Chris Grove: US share price corrections don’t mean the market is a bubble
News from New York
Following the announcement of the ten licensees permitted to offer online sports betting in the state of New York, Grove said the industry had wondered for a while how larger states, who hold more leverage over the market, were likely to wield that leverage with regards to taxes and operating conditions.
It is worth noting, he said, that Pennsylvania went forward with high licence fees and tax rates on online sports betting and iGaming a couple of years ago, but that the market has not necessarily seen that set a precedent for the states that followed – so certainly, New York’s 51% tax rate doesn’t necessarily indicate how large states such as Texas or California will approach the matter.
Another thing to bear in mind, Grove said, is that we are likely to hear conversations around refining New York’s tax approach – including the definition of taxable revenue, and what should be included within that.
Grove commented that: “It would not surprise me if a year from now we’re hearing conversations like: ‘see how much money is still flowing across the border to New Jersey. See how much money we estimate is still flowing to offshore operators. We get that you’re not going to lower the tax rate or give us a rebate, how about you allow us to deduct certain promotional credits, or certain bonuses, or other kinds of spend from the definition of taxable revenue?’”
He said the state of New York is likely to be seeing between $100m and $200m in potential gaming revenue flowing out of the state annually, and that the figure has the opportunity to increase as more and more neighbouring states continue to authorise and launch online gaming.
With regards to how operators are likely to tackle New York’s high tax rate, Grove said he expects they will ignore it for the first year or two. Many operators are not currently concerned with their bottom line, he said, and the tax rate will be considered as another expense or loss that they have to deal with in order to secure as much of a market share as possible.
When we start to consider that question again in 2 or 3 years, once the state’s ‘winners and losers’ have been defined with regards to market share, then we may see operators start to diverge in their approaches, he said.
Broadly speaking, the tax rate is not going to act as a significant dampener for marketing and promotional share in the state, especially not in the first year or two following its launch, Grove concluded.
When will operators turn to profit in US markets?
Speaking of the losses incurred by several US-facing online operators – Lindh asked – following the release of DraftKings’ Q3 interim report, which showed increased revenues but broadening losses, when will the operator start closing in on the massive losses it is incurring? And in addition – is there a risk that the US market is becoming a bubble?
Grove described an ‘attitudinal correction’ taking place over the last few months – with a lot of retail and institutional investors having potentially misunderstood what the opportunity was, and therefore bestowed overly generous valuations on several companies.
Now, he said, we are seeing a ‘snap-back’ on these valuations, which is almost as disproportionate as the over-enthusiasm that characterised the first few quarters.
Grove said therefore that he doesn’t think what we’re seeing is a bubble – by examining the older markets in the US such as New Jersey, and looking at the player values for online casino and sports betting there, the figures set the stage for a confirmation of what many asserted but were unable to prove – that the US will end up being among the most, if not the most, productive online gaming market in the world on a per-capita basis.
Looking at early states such as New Jersey and Pennsylvania, he said we are seeing increasingly compelling evidence that these are markets that could not only mirror the UK, but might outperform it and other established higher-GDP European markets.
We also have a relatively predictable trajectory of authorisation for at least sports betting across the US, he said, despite doubts around how and when states such as California may regulate, as well as considering that some states, though relatively few, may never regulate.
However, a deep and robust demand from consumers willing to spend at relatively high levels, combined with the predictable authorisation of sports betting, means the market continues to be an appealing one.
New products and the path to profitability
Grove also discussed ‘gaming-adjacent’ industries, including for example the recent launch of DraftKings’ NFT marketplace, which increases the size of the total addressable market significantly for operators who are willing to experiment with offering new products.
If an operator is able to increase the lifetime value of its customers using such products, he said, then the current levels of acquisition spend seem not only sustainable, but appear to be a much smarter investment, as opposed to a borderline reckless level of spending.
Grove said for as long as DraftKings, for example, doesn’t face pressure from its investors, it is unlikely to turn a profit in the next 2-3 years. However, the company does have a path to profitability within the next 3 years, he said, even if that does rely on a greater online casino map and the introduction of adjacent products which will allow it to increase the lifetime value of its customers.
Online casino expansion in the US
With regards to the expansion of iGaming regulation across the country, Grove reminded listeners of the key differences in the way the US defines sports betting compared to other forms of gambling, both culturally and politically.
Sports betting is not really considered gambling as such in the country, he said, in the same way as casino gaming – and therefore it is not inevitable that where sports betting is regulated, online casino will follow.
This cultural acceptance of sports betting helps to explain the speed at which regulation of the vertical has swept across the nation, he said, whereas usually it would take over a decade for a new form of gambling to spread so far.
It’s therefore not difficult to generate consensus in support of sports betting among gaming industry stakeholders, he said, as the vertical is being viewed as a new revenue stream.
Online casino, on the other hand, presents different challenges when it comes to generating consensus among the industry, as the product can be perceived as a threat to the land-based gaming industry, while sports betting is not.
Something is changing in the US, however, Grove said, as while sports betting expands across the nation, it is helping to create an environment where the incentives for stakeholders to support iGaming are expanding, and the motivations to advocate for it are increasing.
In addition, where traditional land-based operators who were not interested in iGaming a few years ago have now added the product to their portfolios, and benefited from increased company valuations as a result, the businesses will need to find new ways to generate digital growth – and there’s only so much to go around in sports betting.
Casino stakeholders who were not previously strong advocates for iGaming are now deeply incentivised to find new paths for growth for their businesses, he concluded.
Opportunities for tier-two operators in the US
Lindh asked whether, given the interim reports published during the Q3 results season, it is still possible for tier-two or tier-three operators to successfully enter the US market.
Grove responded by stating that there are a lot of reasons to run an online sportsbook in the US – and not only because you want to be in the top three of national market share.
There are many reasons to run a sportsbook at a low-to-mid local, single-state share, he said, such as for building your audience before moving into other products including iGaming. Or, operators could be positioning themselves for acquisition, or to become an adjacent brand to another operator.
He predicted that the market will soon start to see some of the larger operators adopt a multi-brand strategy, at which point B2C acquisitions will become more common.
The US opportunity is still very new, he said, and while it has an upward trajectory in terms of its total addressable market, etc, the way in which operators will approach the opportunity with regards to what marketing will be effective, among other considerations, is still up for discussion.
Despite many operators posting consistent losses since launching in the US, “I don’t think anyone is making a mistake by sharpening their operational chops and expanding their footprint at the moment,” Grove said.
With online casino still emerging and the plausible opportunity to be bailed out by M&A, by a big operator or a non-endemic entry, smaller challenger brands may look to enter the market once it is a bit more steady.
Mainstream and media brands entering the gaming space
On the topic of challenger brands, Lindh asked a question about mainstream and particularly media brands entering the online gaming and sports betting space. He referred Grove to a recent statement from Disney, for example, claiming that the company is “aggressively” pursuing opportunities in the sports betting industry.
“iGaming has always flown under the radar to some extent in Europe, no mainstream household brands have moved into the space so we’re not used to seeing it. What does it mean for the industry?” Lindh asked.
Grove responded that the industry is likely to see disruption in this area. Referring again to US attitudes towards sports betting, and its separate status from ‘Gambling’ as a whole, he said the environment creates an interesting opportunity for businesses that wouldn’t necessarily be comfortable with ‘Gambling’ to enter the space.
And maybe it will stop at sports betting, he said, or maybe it’s an entry point – and inevitably will be for some brands – into other forms of gambling. These could, for example, be NFTs, or products that look like financial instrument trading. Conversely, he said, anyone offering those products is also going to look into sports betting.
How disruptive that will be depends on whether the brands enter on their own or in partnership with a regulated gambling entity, Grove said.
By entering in partnership with a regulated operator, the disruptive impact of mainstream businesses entering the space will be limited, he said, because a significant amount of revenue is still captured by legacy brands, and the revenue that they’re giving up is offset by the fact the challenger brands are expanding the market to new customers who wouldn’t have otherwise considered betting.
If, however, mainstream and media companies can chart their own course into gambling, and state policy moves towards supporting those entry methods, then the question becomes more complicated.
The brands are coming, they’ll expand the market but also take share from endemic brands. Therefore, the level of disruption depends upon who will be the gatekeeper – the licence holders of today, or a broader range of possible entrants?
The future of sports betting for customers
The episode concluded with a discussion around product innovation, and changes to the ways customers play. Grove said the sports betting form factor may shift in the future in a similar way to the introduction of ‘spin and go’ products in online poker – a new way of betting which allows sports bettors to take part without feeling like they have placed a sports bet.
Existing sports betting is quite a limited product, he said, as is fantasy sports, but a lot of brands will start to reshape that form factor – so that if, for example, Robinhood offered sports bets, it wouldn’t come up with a standard-looking sportsbook.
Rather, the brand would find a way to productise the existing activity of risking money dependent on the outcome of a sports game – and integrate it in a way that feels natural and seamless with the existing nature of the platform.
With this in mind, we will see an evolution of the way sports betting is presented to customers, Grove concluded.