Online sports betting made its long-awaited debut in New York on Jan. 8, as four operators went live with a series of eye-catching promotions in an effort to woo customers (see: Caesars Sportsbook’s $3K Empire State Royal Welcome offering). It might sound illogical to spend heavily on marketing in a state with a 51% tax rate on sports betting, the highest in the country by a wide margin. In fact, a common narrative prior to launch was that operators would dial back their marketing and promotional efforts in New York because the cost structure within the state makes it difficult to turn a profit. But history shows the importance of achieving scale and gaining a first-mover advantage, and industry experts say Caesars, DraftKings, FanDuel and BetRivers are wise to be just as aggressive in opening up New York, if not more so, as they have been in other states.
JWS’ Take: The 51% tax rate on sports betting revenue in New York is undoubtedly steep. For perspective, most states have a tax rate between 10-20%. But other states have placed a heavy tax on commercial gambling and seen the industry persist there. Pennsylvania for example, has a 54% tax rate on slot revenue, and Chris Grove (CEO, American Affiliate Co.) said it remains “one of the biggest retail casino markets in the U.S.”
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The cost structure won’t make it easy. But it will be possible to make money in New York. “In order to even think about being profitable … [an operator] needs to have 15-20% market share,” David Van Egmond (CEO, Bettor Capital) said. The theory is that economies of scale make it easier to absorb costs like the high tax rate. For reference purposes, Vixio Gambling Compliance believes there could be $667 million generated in New York sports betting revenue in 2022.
Operators are pushing to establish a strong early customer base, because they recognize the importance of gaining a first-mover advantage. As Van Egmond explained: “Operators who are first to launch or gain strong market share early [have been able to hold to it]. Look at FanDuel in New Jersey. They were first [to go live], they still have more than 40% market share, and are a clear No. 1. FanDuel launched by itself on the first day in Virginia—they hold nearly 50% of the market share in the state. It has been proven that establishing strong share [from the outset] is critically important” to achieving scale.
FWIW, FanDuel CMO Mike Raffensperger said his company did not approach its Empire State launch any more aggressively than it has in other states. “In each scenario we’ve recognized that being early, demonstrating the quality of our product and getting some of those early trials from sports bettors really matters.”
Part of the reason it matters so much is because early adopters tend to be an operator’s most valuable customers (think: biggest and most frequent players). The average U.S. sports bettor also uses two or fewer apps, Van Egmond said, so once someone starts wagering with a company it becomes harder to woo them to a competing platform.
Profitability aside, there are several other reasons why operators are aggressively in pursuit of a top three market-share position in New York. As the largest live market in the U.S. (in terms of population and opportunity), there is a prestige factor associated with being a market leader there. Grove explained that capturing meaningful share of market may convince casual consumers in the state and in neighboring states that it is the best possible brand.
It’s not just customers, either. It’s helpful in convincing “casino partners in other states where [an operator] is looking to get market access that it is the best possible choice,” Grove said.
Establishing a leading position in New York also gives publicly traded operators a compelling story to tell investors. It’s one thing to say the company believes the U.S. will become a profitable market, as Grove said. It is another to be able to say it is a leader in the largest state open to date and can replicate the strategy as new markets open up.
The stock-price losses experienced over the last week (see: CZR –2.6%, DKNG –9.7%, RSI –17.5%) should not be attributed to the operators’ approach to New York. Sports betting stocks have experienced a drawdown in share price over the last 90 days. “We’re past the point of market openings and the vagaries of early performance really moving numbers,” Grove said. “We’re now looking at more of a catalytic universe” (think: large states passing legislation).
Just because a promotion touts $3,000-plus in bonuses (Caesars is offering a $300 registration bonus in addition to the $3,000 deposit match) does not mean the operator is handing out that much cash to every customer it signs up. “The average customer is not depositing $3,000 and getting a $3,000 deposit match. The average customer is probably depositing a couple hundred dollars. So, the embedded cost of the bonus is nowhere near those numbers,” Van Egmond explained. And in some cases, the bonus cost ends up being $0 because the bettor never withdraws any money.
Many sportsbooks are not underwriting player lifetime values solely as sports bettors. FanDuel’s Raffensperger said, “We certainly contemplate all of our products and have cross-sell assumptions when we acquire a new customer at FanDuel, regardless of which product that is.” Presumably the belief that the company will be able to drive additional value from its sports betting customers (think: online casino, poker, DFS) makes it easier to justify aggressive spending in the early days of a new market.
Sports fans in New York, who have yet to sign up for a sports betting account and want to place at wager at some point should do so over the next few weeks. Van Egmond said he expects “huge promotions [between now and] the Super Bowl,” as operators look to gain an early lead in the market.
As the focus turns to profitability, bonus amounts are likely to come down. Raffensperger seemed to confirm that would be the case. “It’s a balance of taking advantage of a moment like a market launch, with over the coming months and years being stewards of our business and ultimately managing the promotions, economics, media spend in New York such that we’re going to be a sportsbook for decades to come.”
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