The quarter in US sports betting

Fanatics-PointsBet captured a combined 14% US online sports betting (OSB) app download share in NFL weekend one, per Sensor Tower. So, what’s driving the impressive momentum? Here are a few tidbits from our newly published September 2023 US Sports Betting Market Monitor:

• Merchandise: Brands are offering merchandise-based promotions that seem to resonate with US OSB players.

• Differentiation: PointsBet’s bet-$50-and-get-an-official-jersey promo is (at least for now) a unique offering in the US OSB market.

• Fast-follow competition expected: We definitely expect DraftKings to ink a merch collab with the likes of Starter (satin jackets are back!) or Adidas.

• Promos matter … but product matters more: Will the PointsBet and Fanatics apps keep customers coming back after they claim their merch?

• Take the downloads with a pinch of salt: Fanatics downloads, for instance, may be boosted by curious folks in states without OSB (e.g. California).

On deck: Kentucky OSB launch

Kentucky launched online sports betting on September 28. Here are three predictions alongside three things we’ll be watching for.

Three predictions:

1. FanDuel and DraftKings capture 70%-75% combined gross gaming revenue (GGR) share in Y1, given their clear advance marketing advantage and willingness to spend aggressively on user acquisition.

2. The Kentucky market ramps up rapidly, in line with recent state launches. The ramp-up is driven by marketing spend at FanDuel and DraftKings.

3. Some tier-two OSB operators (e.g. Rush Street Interactive, Hard Rock Digital) pass on the Kentucky OSB opportunity because of the state’s lower GGR ceiling.

Three things we’ll be watching for:

1. To 18+ or to 21+: Although the state requires OSB players to be over-18, will OSB operators limit the market to over-21 players?

2. Own college betting, own Kentucky: Kentucky is a college-centric betting market. Whichever operator has the best college/localized product will have a significant advantage.

3. Aggro bet365: Kentucky is a smaller, non-affluent market. That said, bet365’s core market of Ohio — where it has been extremely aggressive — does share a border with Kentucky, giving the operator an opportunity to expand its footprint in the Midwest as a first mover.

Numbers to notice

1. Q4 2023: BetMGM is aiming to have Angstrom’s pricing models fully integrated into its platform by the end of Q4, per CEO Adam Greenblatt. Greenblatt said the ultimate goal of the Angstrom integration was “infinite combinability” — i.e. the ability for customers to combine anything on site into a parlay or same-game parlay. Greenblatt noted the integration would help BetMGM “gain meaningful ground” on the market leaders.

2. 27%: That’s how many US colleges had some kind of sports betting problem among athletes or staff within the past year, according to a survey of 500 college campus compliance directors. That’s up from just 3% in a similar survey back in 2019. NCAA president Charlie Baker said the organization needed help from regulators and sportsbooks to protect student-athletes and the integrity of games.

3. 600k: That’s how many FanDuel customers have tried horse race betting since the FanDuel Racing tab was added into the FanDuel Sportsbook in December last year, per FanDuel’s racing general manager Andrew Moore. For context, FanDuel reported about three million actives in Q4 2022. Moore said FanDuel also saw a 20% increase in Kentucky Derby handle this year, largely due to increased cross-sell from sports betting.

What we learned from Q2 2023 earnings

Some key takeaways:

• Promo wars, take two: In previous quarters, operators had expressed optimism that the frothiest days of promo and marketing spend were in the rear-view mirror, especially as competition dwindled, small operators disappeared, and tier-two firms focused on profit over market share.

However, the marketing wars could well be back on this football season. PENN Entertainment said it wanted “no regrets” and would “not be cheap” about launching the ESPN Bet brand. PENN alone will spend $150m annually with ESPN and another ~$150m on other external marketing channels, suggesting it has learned a lesson from the failed Barstool experiment and its aversion to external marketing.

• Pressure on FanDuel? For almost the first time, analysts had some questions about the sustainability of FanDuel’s position atop the US market and whether rivals were closing the gap in some areas. One analyst noted that, per our research, bet365 had quicker in-play bet placement times than FanDuel, prompting Flutter CEO Peter Jackson to say: “Rest assured, we’re investing very heavily in maintaining our product leadership in the market.” Jackson was also pushed on the fact FanDuel’s “closest and largest competitor” was taking a little bit of share in OSB, but he retorted that 47% share was a “very, very strong performance.”

• DFS returns: While daily fantasy sports (DFS) has taken a back seat to OSB in recent years, it was back in the spotlight in Q2 2023, perhaps due to increasing competition in, and coverage of, the prop-parlay DFS space. DraftKings CEO Jason Robins noted DFS was having a great year, driven by a big jump in Best Ball. He also said cross-sell from DFS to sports betting remained high, with “fairly minimal” cannibalization. Robins explained: “A lot of [cannibalization] happens in the initial launch stages. People are excited about sports betting. They may forget about DFS for a while, but we’re seeing some of our older state vintages, as time goes on, they come back.”

• No margin for error: US OSB operators have been talking of the sunlit uplands of 30% EBITDA margins since day one, but with the first glimmers of (adjusted) profit shining through, it’s hard to see how they will get there. Flutter laid out its long-term expectations for 2030 and the most eye-catching point was cost of sales at 50% of revenue, which leaves very little wiggle room for marketing and OpEx. While the benefits of scale should get OpEx down to the required levels, marketing feels very ambitious at a projected 12.5% of revenue — unless the firm is anticipating that everyone else has given up by then.

Eilers & Krejcik Gaming LLC is an independent research and consulting firm with branches in Orange County, California and Las Vegas, Nevada. The firm’s focus is on product, market, and policy analysis related to the global regulated gambling market. Clients include operators, suppliers, private equity and venture capital firms, institutional investors, and state governments. To learn more about the firm, visit http://www.ekgamingllc.com