– Lachlan Mackay
Plenty of noise has been generated in the US online sports betting space this year. DraftKings stock has grown +400% year-to-date, Penn National +170% and Australia’s Pointsbet +150%. The excitement is around an expected $20-30 billion addressable market, growing from around $1 billion in 2019. Naturally, this level of growth generates a lot of competition, and everyone from casinos to fantasy sports operators have bought in by gathering partners and starting a sportsbook; however, we will see that not all competition is created equal.
Traditionally, sports betting was considered taboo in the US, undermining the sanctity of sports by encouraging match fixing. It has since become clear that betting helps to drive engagement and is an important social aspect of sports, similar to its role in Australia. The American Gambling Association estimated that over $150 billion was being wagered on sports illegally every year, often through offshore bookies. Legalisation provides an opportunity to regulate this space and take control of the bets being placed.
In May 2018, the US Supreme Court overturned PASPA, the law that had imposed a federal ban on sports betting across 46 states. Importantly, the ban exempted Nevada, which had helped to make Las Vegas the gambling destination it is, and ultimately provided the grounds to overturn. As of July 2020, 22 states plus D.C. had passed sports betting bills. All of which, except early movers New Jersey, are still in the earliest stage of rapid growth.
The momentum to pass such bills has accelerated through 2020 as states run up deficits to offset the impact of the pandemic. For decades, governments worldwide have used gambling revenue to recoup much-needed income. The Sydney Opera House was largely paid for by a State Lottery after the total cost was almost A$100 million over the A$7 million projection. US states are taking the opportunity to both generate significant tax revenue and appease their voting population by legalising a widely embraced activity, a no brainer for any policymaker.
Case studies of the UK and Australian markets prove that winning the US sports betting space will be an incredible long-term scale game, with lucrative rewards for those who can establish the strongest market position. High competition means years of high customer acquisition costs and, when factored in on top of licensing, technology, payments, compliance, taxes and other costs, profitability is far from a guarantee. The industry has a history of consolidation and countless failed businesses.
Despite the competition, investors have picked some early winners, noted above. However, closer inspection shows that just two enter with an incredible advantage in branding and customer access. DraftKings and Flutter’s FanDuel have been operating Daily Fantasy Sports (DFS) businesses for a decade, each spending over $500 million on national branding and marketing before sports betting was even legalised.
DFS is essentially wagering on the outcome of sports, and together DraftKings and FanDuel control over 90% of that $300 million market with operations in 43 states. As such, they had accumulated a wealth of experience and partnerships with the sports leagues, teams, athletes, fans, media partners and state regulators before any other operator considered starting a US sportsbook. Most importantly, they each have a database of more than 8 million sports bettors already using wallets to play DFS on their platforms, with users’ accounts and wallets transferrable across DFS, sports betting and online casino gaming as each is legalised.
This head start immediately gives DraftKings and FanDuel default top 2 positions in online sports betting as a state introduces regulation. Unaided brand familiarity and the efficiency of cross-selling as a source of customer acquisition creates a flywheel that has so far proven sustainable as the market grows and competition intensifies. According to Redburn, Flutter and DraftKings had 49% and 28% respective shares of the US total addressable market in August. Flutter noted at year-end 2019 that 42% of FanDuel’s sportsbook users came directly from their DFS database.
The nature of this scale game is such that at sufficient scale you can apply marketing, promotional offers and technology across such a wide base that you maintain competitive advantage. For example, US national advertising is a third of the per unit cost of equivalent localised ads.
Moreover, in our digital world data becomes increasingly valuable. Analysing across larger sets of customer data gives incumbents stronger market analytics than their competitors, fundamental for pricing risk, offering promotions and taking advantage of cross-selling opportunities. For instance, through the sport-free period it became clear that e-sports may become a large sector of the betting market, with far higher acceptance and adoption than anticipated. Similarly, in-game betting during live sports will likely become important in the US (major sports such as football, baseball and basketball all pause frequently) – the risk analytics required to successfully price odds for the next play in real time demands capability with enormous amounts of data.
Evidently, the US sports betting space is an exciting vertical to be studying. Despite the outsized opportunity, risks such as regulation and ongoing competition may erode the industry’s potential rewards. A core Montaka belief is to own the long-term winners in attractive markets. Our focus on deep sector analysis helps us to see through the market’s excitement (or pessimism) to find excellent businesses and take advantage of any associated mispricing.
Lachlan Mackay is a Research Analyst with Montaka Global Investments. To learn more about Montaka, please call +612 7202 0100.