore to acquire more customers.