Cover Feature: Evaluating the state of US online gaming

Whether the brands who have exited the US were via acquisition, the sale of assets or a calculated step back, one thing has been made clear: Even for big-name brands, financial success in the US is no guarantee. From Tipico to Evoke to Kindred, operators exiting stage left have become increasingly noticeable, with  many of the States’ largest operators still struggling to report quarterly profits. Even homegrown WynnBet and Superbook have scaled back their online operations. So, what is causing operators to leave the US, while those that remain solidify their market share? Gambling Insider investigates…  

PASPA and iGaming – A retrospective 

Before looking into the organisations that have succeeded and those that have faltered in the US, it’s important to look at the region’s turning point, or overturning point, if you will: the overturning of the Professional and Amateur Sports Protection Act of 1992 (PASPA). Occurring on 14 May 2018, those familiar will know this ruling changed everything for online sports betting in the US. The overturning of the  law gave individual states the power to legalise  the practice of sports wagering, with some offering online betting, some offering retail sports betting and others offering both.   

For operators already working in the US, such as MGM and Caesars, as well as the fantasy sports apps operating at the time such as FanDuel and DraftKings, the overturning of PASPA meant  the opportunity to take on a particularly lucrative new vertical. International operators, though, also had the same idea, resulting in a gold rush  of operators arriving Stateside. It was at the time of PASPA’s overturning that iGaming began to make its presence known in the legalised gaming market, too.  

Online gambling was hit hard in the mid-2000’s when the US Senate passed the Unlawful Internet Gambling Enforcement Act (UIGEA) in 2006, which prohibited “knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the internet and that is unlawful under any federal or state law.” However, states in the past decade have changed their tune and are now able to legalise iGaming, with iGaming now legalised in seven US states. The first of these was Delaware in 2013, with states including Michigan, Pennsylvania and Rhode Island following suit. Naturally, though, there is still some way to go here compared to the 35+ states with legal sports betting.  

“At first, digital gaming in the US was present from 2013, but not much  happened until the PASPA overturning,” Kresimir Spajic, Betfred USA CEO, tells Gambling Insider. “Then everybody rushed into the US because they knew this would be a large market. In the US, sports and sports betting is so ingrained in the culture. Although it wasn’t legal, many people were betting with offshore books or just between themselves. So even for the people that didn’t want to go into the market or didn’t know exactly what to do in the market, they rushed because they would have been punished by the stock markets for not participating in such a great opportunity.”  

The US needs to be treated like each state is a separate country, as you have it with Europe – Kresimir Spajic, Betfred USA CEO

Six years on, Spajic now calls the market one of “reflection” for those that rushed in. The cost of operating in the US, the taxation rates; all things operators are now feeling the brunt of following the  market’s stabilisation. As well as paying taxes – with rates as high as 51% (New York), even leading DraftKings to announce a  Q2 surcharge for its customers (before shortly  rescinding it) – operators must invest in technology, which can be over $2m per state, according to Spajic. Then operators must go through the licensing process, both for the product and the company owners; something Spajic describes as “very intruding for some individuals” and a “very lengthy process.”  

Yet this is not just the case for operators. Suppliers must also go through this process – with costs higher than the rest of the world, from technology and licences to salaries and simply every-day costs for employees and executives. When operators dived into the market en masse, they were not “really thinking,” says Spajic, “because people were thinking ‘I’m going to have 3% of the market and 3% of $27bn sounds like a sizeable amount of money.’ But this is where mistakes were made, because many models were built from the top town, instead of from the bottom up to understand the cost structure.  

“Now, everybody is saying ‘Oh we lost several $100m or billions of dollars, and now we are getting penalised either by our core business, which is our brick-and-mortar business, or for hitting good results in the rest  of the world by losing tens or hundreds of  millions of the dollars in the US. So, now you see that mostly public companies are withdrawing.”  

As a privately funded company, Betfred is able to take a “long-term approach,” with Spajic explaining that “I believe there is a market share at the bottom. You are not looking to be the market leaders. You’re going to be market participants with a sustainable business.” But what makes a market leader? And where does that leave the operators that cannot sustain operations at the bottom?  

The secret to success 

The US market is dominated by a handful of operators. FanDuel and DraftKings alone, according to various data and company earnings reports, hold 67% of US sportsbook market share by gross gaming revenue (GGR), with BetMGM and Caesars Sportsbook following behind with an 11% and 6% GGR market share, respectively. This means just 16% of the market is to play for for the rest. How did FanDuel and DraftKings manage to pull this off?  

The first factor to consider is being first. Engaging in a market before anyone else, or being the first to gain public attention and recognition, can ensure huge success going forward. Not always, of course, but it creates the advantage of a customer associating the first product they  used with that service (like thinking of Googling for SEO or Kleenex for tissue paper). When people think of major casinos in the US, their minds will likely go the properties located on the Strip; Caesars Palace, The Bellagio, Luxor and thus their operators, Caesars and MGM. Similarly, when they think of mobile sportsbooks, their minds will go the company’s that first popularised it first via fantasy sports – namely, DraftKings and FanDuel.   

Secondly, wise M&A activity and in-house tech has allowed operators like DraftKings and FanDuel to hold  influence over a wider range of  verticals than they could on their own. As  SCCG Management Founder and CEO Stephen Crystal tells Gambling Insider: “The dominance of major operators in the US iGaming and sports betting market is  driven by strategic acquisitions, partnerships and proprietary technology. DraftKings’ acquisition of SBTech enabled a proprietary platform and its recent purchase of Jackpocket  targets the digital lottery market. FanDuel’s merger with Flutter Entertainment diversified its offerings, including racing and poker. BetMGM leveraged MGM Resorts’ brick-and-mortar presence for omnichannel experiences, while Caesars expanded its digital footprint with the acquisition of William Hill. Partnerships have also played a crucial role across media, big tech, teams, leagues and influencers. Only operators that can afford to pay a premium or partnerships with major platforms like Prime Video, AppleTV, CBS, NBC and ESPN can leverage the extensive reach  and market  dominance of these media brands to enhance their content offerings and co-branding opportunities.   

“Additionally, paying premiums for competitive marketing and league data in a business characterised by small margins makes it exceedingly difficult for smaller operators to operate efficiently. These extensive media deals set a high precedent for customer acquisition costs and market share expansion, driving smaller operators out of the market.”  

A homegrown bonus 

Notice how many of the US’ biggest operators are US-based companies? This is another factor to consider. American born-and-bred operators have shown an ability to dominate the market, while European-based operators like Kindred and Evoke have had to return to  their side of the pond. However, opinions on whether operators from the US have a  market advantage over overseas operators are mixed. According to Crystal: “US-grown operators have an edge in the US market due to their familiarity with local regulations and consumer preferences, rapid adaptability and strong brand recognition created by partnerships with major US media brands. However, international operators benefit from extensive experience in mature markets, advanced technology and global brand recognition, enabling them to bring  innovative products and strategies to the US.” Similarly, being in the market early gives an operator a better chance of securing the correct licences to operate in a new vertical, according to Segev LLP US Special Counsel Mark Balestra. Balestra made  a similar point, telling Gambling Insider that,  while “US operators have the advantage of exclusive licensing rights,” international operators have “invaluable experience in  the online space,” pointing to how many US operators have partnered with online providers from outside the US. “In many cases, well-established existing  land-based operators were the only businesses eligible for licensure, so  opportunities for newcomers have  been limited,” he says. “When land- based licensees partner with online operators they are of course apt to work with providers with a track record for success. So for the most part, the handful of major operators who dominate the US market is the same handful of major operators who dominated their respective markets prior to legalisation in the United States.”  

Thinking back to the overturning of PASPA,   Ifrah Law Founder Jeff Ifrah recounts how, initially, it was assumed that “sports bettors want to bet with a brand they know,” pointing to brands like bet365 and Betfred as early candidates for US success. Of course, that was not the case, noting that for the brands that were successful, it was not the brand itself that drove their success.   

When smaller or international operators exit, the market becomes increasingly dominated by a few major players – Stephen Crystal, SCCG Management CEO & Founder

Another school of thought at the time was that it would be casino brands that would find success in the newly legalised sports betting market – MGM, Caesars and so on. It was “the initial concept that these casino operators would succeed because of their recognition in America, which was wrong. So what was right? It seems what was right was someone already in America. If you look at FanDuel and DraftKings, what was their recipe for success? They were already in America. They already had loyal fans on the fantasy side. And I think one of the things that doesn’t get spoken about a lot is that they had payment processing lined up.”     

Indeed, gaming has often faced challenges with online payment processors, with many opting to avoid the industry due to perceived risk, especailly when it comes to banking. According to Ifrah, “the statistic used to be that only 35% of customers are successful in onboarding from a payment perspective, on  their journey on a given operator. When  the numbers are that low, and on top of that you are having tension with your payment suppliers or with the card networks, it’s not a good recipe.”  

While DraftKings and FanDuel may have had a headstart due to their card processing capabilities, Ifrah also pointed to the cost of customer acquisition in the US – something European operators may have been unprepared for. “Six years [after PASPA], a new market opens up, and DraftKings and FanDuel on  day one occupy over 80% of it,” says Ifrah. “They’ve got brand recognition. They have a product that seems to satisfy that market. Now they have volume throughout, which helps them succeed anywhere they go on day one. MGM, Caesars and Fanatics have done a good job of catching up. In Ontario, bet365 is doing very well, in Ohio they’re doing very well. So there still is room for someone below those top five. But it’s very difficult. It’s not going to be for everybody. And it’s not going to follow the mould that the European operators are used to.”  

All this is to say, to some extent, and especially in the market’s opening years, yes, homegrown talent did have something of an advantage, though it was far more than just being there first that sealed FanDuel and DraftKings’ success. Being on top of taking payments and the regulatory frameworks of different states is critical – especially considering the idea that, as Spajic puts it, each state is like its own country.   

“I come from Europe and I’ve lived in the US for over 10 years. Here in the US, people were just using what they knew,” Spajic recounts, thinking back to the overturning of PASPA. “It was a standard approach to think ‘we already    have our technology, let’s bring it to  the US. We have been doing this for so many years and so many countries, let’s do this again.’ But the US is very specific. The US needs to be  treated like each state is a separate country, as  you have it with Europe. You cannot also use the same approach in Wales, Ireland and England. It’s the same as how you treat Iowa, New York and Florida. It’s very different. There are some similarities and commonalities, of course, but legislation might be different. Bettor preferences might be different.”  

Indeed, US and European markets are very different – the models used in Europe are not guaranteed to work in the US, and considering how different each state is, having just one game plan for the US as a whole is already playing the field with a disadvantage. When asked where he feels international operators are going wrong when entering the US, Crystal tells us: “One major issue is their difficulty in appealing to US consumers’ preferences and betting habits. International operators sometimes misjudge the popularity of certain sports and betting types in the US, failing to offer the right mix  of options that resonate with American players. Their marketing strategies, which might be  effective globally, often need significant adjustments to cater to the cultural nuances and media consumption habits of the US audience.” Of course, being from the US brings an advantage here too – putting FanDuel and DraftKings in a particularly favourable position. But what do operators have to contend with when they make it to the top?  

The price of success 

Operating in the US is expensive. Consider again the market’s largest operators; FanDuel, DraftKings, MGM. Despite bringing in billions in revenue annually – even quarterly – these operators struggle to report positive EBITDA or net incomes, with some yet to break this glass ceiling.   

Looking at some recent Q2 results, the expenses of operating in the US become more apparent. In its Q2 report, DraftKings even went so far as to announce its plans to introduce a surcharge fee for large bets made by players in certain high-tax states at the start of the new year, supplementing the charges made to the operator. This, CEO and Co-Founder Jason Robins said, would hopefully allow it to “drive adjusted EBITDA upside on an annual basis.” DraftKings quickly reneged on this decision, but the fact it was even a consideration shows exactly the kind of cost level operators are dealing with.  

Consider the mobile tax rate in New York. At 51%, it is the highest in the US. There is  also the recently announced tax hike in Illinois, which will take rates from 15% to 40%. DraftKings pointed to Illinois, New York, Pennsylvania and Vermont as the only four states to initially face the surcharge… though if another state chose to follow in Illinois’ footsteps, who’s to say they may not have been impacted by a surcharge too?  

Of course, not every operator expressed a desire to copy DraftKings in this decision – Rush Street (RSI), while doing so without naming names, said it “has no plans to implement a customer surcharge” according to CEO Richard Schwartz, stating that “as we put our customers first, it was an easy decision for us.” Ouch.  

But beyond this, consider the price of customer acquisition in the US. Speaking on DraftKings and FanDuel, Ifrah says: “They were spending a lot of money on customer acquisition. They were operating in a way that European operators weren’t used to, in terms of the money spent to acquire customers.”  

To assess the cost of a new customer and  whether that expense can be turned into profit, operators will need to compare these versus the player’s lifetime spend. For the most part, at least in the US, the cost of acquiring a customer can far outweigh the latter. As Ifrah puts it: “Those metrics are always upside down. The lifetime customer spend has historically been less than the cost of acquiring a customer. We used to see figures of upwards of $1,000 for a new customer and under $1,000 lifetime spent by that customer. So it is not a good picture.”  

This kind of spend is not one many European operators will be familiar with in their home territories. Instead, the US is a region centred on staying afloat despite the losses – those that succeed are those with a tolerance for staying “upside down,” Ifrah states.  

The power of niche 

So, with all this to consider, where is the US market heading? With the dominance of the US’ major players showing little in the way of change, it will likely mean more small-scale operators pulling the plug, or finding new and creating ways to survive “upside down.”   

Going niche in your product offering was  the advise given by Crystal for small to mid-size operators. “They can survive in  the US by focusing on niche markets and innovative offerings that differentiate them from larger competitors. Effective bankroll management, strategic partnerships, targeted marketing and leveraging unique technologies or customer experiences are crucial for gaining and retaining market share. Developing exclusive content, forming partnerships with local influencers or sports teams and offering specialised products such as localised betting options or unique gaming experiences can attract a dedicated customer base and drive growth,” he explains.  

Ifrah has a similar idea, pointing to the range of verticals that businesses could target to avoid competing in a pond with the likes of DraftKings and FanDuel. Using Super Group, another recent US sportsbook market exitee as an example, he says: “You can survive with online gaming. You can survive in live dealer. They may have databases they can monetize through affiliate arrangements. Also, if they have good content, they can enter into rev-share agreements with DraftKings, FanDuel etc to offer that content on those sites. The skill is maybe to not just be a B2C operator of sports betting.”  

Moreover, Ifrah notes that, for the most part, it is the suppliers in the US market that are making the money, not the operators. “Suppliers of tech; geolocation or identity verification of KYC, fraud detection tools,” as well as affiliates and odds makers, provide particular value to operators, making them potential verticals to explore.  

The iGaming haven 

For Ifrah, avoiding the sports betting market is also key because, to him, while the monopoly on sports betting is likely to remain, the iGaming market is still one to play for – and it is one operators should not overlook. “I don’t think we’ve seen what can happen there because that market is a lot more profitable. It’s funny. DraftKings reported their numbers and, in New Jersey, 55% of their revenue comes from online casino. I think that when it comes to online casino, you are going to see other brands be able to take market share. We’re not going to see DraftKings and FanDuel taking the market share they take in sports in casino.   

“If you notice, Betway announced that they  were leaving. But, then they announced they’re staying in Michigan and New Jersey on the online  casino side. That’s because they recognise that’s a profitable market. Maybe sports aren’t. Maybe we don’t need omnichannel, maybe we don’t need to be able to sell our consumers everything.”  

While the iGaming market has potential to be profitable for alternative operators, for Balestra, it is important to note that this market is even newer than the sports betting market, with even less regulation in place. “Online casino gambling in the US may be approaching a crossroads,” he explains. “The sweepstakes casino model is thriving because companies have – at least up to this point – been able to offer casino entertainment without having to comply with government regulations. There’s a lot of legal uncertainty surrounding the model, however, and that leaves licensed casinos with a dilemma: either enter the space and put their licenses at risk or sit back and watch the sweepstakes casinos make hay.” The American Gaming Association’s recent note to regulators on sweepstake casinos, advising them to clamp down on the practice, certainly adds to this dilemma.  

For the most part, the handful of major operators who dominate the US market is the same handful of major operators who dominated their respective markets prior to legalisation in the United States – Mark Balestra, Segev LLP US Special Counsel

Concluding thoughts 

With just a handful of operators occupying the  majority of the market, while the rest of the US’  operators fight for their share of less than 20%  of the market, it is likely we will see more  exits, more buyouts and more specification in operator product offerings. Crystal comments: “When smaller or international operators exit, the market becomes increasingly dominated by a few major players. This  concentration can lead to reduced competition, potentially resulting in fewer choices for  consumers in terms of betting options and  promotions. A less diverse market may also  stifle innovation, as smaller operators often  drive new ideas and technologies to differentiate themselves.” Current market trends, meanwhile, have led to a “snowballing” effect, according to Balestra. “In the last five years or so, we’ve  seen professional sports leagues and sports media conglomerates begin to steer the market, and this will only continue… Not long ago the sports entertainment industry in the US wanted nothing to do with betting, which was seen only as a threat to the integrity of sports. That has changed drastically in recent years, and partnerships among the leagues, the sportsbooks and the media are flourishing,”  

Indeed, and with it only being the largest operators that can afford to participate in these partnerships, the divide between top dog and small operator will likely continue to widen. But should we be concerned? We feel not. Innovation in the gaming industry  is always just around the corner, and with that presents routine opportunities for operators to claw back a place at the table, or to turn themselves downside up. Where there’s a will, there’s a way. It’s just a case of who will get there first.