Since sports betting became legal in the United States, sportsbooks have been racing to attract customers. That’s why bettors are inundated with welcome bonus ads that promise new users hundreds of dollars upon signup.
While that’s attractive to bettors, it’s expensive for sportsbooks. Larger sportsbooks can absorb the cost of acquiring and retaining customers with attractive bonuses. But smaller sportsbooks can’t spend that freely without bleeding cash. Larger sportsbooks can also buy other major sportsbook operators to acquire new technology. Owning technology allows sportsbook companies to be nimble enough to adapt to customer needs. Leasing technology limits sportsbooks, and can lead to obsolete features that make smaller sportsbooks unattractive to bettors. So, large operators have major advantages over their smaller competitors.
The combined pressures of high cash spend and high-dollar acquisitions are shrinking the sports betting industry. That has important policy implications for new sports betting markets that desire competitive sports betting industries.
But an opportunity is hidden in this carnage. Startups who can overcome the industry’s high barriers to entry could become fierce competitors. All the traditional sportsbooks operate the same way. So, startups have a chance to acquire customers with a novelty product instead of expensive promotions. But after the bubble bursts, sportsbooks may face increased competition from other prediction market companies. Customers may want to try predicting other popular events once they’re comfortable—or bored—with betting on sports. The sports betting industry is in for a big shakeup.
How Promotions Drain Cash
Cash is a business’ life blood. It’s even more important than revenue. A business can have all the revenue in the world on the books. But if revenue doesn’t arrive until the month’s end and bills are due at the month’s beginning, the business crumbles. Spending cash before the next round of money comes in is a common way for small companies to go under. It’s why a startup’s rapid growth stage is the most dangerous time in its life.
For small sportsbooks, promotions are the main source of danger. For example, a sportsbook could offer a $1,000 risk-free bet. Awarding $1,000 in site credits costs sportsbooks revenue that it could’ve earned from bettor losses. Awarding winnings to bettors who use site credits is also a large drain on sportsbooks’ coffers. But over time, sportsbooks get new bettors comfortable with sports betting. That converts new bettors into lifelong bettors that will fund the sportsbook over time. So each bettor who continues using a sportsbook makes up for the cost of acquiring them.
However, sportsbooks only make a little money on each customer. So, they need as many users as possible to make their business models work. That means luring as many customers as possible away from competitors, usually with bonuses. That includes a hearty welcome bonus and additional promotions, like $50 risk-free bets on major sports during popular seasons.
The danger is spending more money faster than it can be earned. It’s unsustainable over the long run. The only businesses that can win that race are the largest ones. Smaller sportsbooks with smaller cash reserves will run dry and close. Leaning too heavily on acquiring customers through promotions is the greatest danger for sportsbook brands today.
Why There Are So Many Mergers And Acquisitions
2021 has been a big year for mergers, acquisitions, and other major deals. In 2021 alone:
- Caesars Entertainment acquired William Hill for $4 billion
- Penn National Gaming acquired Score Media and Gaming for $2 billion
- DraftKings acquired Golden Nugget Online Gaming for $1.56 billion
- Endeavor Group Holdings Inc, the company that owns the UFC, bought OpenBet for $1.2 billion
- Entain rejected an $11 billion bid from MGM Resorts for being too low
The staggering amount of money is an attempt to do three things: acquire new technology, gain access to new customers, and eliminate competitors.
Acquiring New Technology And New Customers
When a sportsbook buys another gaming company, they’re not only getting the technology that the new company offers. Sportsbooks also get the customers that the new company serviced. So, a strategically sound acquisition can give sportsbooks new technology to serve bettors and further crowd competitors out of the market.
The new technology will be especially important as the sports betting bubble bursts. For example, simulcasting used to be a novel offering. Seeing a game simulated on the same screen as a live betting line gave bettors without access to the game a way to gain enough information to place an informed bet. However, that technology is quickly spreading. Sportsbooks that don’t offer it are becoming obsolete and less attractive to bettors.
But owning a technology stack offers backend features that bettors only notice if they go wrong. iGaming payments often bounce players from site to site as different vendors satisfy different know-your-customer requirements. This creates clunky deposit and withdrawal processes that turn new bettors off. A sportsbook that owned its own technology could integrate its backend payment systems into its app. So, instead of being redirected to a new site, bettors would deposit money through the same app in fewer steps. A small increase in converted customers translates to a lot of money over hundreds of thousands of users.
So, by getting more customers under one corporate umbrella and by seizing control of vital technologies, a small group of companies are shaping up to be the most interesting companies to bettors.
The Financial Times quotes FanDuel’s CEO as saying that the sports betting market “is going to settle out with three, four, five competitors.” That’s a dire prediction for an industry where there are over 20 companies in the most competitive markets.
However, it’s not an unreasonable prediction when even major sportsbook brands are on the defensive. MGM Resorts offered Entain $11 billion because BetMGM is a joint venture between MGM Resorts and Entain. If another major competitor, like DraftKings, got ownership of Entain, it would also acquire partial control of BetMGM. If a company as large as DraftKings has the resources to be a threat to another major sportsbook brand, three to five competitors in the long run doesn’t sound so ridiculous.
Policy Ideas For Fostering Competitive Sports Betting Industries
Sports betting’s tilt toward an oligopoly seems inevitable. The largest sportsbook operators are buying small operators up. Some of the largest sportsbook operators even pose direct threats to each other’s ownership. Over the next three to five years, it seems like there will either be a handful of sports betting brands or there will be many sportsbook brands owned by a handful of companies.
However, it’s more likely that there will be fewer sportsbook operators. If one impossibly large company owned both DraftKings and FanDuel, that impossible company wouldn’t necessarily maximize its profit. DraftKings and FanDuel are the industries largest rivals. So, improving one would harm the performance of the other. The two products would cannibalize each other. Similarly, if the largest sports betting operators owned multiple popular sportsbook brands, it’d be unlikely that they could avoid cannibalization. That leaves a few large operators dominating the industry the most likely scenario.
That makes the job of policy makers difficult. Many of them hope to foster competition within their new sports betting industries. Maryland is hoping that offering 60 mobile gaming licenses will encourage innovative startups to enter the market and compete effectively. However, those efforts are undone by the high license fees that ice startups out of the industry. Maryland will charge $500,000 for a mobile sports betting license. That is a massive barrier to entry to startups and ices the most effective competitors out of the industry before they launch.
By comparison, Colorado only charges $7,000 to obtain a retail marijuana dispensary license. It’s another highly regulated and stigmatized industry that remains accessible to startups. Maryland’s policies are misaligned with the state’s intention to generate competition for large companies like DraftKings, FanDuel, and BetMGM.
The Startup Advantage
Startups have unique advantages over large sportsbook companies. All the traditional sportsbooks work the same way. The bonuses and odds change, but if bettors try DraftKings, they know how to use FOX Bet or SBK. Startups can begin from scratch and build around new ideas and business models that large companies can’t switch to.
Sporttrade is a good example of a startup offering sports betting in a new way. Instead of a traditional bookmaker, Sporttrade is a New Jersey startup that runs a betting exchange. Bettors trade on outcomes with fluctuating prices instead of binary choices at set prices. For example, a bettor could buy Broncos wins at $20 each, the Broncos could pull themselves together, the wager’s value could increase, and bettors could trade those shares away for $80 each. Bettors could also hold out for the guaranteed $1 payout per share that Sporttrade pays out on correct wagers.
The exchange model offers bettors strategies that are unavailable at traditional sportsbooks. Exchange bettors can yield-skim by buying $0.99 shares and getting the $1 payouts. They can sell shares they’re uncertain about without having to risk a comeback at the end of the game ruining their wagers. Traditional sportsbooks can’t accommodate strategies that guarantee bettor winnings or wagers that award partial credit. This is a market need that startups could fill if they were welcomed into the gaming industry.
Even though some startups can accumulate the capital to afford opening a sports betting startup, most can’t. Any policymaker that claims to want competition but keeps barriers to entry high is uninformed or dishonest. The recreational marijuana industry maintains tight regulations without keeping startups out of the industry. A competitive gambling industry can afford to lower the license fees to reasonable levels.
The Prediction Industry
The broader prediction industry could be a long-term pressure point on the sports betting industry. During the pandemic, online gamblers flocked to investment platforms to scratch their gambling itches. Predicting stock movements was as good as predicting sports outcomes.
The prediction industry is a group of companies that lie in a gray area between gambling and investing. For example, there’s a website called Futuur that allows bettors to predict real world events. Users can put fictional or real money on their predictions. This is a product that’s clearly used for fun and has no practical application in investing. But real money payouts are so bad that it’s a comically uncompetitive gambling product. It exists in its own strange space.
As bettors become used to sports betting, they’ll still enjoy sports betting. But many sports bettors will try to apply their sports betting prowess to other prediction markets. Instead, they may try betting on real world events on a platform that’s comfortable like a game. As companies like Futuur proliferate, bettors may flock to them like they have sportsbooks. If policymakers want to force competition onto sportsbooks, they may be able to leverage prediction market companies to do it. Prediction market companies don’t face the same regulatory barriers as other sportsbooks. So, this may be the path of least resistance.
However, it’s a suboptimal solution. Cultivating a startup-friendly environment in the gambling industry would be better than trying to help a related industry sidestep onto sportsbooks’ turf. Prediction industry companies will likely forge partnerships with sportsbooks.
But for states looking for competitive markets, they must consider all their long-term options—both the effective and the last resorts.