DraftKings, much like its name suggests, is undoubtedly one of the monarchs of American sports betting. Similar to FanDuel, it has around 30% of the market share in the US, which is no small feat. In its Q1 2024 result, for the period ending 31 March, DraftKings reported a revenue of $1.17bn - but a net loss of $142.6m. For Q2, it had a revenue of $1.1bn and a net income of $63.8m, but still a loss from operations to the tune of $32.4m. So what’s happening, and why is it important? Well, the second rule of business is that in order to make money, you have to spend money.
In 2023, DraftKings spent a total of $1.2bn on its Sales and Marketing, and it’s continuing strong this year, with $341m spent in this Q1 alone AND $216m in Q2. In comparison, the company spent $89m on Product and Technology and $174m on General and Administrative in Q1 2024.
Despite dropping the big bucks, DraftKings undoubtedly saw results from it too. Q1 monthly unique players (MUPs) rose 23% to 3.4 million on average, while the average revenue per MUP (ARPMUP) grew 25% to $114. The company attributed the former to its expansion into new jurisdictions and the latter to hold percentage and improved promotional reinvestment for Sportsbook and iGaming. The higher player percentages aren’t the results either, as its adjusted EBITDA rose 110% to $22.4m – and the Q1 net loss of $142.6m mentioned earlier was actually an improvement of 64% when compared to the high net loss from the year prior. DraftKings has been very open about this business strategy too. The executives are well aware that they aren’t currently making a profit.
“DraftKings’ performance in the first quarter of 2024 was outstanding, reflecting healthy revenue growth and a scaled fixed cost structure that positions us to drive rapidly improving adjusted EBITDA,” said Jason Robins, CEO and Co-Founder of DraftKings. “We successfully launched our online sportsbook in Vermont and North Carolina with highly efficient customer acquisition. Looking ahead, we remain committed to maximising shareholder value through continued innovation, operational excellence and disciplined capital allocation.”
It’s this final sentence that we need to focus on. The company is not taking the easy route, if one is even possible in establishing itself in the US sports betting market. With the Murphy vs NCAA ruling only overturned in 2018, sports betting has only been live for six years in the US, making it a relatively immature market still. At the time of writing, 38 states and jurisdictions across America have legalised sports betting and DraftKings is live in 25 of them. This equals out to the business expanding to four new states a year on average, which is quite a lot when you think about it. When appointing Jason Park as the company’s Chief Transformation Officer, Robins quoted that “this would generate significant incremental profitability over the coming years”. It’s clear that making a profit is an obvious goal for the company, that being said, DraftKings isn’t going to rush the process just to reach the milestone any quicker.
It’s not just the executives who have addressed this, either. You can find countless threads on Reddit discussing the losses from DraftKings for many years. The users on r/stocks explored how starting in new states is great for long-term growth, but this comes with brutal costs associated with winning customers over from the competition; while the regulars on r/sportsbetting held talks on which of DraftKings’ products had been released to attract new customers to the business, and which ones would likely bring in the revenue after a few years. If even Redditors can unanimously recognise that your high customer acquisition costs are a strategic long-term play and that “DKNG will be one of the winners when all is said and done”, then you know your operations team has done something right.
Going forward, we might not see DraftKings make significant profits for some time. It was said three years ago that we wouldn’t see any profits from the company for, well, at least three years. This is where the Q1 2024 net loss of $142.6m is so important – because in the same period the year before, it was actually a net loss of $397.1m. While it would be naive to assume that the company could continue this exact trajectory, it’s also worth considering that we could actually see DraftKings make a profit this year. This has been something that people have been holding their breath over for quite a while. But if DraftKings has taught us anything, it’s that slow and steady really could win this race.
If even Redditors can unanimously recognise that your high customer acquisition costs are a strategic long-term play and that “DKNG will be one of the winners when all is said and done”, then you know your operations team has done something right
On the other end of the scale, we have PointsBet: A successful and well-known sports betting platform headquartered in Melbourne, Australia. When the brand launched in the US in 2019, a year after wagering on sports was legalised in the US, PointsBet had no idea it would be at the heart of a high-profile exit sale less than five years later. Despite years of industry experience and the best intentions, PointsBet went on to become less of a case study, and more of a cautionary tale on how to tread the dangerous waters of sports betting business operating in the US.
During its H1 2023 report, PointsBet’s revenue was AU$178.1m (US$118m), a 28% improvement year-on-year, which was just topped by a net loss of AU$178.2m, an increase of 22%. By the time the FY2023 results rolled around, and PointsBet was certain it was going to sell the US business arm, its annual revenue was AU$210.3m (US$139.4m), but its total loss for the year was AU$276.3m. You might be wondering whether this was just because its business didn’t take off in the US like it did in Australia, but the US branch was actually handling a larger turnover. By H1 2023, the turnover for down under was AU$1.55bn, while in the states it was AU$1.57bn. Sure, it’s a small win, but a notable one all the same. The revenue wasn’t too far off either, with a 2.4% dip in the former totalling $AU95.3m and a jump of 86.3% for the latter, with $75m. So its business was thriving and growing. By 2023, PointsBet was active in 14 online sports betting states, four online casino states and had a retail sports betting footprint across three states. In fact, the company described it best in its own financial reports, stating that “in the United States, the largest and fastest-growing online betting market in the world, we are the seventh largest online operator, out of a field of over 60 licensed online operators. On top of that, our app which is powered by our proprietary tech stack is independently ranked as top three in the US market.”
So, what happened? Well, PointsBet simply didn’t believe in waiting for the company to make a profit. It even says as much in its reports, saying that the reason it’s selling up is because “it is not expected to be cash flow positive in the near term. PointsBet’s current corporate cash balance is insufficient to fund the US business through to profitability”, the report explained, “and as such, should the proposed transaction not proceed, the company would need to raise additional capital in the near term”. It’s all well and good to joke at the fact that companies like DraftKings still aren’t making a profit, but the reality is that it’s incredibly expensive. There are real stakes involved in the path to profitability, and this race was one that PointsBet couldn’t feasibly keep taking part in.
When PointsBet Managing Director and Group CEO, Sam Swanell, discussed selling the business, he said: “Despite the strategic success building a valuable asset in the US, the costs of operating in a state-by-state environment, together with the requirement to build significant scale to compete against well-capitalised operators, led us to explore a number of options.” The costs associated with expanding into different states is something that should be highlighted when breaking down the nuances of a business building a userbase against making a profit. In order to launch a sports betting business in New Jersey, operators must first partner with a licensed casino or racetrack in the state. After this, the company must then pay $100,000 to the New Jersey Division of Gaming Enforcement (NJDGE) to apply for a licence, for any costs associated with handling the application. Once you add on all of the sales, marketing and promotional costs required for launching in a new area, across at least 14 different states; it’s easy to see why this can drain a business fast, especially if they weren’t prepared to deal with a money sink of this proportion.
“This reflects the structurally high cost of operating in a state-by-state regulated environment”, PointsBet concluded quite succinctly. “The requirement to pay partner fees in most US States and continued competition from well-capitalised operators.” Perhaps the biggest shame in this entire debacle is the fact that the company PointsBet sold its US operations to, Fanatics, is a private company – meaning that we cannot see its financial results and draw any conclusions about its fiscal state a year on from the deal.
DraftKings
DraftKings - High revenue, mid loss from operations - prioritising growth
PointsBet
PointsBet - Low revenue, high loss from operations - prioritised immediate profit
In defence of low profit, high revenue
In a world still struggling to grapple with evolving business demands post-Covid, perhaps we’ve become a little too overanalytical of quarterly profit reports. There was a massive demand for online gaming a few years ago, which came hand-in-hand with a massive drop in revenue too. What was popular five years ago was impossible four years ago, with people wanting new experiences once the world normalised two years ago. If you then mix in the fact that America has only recently legalised sports betting, with many states still not allowing it, then this is a major shift in customer trends and it makes it impossible to predict what will stick and what won’t. In such a turbulent environment, a quick profit is impossible. You have to be able to ride out all of the waves as the US sports betting environment stabilises itself. While Europeans grew up with a peripheral betting culture, many in the US simply didn’t have that, and so this is the first time they’ve even been able to discuss bet slips with friends and family.
It might seem obscene for DraftKings to be spending so much on its Sales and Marketing, with $1.2bn dropping on acquiring new customers in 2023, but if you take a look at the consumer figures then it makes more sense. According to the US bettor report for 2024 from YouGov, 73% of sports bettors used more than one wagering app last month, and 43% used three or more. The customers are playing the field, which is completely understandable. Not only is it a new experience for them, but many of the operators are offering enticing welcome offers, so why not sign up for all of them? The real skill is keeping them betting on the platform after the honeymoon period ends, because that’s where the long-term revenue comes from. Hypothetically, would you spend $10m to be unlikely to retain customers in the short term, or spend $100m with a much better chance to make that back, and more, over a ten-year period?
It’s also no surprise to see that, with such an emphasis on these quarterly reports, many businesses in the gambling industry are going private. In the past 12 months alone, we’ve seen Endeavor, PlayAGS and SKS365 go private, while Games Global thought about going public but didn’t; Bally’s is in a precarious takeover situation, and PointsBet sold its US branch to Fanatics, a private company. This seems to be a trend that isn’t going to stop anytime soon, but it’s also one that’s difficult to pinpoint a particular reasoning onto. Are IPOs, the long-time beacon of ‘making it’ in the business world, losing their popularity in favour of running a business away from prying eyes?
Overall, perhaps this should be a lesson in how to navigate a sports betting business through an unsteady market, especially with the focus on Latin America, South Africa and even potentially Asia. Many people saw the US as an easy jurisdiction to open up in, especially considering the huge NFL games held in the country, but what about when a sportsbook wants to open up in a country that could be even more volatile when it comes to handles and net win? It’s always been emphasised that gambling as a player could see short-term success, but this is impossible to maintain over a long period of time; but it’s become pertinent that launching a sports betting business in an immature market requires a brilliant strategy if it wants to translate a short-term loss into that coveted steady net profit result.
Crucially, if a company (like Tesla or DraftKings) can earn billions in revenue and create billions worth of jobs, adding to the global economy, if investors are willing to fund it–perhaps there is nothing wrong with the occasional net loss? You would have to ask investors, though, if they are willing to continue backing that thesis in the long term.