DraftKings CEO Talks New York Tax and the ‘Kind of Players We Want’

On Tuesday, DraftKings CEO Jason Robins spoke at a gaming summit hosted by Canaccord Genuity. Touching on a series of topics concerning his company (Nasdaq: DKNG), Robins offered a bit more color than usual. Here are five points that stuck out:

1. “Not the Kind of Players We Want”

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The most notable comments focused on the difference between casual and serious players. Robins said DraftKings offers an entertainment product, and that people who bet on sports for a profit are “not the kind of players we want.”

In another part of the interview, Robins said that there’s evidence that players tend to concentrate most of their play on a single app, even if they originally try out a number of different operators.

“And the ones that don’t are more the ones that you don’t really want,” Robins said. “They’re bonus hunters and odd shoppers, and it’s a very small fraction of the audience. It’s less than 10% of the audience. But those are not the most profitable customers, for obvious reasons.”

2. New York’s 51% Tax

DraftKings was one of nine operators recently recommended for mobile licenses in New York. The right to take bets in one of the country’s most populous states comes at a hefty price—a 51% tax on revenue, higher than any other jurisdiction (Arizona, for example, is 8%).Some have publicly doubted whether any operator will be able to turn a profit in New York. Robins said the opposite.

“Australia is a 43% tax, and it’s one of the most profitable countries for a lot of the operators there,” Robins said. “I think that high tax rates certainly favor scale-operators because the fixed costs are buried in a lot more top-line revenue. I also think that you adjust, so we’ll run [fewer] promotions. We’ll spend less long-term on marketing.

3. Fixing NFL Volatility

Last month DraftKings reported third quarter earnings that included a $25 million revenue headwind, attributed largely to volatility in the early weeks of the NFL season. In September, NFL favorites performed abnormally well, which is typically good for the betting public and bad for sportsbooks.

Asked how the company can insulate itself from those swings, Robins cited the growth of its iGaming product and its new NFT marketplace, two verticals where profit isn’t predicated on the outcome of games. In the short-term, however, online sports betting will likely become a bigger percentage of the DraftKings business, not smaller, which means the company may explore other options.

“The things you can do to make it less volatile actually reduce expected value,” Robins said. “So for example, reducing your mix of parlays will reduce volatility because big parlays can swing things either way, but that also makes your overall expected value go down because parlays are some of the most profitable bets that you can take.”

4. Overseas Deal Unlikely in Near Term

Earlier this summer DraftKings entertained making a $22.6 billion offer for sports betting giant Entain (LSE: ENT), whose portfolio includes Europe-focused gaming brands Ladbrokes, Coral and bwin. Those talks ended in October. Asked about DraftKings’ overseas ambitions, Robins said that the likelihood of an acquisition in the near-term is “probably not high, but you never know.”

“We want to be global one day,” Robins said. “It’s going to take a very high bar for us to say, ‘Let’s go do something elsewhere.’ I think we would have to feel like the asset we’re getting is kind of on autopilot, and we don’t have to focus much attention, because we really do need to focus all of our attention on winning in the U.S. and Canada.

5. “A Fun Mathematical Exercise For Everybody”

U.S. sportsbooks are spending massive amounts on customer acquisition, much of that in the form of advertising. And so far, much of that has been spent locally, in specific cities and states.

But as more and more U.S. states legalize sports betting, national campaigns will become more common, and that presents a unique challenge, Robins said. DraftKings is operating under the assumption that the lifetime value of its customer will start to drop roughly four years after the state goes live (which is what it saw in daily fantasy). Thus, it intends to slow its aggressive marketing spend once that happens. National ads will complicate that picture, since ads could be appearing both in states that are one year into legalization (needing a strong marketing push) and states that are four years in (requiring a scaled-back approach).

“We’re going to have to get pretty sophisticated on the modeling side to figure out what our blended [customer acquisition costs] should be and how to think about local versus national mix,” Robins said. “Because you’re going to want to heavy up in some of the new markets by buying more local even if the base is more national. That will be a fun mathematical exercise for everybody.”

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