Newly rebranded Penn Entertainment has exercised options to acquire the remaining shares in Barstool Sports, making the brand a wholly-owned subsidiary of the US operator.

In a filing sent to the SEC on Wednesday (17 August), Penn said it had exercised existing call rights to acquire the remaining shares in the business, and that the purchase would be completed by February 2023.

Penn’s first acquisition in the business took place in 2020, when it agreed to buy a 36% stake in Barstool for $161.2m.

Terms of the latest deal suggest it will buy the remaining two-thirds or so of the business in two steps, for total consideration of $387m.

Penn’s Interactive segment, which includes both the Barstool brand in the US and theScore in Canada, generated revenue of $154.9m in Q2 2022 – a 61.4% increase year-on-year – while declaring an adjusted EBITDAR loss of $20.8m.

Penn said that following the migration of theScore Bet onto its proprietary PAM and risk and trading platforms, it remains confident in its ability to migrate Barstool Sportsbook onto its new tech stack in Q3 2023.

Penn Entertainment president and CEO Jay Snowden: “Our Barstool branded retail sportsbooks resonate with the younger demographics and create meaningful cross-sell opportunities.”

This, it said, will allow it to realise the full benefits of its in-house technology stack by creating meaningful cost synergies and improved marketing and promotional capabilities.

In addition to its online Barstool Sportsbook offering, Penn also leverages the brand in its retail sports betting operations across the US.

Jay Snowden, CEO and president of Penn Entertainment, said in the operator’s Q2 2022 earnings report: “Our Barstool branded retail sportsbooks resonate with the younger demographics and create meaningful cross-sell opportunities. 

“Our recently converted Barstool sportsbook in Lake Charles, Louisiana, set a new standard for retail sportsbook experiences, and we are seeing encouraging results in visitation and spend. 

“Additionally, with the passage of sports betting in Massachusetts earlier this week – the birthplace of Barstool Sports and home to our Plainridge Park Casino – we are excited to add yet another possible retail launch by the end of this year while mobile wagering is anticipated in 2023.”

TheScore Bet has launched on its newly built in-house technology platform, just one year after being acquired by Penn National Gaming.

PNG agreed a $2bn cash and stock deal to acquire Score Media and Gaming in August 2021.

At the time, the US operator cited the chance to take control of its own technology journey as a key reason for the purchase and revealed an ambitious migration timeline to investors.

As of yesterday (25 July), theScore Bet – which is PNG’s Canada-facing sportsbook brand – is up and running on its own technology stack.

The new software covers all components, including a risk and trading platform, a player account management platform (PAM) and a custom promotion engine.

It was built by theScore Bet’s in-house product and engineering teams. The project was led by UK trading veteran Patrick Jay, who was recruited as SVP and head of sportsbook in September 2021.

PNG said the migration would significantly enhance theScore Bet’s mobile product offering in Ontario, where it has become a sports betting market leader since going live on 4 April – otherwise known as launch day for the province’s newly regulated wagering market.

Platform upgrades include increased in-play betting options, event props and markets, while its proprietary Parlay+ feature will go live across all major league sports in the autumn.

PNG CEO Jay Snowden: “This vertically integrated platform will increase our ability to engage and retain customers, drive more flexible pricing, provide valuable savings on third-party platform costs, and allow us to deliver the most personalised product experience in the market.”

“The completion of theScore Bet’s technology stack is a milestone accomplishment that significantly strengthens our online betting capabilities, mobile product offerings and overall integrated media and betting ecosystem,” said PNG CEO and president Jay Snowden.

“This vertically integrated platform will increase our ability to engage and retain customers, drive more flexible pricing, provide valuable savings on third-party platform costs, and allow us to deliver the most personalised product experience in the market.”

TheScore Bet was previously powered by Bally’s-owned sportsbook supplier Bet.Works.

The rollout of theScore Bet is only the first step in PNG’s ambitious migration plan. The operator intends to migrate its US-facing Barstool Sportsbook brand – which is currently powered by Kambi – onto the same platform in Q3 2023.

PNG forecasts a positive medium-term EBITDA impact of $90m through to 2026 as a result of bringing the technology in-house, with long-term upside of $195m. The operator reported annual adjusted EBITDA of $1.54bn for full-year 2021.

“We’re thrilled to have this technology deployed in Ontario and are diligently working toward migrating the Barstool Sportsbook in the US to the platform in Q3 2023, after which we will begin to realise the full benefits of our in-house, custom designed technology,” added Snowden.

TheScore CEO John Levy said the new platform would “supercharge” the brand’s ability to roll out new features on a custom-built operating system.

“From the outset, achieving technology independence has been a core priority of ours and I could not be prouder of the incredible team who built this state-of-the-art platform from the ground up,” he added.

The California online sports betting bill backed by FanDuel, DraftKings and BetMGM will be added to the state’s November ballot by Secretary of State Shirley Weber tomorrow (30 June).

This means voters in the state will be able to have their say on two separate sports betting bills in the November election, with a tribal-backed retail-only proposition also included on the ballot.

Last month, a petition to have the online bill included on the ballot received some 1.6 million signatures. Enough of those signatures have now been verified by the state to confirm the bill’s inclusion.

A consortium of major US-facing operators have backed the bill and helped fund its campaign, spending more than $100m throughout the lobbying process under the campaign name Californians for Solutions to Homelessness and Mental Health Support.

Indeed, the bill would see 85% of tax revenue from online sports betting dedicated to helping tackle problems of homelessness and mental health in the state, with the remaining 15% awarded to tribes not directly involved in sports betting.

According to statistics from World Population Review, there are currently more than 160,000 homeless people in California – around one-fifth of the total homeless population of the US. Due to the difficulties associated with collecting such data, however, it is likely the actual number of people living without shelter in the state is somewhat higher than this.

Sports betting revenue for the state under this bill would consist of licensing fees and further taxes. An initial $100m upfront licensing fee for operators – with a renewal fee of $10m to be paid every five years – would be collected by the state, alongside 10% of sports betting revenue.

Former California gambling commissioner Richard Schuetz: “The suggestion that a state with a $222bn deficit is going to feel the dramatic effect of sports betting I think is absolutely incorrect.”

The licensing costs, combined with a provision that any licence applicant is already licensed for sports betting in a minimum of 10 US states, are likely to greatly diminish the number of operators capable of submitting a successful application.

Indeed, it is unlikely that any operator outside of the members of the Californians for Solutions to Homelessness and Mental Health Support campaign – DraftKings, FanDuel, BetMGM, Bally’s Interactive, Fanatics Betting & Gaming, Penn National Gaming, and WynnBET – will meet the requirements to make a licence application.

Still, if the bill is passed in November, it will be a cause for celebration within the gaming industry as the state would likely become one of the largest sports betting markets globally.

However, two dangers persist in relation to the competing bills included on the ballot as one is driven by online-first industry giants, and the other is driven by the state’s tribes, which propose a retail-only market based on tribal reservations.

If both bills are approved by voters, it is possible they will end up in court where a judge will decide whether the measures are in direct competition. If they are considered to be competing with one another, the measure with the most affirmative votes would go into effect.

Another danger, though, is that the inclusion of two separate sports betting initiatives could split the vote, meaning neither reaches the sufficient level of support to be approved.

Still, there is plenty of optimism surrounding the online sports betting proposal. Polling data from David Binder Research between March and April showed that 59% of respondents would vote yes on the measure, while 13% of respondents remained undecided. A further 28% said they would vote against the measure.

Not everyone in the industry is convinced that the legalisation of sports betting in California will provide a major boost for the state, however. 

Speaking at iGaming NEXT New York City last month, industry veteran Richard Schuetz said: “I was in California working for the government when the iPoker folks came through and they said: ‘do you realise that this could bring $300m-$400m to your state?’”

“In California, we call that ‘budget dust’. The suggestion that a state with a $222bn deficit is going to feel the dramatic effect of sports betting I think is absolutely incorrect. And I think that’s a sales line that they’re told, I just don’t believe it’s real.

“I ran the biggest book in Las Vegas for a number of years, I know what a P&L for a sports betting operation looks like. I lived that daily. That’s not going to matter for California’s budget. I just don’t believe that.”

Similarly, the Stop the Corporate Online Gambling Prop campaign – run by stakeholders in California’s tribal gaming industry – has been quick to suggest that with $30bn spent on relieving homelessness over the past five years, Californians would do well to demand accountability and results for that spending, rather than throwing more money at the problem through the online sports betting bill now waiting to be voted on in November.

CA has spent $30 billion on homelessness in the last 5 years. Rather than send politicians more tax dollars to waste, we should require accountability and results for the billions they’re already spending. STOP the Corporate Online Gambling Prop.

— Stop the Corporate Online Gambling Prop (@NoCorpGambling) June 3, 2022

Jon Kaplowitz has announced his intention to stand down as head of Penn Interactive after leading the business for more than three years. 

Announcing his intention to move on from the Penn National Gaming subsidiary in a post on LinkedIn, Kaplowitz celebrated his achievements in the position and explained that he is leaving to spend more time with his family, ahead of the birth of his second child.

“Building and leading PI has been the singular best experience in my professional career, and it was made even better by working with an incredible team and partners,” he said. 

“From day one, our collective goal was to become the best and most innovative integrated sports media and gaming company in the US.

“We did that and have accomplished so much more, from growing the division’s top line 12x in less than three years, having a top-rated app in the US, and being ranked one of the top workplaces in Philly and in the industry. 

Outgoing head of Penn Interactive Jon Kaplowitz: “Building and leading PI has been the singular best experience in my professional career, and it was made even better by working with an incredible team and partners.”

“I am most proud of the strong culture that is in our DNA, one of collaboration, transparency, and building our leaders from within.”

Penn National Gaming has not yet responded to an iGaming NEXT request for comment. It is not clear who will take over when Kaplowitz departs.

Results released earlier this year showed that Penn Interactive – which operates the Barstool Sportsbook brand in the US and theScore Bet brand in Canada – tripled its revenue year-on-year in Q4 2021 to $157.6m.

Penn National Gaming said in May that the Penn Interactive digital subsidiary was on track to generate an EBITDA loss of $50m in 2022 before hitting breakeven in Q4 of 2022 and turning profitable in 2023.

More to follow…

In the bleak (crypto) midwinter

CNN revealed this week that cryptocurrency exchange Coinbase is laying off some 18% of its workforce, representing around 1,000 of its more than 4,900 employees at present.

Crypto markets have suffered a particularly tough few weeks, with the price of bitcoin tumbling from over $30,000 on 6 June to little over $20,000 today.

Coinbase CEO Brian Armstrong said in an open letter that the firm’s decision to cut staff was made to ensure the business “stays healthy during this economic downturn,” which he warned could extend beyond the current bear market.

“We appear to be entering a recession after a 10-plus year economic boom,” he said. “A recession could lead to another crypto winter, and could last for an extended period.”

Coinbase itself has not been immune to the effects of the economic downturn, either. The firm’s share price has taken a catastrophic fall over the past six months or so, from a 52-week high of $368.90, to just $51.05 today.

This, CNN said, was the result of investors continuing to sell off crypto, bailing out of risky assets as they expect sharp increases in interest rates to come their way.

Armstrong said in his letter that the firm “grew too quickly,” since listing on the Nasdaq last year, and that “in this case it is now clear to me that we over-hired.”

If the warning signs are anything to go by, crypto investors may want to prepare themselves for a long, cold winter.

Disney taking the Mickey on sports betting

Investment magazine Seeking Alpha published a story on one of the highest-profile non-endemic businesses to have expressed an interest in entering the gaming sector; Disney.

Specifically, the author asked: “Why is its ESPN unit, four years into the legalisation of sports betting, still waffling around with neither its own betting platform, or one launched in partnership with an existing online betting giant? 

“Who was fast asleep at the ESPN switch when the Supreme Court ruling opened the doors wide to legal sports betting in May of 2018?”

A lack of commentary on the sports betting question in Disney’s latest earnings call was, according to the author, “a message to shareholders by the silence of its leadership.”

The opportunity for driving sports betting revenue from ESPN’s 76 million-strong viewership is too good to have passed up, author Howard Jay Klein argued, especially given its ability to advertise to the audience it has already amassed – in stark contrast to the big US players currently blowing hundreds of millions on costly marketing campaigns.

He then compared ESPN with Barstool Sports to show what an early entry into the betting market could have looked like for Disney.

“Note that Penn National Gaming recognised the value of a sports-crazy audience base by their acquisition of 38% of Barstool Sports for $163m largely due to its reach of 55 million online TV ‘stoolies’,” he said.

“On average, Penn’s promotional and media costs have run lower than the leaders. They have decided not to chase business with excessive dollars but be content to get into black numbers as a priority over empty calorie volume. They have made the right call here.”

Despite Penn’s success, it still remains to be seen whether Disney will get animated again about sports betting.

FanDuel staying out of college

FanDuel made a splash in the Wall Street Journal this week, as the paper published a story on some of the challenges faced by the firm’s chief executive, Amy Howe.

Namely, it explored how she must “satisfy a number of constituents: gamblers and sports fans, sports leagues, government regulators and investors looking for returns.”

Another significant part of Howe’s mission at FanDuel is to operate the business in the most responsible way. As part of that, she was adamant that “we don’t want the FanDuel brand associated with college campuses.”

College sports sponsorships have become increasingly common among sports betting firms, which are exploring all possible avenues to help them carve out market share in the sector.

As the WSJ pointed out, though, young people are at higher risk for gambling addiction according to the National Council on Problem Gambling, and attempts to put a firm’s betting brand in front of as many college student eyeballs as possible is therefore more fraught than it may first appear.

According to the piece, FanDuel is also re-evaluating terms used in advertising promotions such as “risk free”, to assess whether they are a responsible way of marketing its products.

“I certainly feel a huge sense of obligation,” Howe said.

The SEC has charged an ex-Penn Interactive employee with alleged insider trading relating to Penn National Gaming’s $2bn acquisition of theScore.

David Roda, a former software engineer at PNG digital subsidiary Penn Interactive Ventures, allegedly took advantage of confidential information before purchasing 500 out-of-money call options on Score Media in the period leading up to the acquisition.

He also tipped off his friend, an individual named Andrew Larkin, who is thought to have purchased a further 375 shares in Score Media.

According to the SEC’s complaint, Score Media’s stock price shot up nearly 80% after Penn’s acquisition was announced to the public.

Roda and Larkin then sold their individual holdings for unlawful profits of $560,762 and $5,602, respectively.

Co-acting regional director of the SEC’s Philadelphia Regional Office, Scott A. Thompson: “The SEC remains committed to finding, investigating, and charging those who engage in insider trading.” 

“As we allege in our complaint, Roda was entrusted by his employer with critical, market-moving information, and he betrayed that trust by using the information to trade and also tip his friend so they could both profit,” said Scott A. Thompson, co-acting regional director of the SEC’s Philadelphia Regional Office.

“When employees like Roda misappropriate and trade on confidential information, it erodes market confidence. The SEC remains committed to finding, investigating, and charging those who engage in insider trading,” he added.

The SEC has charged Philadelphia residents Roda and Larkin with violating the antifraud provisions of the securities laws in the US.

Roda has agreed to be permanently enjoined from violating those provisions and has agreed to pay disgorgement, prejudgment interest, and a civil penalty to be determined by the court at a later date.

In a parallel action, the US Attorney’s Office for the Eastern District of Pennsylvania announced criminal charges against Roda on 13 June.

Larkin, meanwhile, has agreed to be permanently enjoined from violating the antifraud provisions of the securities laws and will pay more than $11,000 in disgorgement and penalties.

The settlements are still subject to court approval.

TheScore Bet will stop taking wagers in the US from 15 June after struggling to make an impact in the costly and competitive market.

Parent company Penn National Gaming confirmed that Barstool Sportsbook will remain its brand of choice in the US, while theScore Bet will be used north of the border in Canada.

TheScore Bet is currently leading the way in Ontario’s newly regulated iGaming market. It has strong brand heritage and widespread recognition among sports fans due to theScore’s mega media business.

Penn National Gaming acquired theScore nearly eight months ago in a $2bn cash-and-stock deal aimed at growing market share, with one eye on legalisation in Canadian provinces.

TheScore president Benjie Levy: “Since Penn’s acquisition of theScore, the company’s plan has been to lead with Barstool Sportsbook in the US and theScore Bet in Canada, given our strong brand equity there.”

US sports bettors will be able to withdraw their funds from theScore Bet after 15 June but will no longer be able to place sports bets.

It is business as usual for consumers in Canada, however. Fittingly, the US-facing site will shut down on Canada Day.

TheScore Bet had been operating in New Jersey, Colorado, Indiana and Iowa, where customers will now be directed to the Barstool Sportsbook operation.

“Since Penn’s acquisition of theScore, the company’s plan has been to lead with Barstool Sportsbook in the US and theScore Bet in Canada, given our strong brand equity there,” said theScore’s president and COO Benjie Levy in a statement.

“With theScore Bet launched and thriving in Ontario, and as we approach a major undertaking this summer with the launch of our proprietary risk and trading service, the timing is right to focus our US efforts on marketing Barstool Sportsbook and our Canadian efforts on marketing theScore Bet,” he added.

Penn Interactive is on track to generate an EBITDA loss of $50m in 2022, with a breakeven point expected in Q4 before a turn to profitability in 2023, according to the operator’s Q1 2022 results.

The Penn National Gaming subsidiary, which owns and operates the Barstool Sportsbook app and theScore Bet, generated an adjusted EBITDA loss of $10.0m during Q1, alongside $141.5m in revenue. 

This level of revenue represents a marked improvement from Q1 2021, during which the segment generated $86.3m – however it did make a positive EBITDA contribution of $1.3m during that quarter.

Penn Interactive benefitted from new market launches during and following the end of the quarter, with the Barstool Sportsbook launching in Louisiana in January and theScore Bet going live in Ontario on 4 April.

Penn said these markets, and particularly Ontario, have demonstrated the value of cross-sell opportunities and brand recognition among patrons of the operator’s digital brands. 

“While still early, theScore Bet’s performance thus far in Ontario has exceeded our expectations, due in large part to theScore’s incredible brand recognition and media footprint as well as the support from Barstool Sports and the popular team from Spittin Chiclets, the number one hockey podcast in Canada,” Penn National Gaming CEO Jay Snowden told analysts.

“Since launch, theScore Bet ranked as Canada’s number one most downloaded sports betting app and the number one rated betting app in the iOS Store.

“Early results reflect strong cross sell opportunities,” Snowden added. “Currently 79% of all bettors [using theScore Bet] in Ontario are theScore Media app users and 50% of theScore’s sportsbook users have wagered on the iCasino products.”

Penn intends to continue capitalising on the cross-sell and cost-saving opportunities between its owned brands. Future plans include a transition for theScore Bet onto theScore’s proprietary risk and trading platform during Q3, which Snowden said will allow the business to significantly bolster the product’s features and capabilities, including expanded betting markets and parlay options.

Penn National Gaming CEO Jay Snowden: “Since launch, theScore Bet ranked as Canada’s number one most downloaded sports betting app and the number one rated betting app in the iOS Store.”

Penn said it was also on track to transition the Barstool Sportsbook app to theScore’s PAM and trading platform in Q3 2023, which should provide meaningful cost and revenue synergy opportunities. 

In addition, the Barstool Sportsbook app will be fully integrated into theScore Media app during the second half of 2022, which Penn said is the best way to maximise the value of both brands in the US.

Snowden once again saluted Penn Interactive’s relatively low customer acquisition costs, stating: “The Barstool Sportsbook app has gained market share in the three states that report NGR by operator despite our spending a fraction of what our competitors do on promo and paid media.”

Indeed, in Pennsylvania, Michigan and Arizona combined, Barstool Sportsbook has reached market share of 10.7%, despite spending a lower percentage of handle in promotional costs than other operators in those markets.

Sports betting promotional costs for Barstool were equal to 2.1%, 1.5% and 2.6% of handle in each of the states respectively, while other operators spent 3.3%, 4.5% and 4.2% of handle on promos in those markets, according to the company’s data points. 

Looking to the business as a whole, Penn National Gaming brought in total revenue of $1.56bn in Q1 2022, up 22.7% year-on-year.

Penn National Gaming CFO Felicia Hendrix: “We continue to see a dislocation between where we value our shares and where they are currently trading and we expect to allocate capital accordingly if this dislocation persists.”

Adjusted EBITDAR from that revenue came to $494.7m, representing an increase of 10.7% over the prior corresponding period. Net income, however, was down against the prior year at $51.6m on a net income margin of 3.3%, compared to $90.9m at a margin of 7.1% last year. 

Based on its Q1 2022 results, Penn has increased its previously announced revenue guidance to between $6.15bn and $6.55bn. EBITDAR is now expected to fall between $1.88bn and $2bn for the full year 2022.

The business ended the period with $1.81bn in cash and cash equivalents and net debt of $923.5m.

CFO Felicia Hendrix said: “Our balance sheet gives us the flexibility to be opportunistic in a dynamic marketplace and to return capital to shareholders. We continue to see a dislocation between where we value our shares and where they are currently trading, and we expect to allocate capital accordingly if this dislocation persists.”

Indeed, Penn has been active under its existing share repurchase authorisation during Q1, buying back 3.8 million shares of its common stock for a total of $175.1m. This leaves the business with $574.9m remaining under its $750m authorisation.

Morgan Stanley has forecast losses for major US operators as we enter Q1 reporting season due to a mix of aggressive state launches and low hold rates.

An avalanche of Q1 financial results will be published by Nasdaq-listed operators throughout April and May, beginning with Boyd Gaming Corporation later today.

The investment bank said investors should focus on each company’s ability to rein in marketing and promotional spend and assess how this could potentially set them on a path to profitability over the next 12 to 18 months.

US sports betting operators have racked up substantial losses to date as they battle to acquire customers and expand into additional states. Investors have been left asking when, if ever, these companies will turn a profit.

Caesars pledged to dramatically curtail its above-the-line marketing activity for its online sportsbook after Q4 earnings season, although Morgan Stanley is still guiding to digital division losses in excess of $500m for Q1.

The brokerage expects to see the US market turn EBITDA positive by 2025, which is not currently reflected in the share price of major players, according to MD Thomas Allen.

In Q4 for example, Rush Street Interactive reported a $37.1m net loss as BetMGM reported an operating loss of $56.9m, while Penn Interactive generated negative EBITDAR of $5.9m.

Indeed, Q4 rounded off a year of losses for some US market leaders, including FanDuel, which recorded a 2021 operating loss of £289m, and DraftKings, where annual net losses surpassed $1.5bn.

Morgan Stanley said it expects a similar story in Q1 2022, primarily driven by aggressive marketing costs to cover new state launches in New York and to a lesser extent, Louisiana.

Low hold rates are also expected to impact the bottom line. Using New York’s sports betting market as an example, FanDuel, which leads the ranks in terms of handle at $2.1bn, has generated just $143.9m in revenue since January.

The Canadian province of Ontario is also expected to play a pivotal role in operator Q1 reports according to Morgan Stanley, having gone live with regulated iGaming on 4 April.

Penn National Gaming is a frontrunner in Ontario via its theScore subsidiary, which has an established media presence in Canada and went live with theScore Bet sportsbook on day one.

“While we had been concerned about theScore’s ability to take sports betting/iGaming market share in Canada, our recent proprietary analysis suggests that it is the market leader in app downloads, attractive given that we believe investor share expectations have fallen significantly,” said Morgan Stanley in a note to investors.

“Assuming Penn achieves just ~6.75% market share in both US and Canada for sports betting & iGaming, Penn’s core business is trading at just 5.6x 2023e EBITDA versus its historical average of 7.5x.”

Morgan Stanley has therefore upgraded Penn’s stock to overweight, although it is lowering all price targets to reflect higher interest rates, the market de-rating and updated estimates.

“We last published the majority of our models post Q4 earnings in early Feb, when the S&P 500 was trading at 20.0x NTM P/E; it is now at 18.6x,” said Morgan Stanley. “On average, we lower our multiples by 4%.”

Morgan Stanley’s gaming analyst believes the profitability possibilities of the US sports betting market are not currently reflected in the stocks of major public operators.

In an interview with iGaming NEXT co-founder and MD Pierre Lindh, managing director Thomas Allen said he expects the market to really turn profitable around 2025, suggesting that investors hoping for short-term gains have underestimated the time it will take to get from red to black.

Allen said valuing US gaming PLCs using mid-teen EBITDA multiples is fair: “We’re expecting revenue growth for the industry for the next three, four years, I think about 40% a year, and so high multiples should be justified in this context.”

Commenting on the high-profile example of DraftKings, Allen expects the company to reach $1bn of EBITDA in 2025, suggesting the firm’s current market cap of just under $8bn leaves the stock undervalued at present.

At the beginning of March, Morgan Stanley picked DraftKings as its top pick in the US sports betting and iGaming sector following a 70% dip from the firm’s 52-week share price high. 

Recent falls in US gaming stocks are due to an array of both macro and micro factors but are also the result of unrealistic expectations from investors, Allen said.

“The market had to come to the realisation that near-term losses were going to be much higher than the market anticipated,” he explained.

Morgan Stanley’s Thomas Allen: “Where we are most optimistic – and this sounds crazy right now – is actually around marketing efficiency.”

In spite of significant challenges presented by the US market, including fragmented and unpredictable regulation and relatively high comparative tax rates, Allen said there are areas where US operators will be able to mitigate these costs in order to turn a profit.

Where we are most optimistic – and this sounds crazy right now – is actually around marketing efficiency,” said Allen. “How ironic, when so many companies are spending so much money.

“But the reality is that if you think about the main operators in the US, there are only a few of them, right? So basically five operators in the US market today have over 80% market share. And all of them have a customer acquisition advantage.

“You think about the legacy DFS companies, they have all these old customers. You think about the legacy casino customer companies. They have all these old customers that they can cross sell occasionally and hopefully find ways to retain them in the future as well.”

Allen expects the major players today to dominate in the future, leveraging their first-mover advantage. “We expect the top five operators in the US to get to about 85% market share,” he said.

“That’s between Flutter (FanDuel), DraftKings, BetMGM, Caesars, and Penn Barstool, and that does leave room for a couple of other operators. I think in Australia, the top five operators have about 95% market share, so it does leave room.”

Allen pointed to state-by-state revenue data as evidence. He said: “You can see there are certain operators that came in late in states and they haven’t performed as well versus if they came in on day one. 

“I definitely think there is some level of first-mover advantage and if you take the companies at face value, a lot of them have said they’ve been pleasantly surprised by the customer retention they’ve seen in the US market.”

Whatever the future may bring, Allen is bullish on the US online gambling industry but has told investors playing the long game in this space to strap in for a bumpy ride. 

“We think the US market is going to see a lot of growth over the next five years,” he said on the podcast. “It’s going to flip to profitability, which is not really reflected in stocks.

“But it’s going to be choppy and it’s going to be volatile,” he added. 

Morgan Stanley is co-sponsoring the investNEXT 2022 track at iGaming NEXT New York City ’22.