Month: November 2022

As discussed in our June newsletter, investors in US online wagering operators are growing impatient with the losses recorded for the sake of gaining market share.

One reason we focus primarily on suppliers over operators is because operators rely heavily on their customer acquisition cost (CAC).

In mature, highly taxed, regulated markets, a handful of operators earn the majority of profits because they have the lowest CAC and the best operational efficiencies.

Sportsbet take 2

Flutter’s third quarter results demonstrated FanDuel’s (Flutter’s US brand) clear market leadership. It has a 42% gross gaming revenue (GGR) market share in mobile sports betting and 18% market share in igaming.

As shown above, Flutter is the only operator from its peer group to generate positive returns for investors over the past 12 months. It’s also our only portfolio holding in the group. We initially invested in Flutter because of their profitability in mature international markets, scale, marketing expertise and team.

FanDuel’s strong position

In the US, FanDuel has achieved 19% more app downloads than DraftKings year to date (3.3m vs 2.8m) . It has achieved this with 9% less marketing spend ($727m vs $803m).

Product innovation and superior user experience have contributed to 77% year-on-year customer retention (Flutter Entertainment). These strong metrics allow Flutter to guide for US profitability in 2023.

FanDuel is consistently achieving 30%+ share of app downloads. It also has 46% market share of sportsbook GGR in its three largest states (New York, New Jersey, Pennsylvania).

Flutter effectively leverages its experience gained outside the US to grow FanDuel with a focus on near-term profitability. In 2021, the US represented just 22.5% of Flutter’s overall revenue.

As discussed in September, Sportsbet (Flutter’s Australian brand) has 50% online market share and has grown revenue at 36% per annum since 2009.

Scale is critical

In regulated markets like Australia, wagering taxes typically increase over time. Sportsbet’s cost of sales has grown at 42% per annum since 2009, increasing from 30% of revenue in 2009 to 49% in 2021. 

Sportsbet’s increasing cost of sales as a proportion of revenue demonstrates the importance of achieving scale in regulated markets. High CAC and large overheads erodes profits when gross margin is just 51%.

Despite the increase in taxation in Australia, Sportsbet’s operating leverage and scale benefits resulted in EBITDA margin expansion. It rose from 14% in 2009 to 34% in 2021.

Smaller competitors under pressure

The profits of Sportsbet’s smaller competitors are pressured by tax increases, contributing to Sportsbet’s market share gains. In Australia, the top three online sportsbook operators have 87% market share. The top three in the UK have 78% market share; in the US, the top three have 81% (Flutter Entertainment).

All three jurisdictions have a cost of sales higher than 30% of revenue. This negatively impacts the competitiveness, and ultimately the market share, of smaller operators.

With regard to taxation, the US is following a similar trajectory to Australia and mature European markets. FanDuel’s cost of sales has expanded from 31% in 2019 to 50% expected in 2022. New York launched in January with a 51% tax rate. 

Don’t count FanDuel out of igaming 

In October, total igaming revenue in North America was a record $446m. That’s an increase of +26% year-on-year and +10% month-on-month.

Igaming is a significant growth opportunity for FanDuel. The company currently has 18% market share in igaming, lagging third behind BetMGM and DraftKings, which have 29.8% and 22.8% respectively.

FanDuel’s sportsbook is its primary customer acquisition channel. Around 41% of sportsbook customers are then cross-sold into igaming within 30 days. The operator will be improving its range of igaming products and developing promotion tools to retain and monetise players.

Taking a large slice of a large pie

There are many views on the potential revenue of US sports betting at maturity. BetMGM and DraftKings estimate it to be $14.1bn and $22bn respectively, while FanDuel estimates it to be $22.6bn (Flutter Entertainment).

At the moment, FanDuel has 42% market share and expects to generate around $2bn of sportsbook revenue this year.

If the potential revenue opportunity is $19.5bn (taking the average of the three operators’ estimates) and FanDuel’s market share falls to 30%, FanDuel’s implied online sports betting revenue at maturity is $5.9bn. That’s about 3x higher than this year.

If FanDuel’s market share remains at 42%, revenue would be around 4x higher. 

The upside for FanDuel’s sportsbook business

As discussed above, Sportsbet has an EBITDA margin of 34%. Flutter aims for FanDuel to achieve long-term EBITDA margins comparable to their other divisions (including Sportsbet).

If FanDuel achieves a mature EBITDA margin of 25%, the sportsbook business alone can generate higher EBITDA than Flutter’s entire business generated in 2021. This excludes any contribution from igaming.

Waterhouse VC has been invested in Flutter since September 2019. While our initial investment has appreciated 70% over the past three years, we remain particularly optimistic about the growth profile of the company’s US operations. 

Writing in political publication ‘The House’ for the Betting and Gaming Council, Jenkinson warned against a blanket approach to gambling reform as part of the ongoing Gambling Act Review, saying this would not be as effective as targeted changes.

Jenkinson highlighted research from the Gambling Commission that suggested only 0.3% of the population that gamble suffer from gambling-related harm, saying wholesale changes to regulations would not be in the interest of the majority.

However, he did acknowledge that the current laws to need updating to address issues in the modern market, urging the government to use the “technology and the tools already available and devise a targeted approach”.

“How do you allow adults the freedom to bet, while protecting the vulnerable,” Jenkinson said. “One such measure being pushed by the anti-gambling lobby is blanket affordability checks at a very low level, the kind of checks that would compel punters to prove they could afford to have a flutter.

“But compare that to drinking, what would voters say if government, in a move to protect alcoholics, decided to set a limit on how much the rest of us could spend on drink across a set timeframe? There would be outrage, and rightly so. A ‘one size fits all’ approach rarely fits anyone.

“Surely better to use technology and the tools already available and devise a targeted approach? An approach that identifies those at risk and puts in additional protections, while allowing the rest of the public to carry on doing what they love without Nanny State intrusion. That would be the balanced approach.”

Jenkinson noted how the betting and gaming sector contributes billions to the economy and in tax revenue, warning that if the market were to be “over-regulated”, this could harm the wider sure and tourism sector, as well as high streets, across Britain. 

In addition, he said introducing measures such as blanket affordability checks could lead to a rise in the number of punters gambling with unlicensed sites, which do not offer the same protection tools as licensed sites, nor to they contribute to Britain in terms of tax.

“Over-regulate the legal market, and frustrated punters will find another way to place their bets,” Jenkinson said. “The numbers using these sites has doubled and the amount staked is now in the billions.

“Getting the balance right can often be like walking a tightrope. One foot wrong, and you’ll come crashing down to earth. I decided long ago to make up my own mind about betting and gaming, not fall for the lazy stereotypes others continue to cling to. 

“I see an industry ready to find a balance – I hope government offers them a pathway so punters can continue to enjoy a bet.”

Jenkinson’s comments come after the Betting and Gaming Council this week published the results of a new YouGov survey that showed 67% of punters believe compulsory spending limits would risk driving users to the black market.

The survey also found that 64% of the public believe an increased use of illegal sites would cause a rise in problem gambling rates. 

Following a series of investigations, ACMA found Winning Days, 21Bit Casino, Oshi Casino, Lucky Elf Casino, NeoSpin, Lets Lucky, Boho Casino, Ripper Casino and BC.Game were all operating in breach of the Interactive Gambling Act 2001.

The latest round of requests meant that 642 illegal gambling and affiliate websites have been blocked since ACMA made its first blocking request in November 2019.

More than 180 illegal services have also pulled out of the Australian market since ACMA began enforcing new illegal offshore gambling rules in 2017.

“The ACMA is reminding consumers that even if a service looks legitimate, its unlikely to have important customer protections; this means Australians who use illegal gambling services risk losing their money,” ACMA said.

Earlier this month, ACMA said that it intends to focus on “affiliate services that promote and drive traffic to illegal online casinos” this year.

ACMA explained its actions for the July-September period, declaring affiliate services that drive traffic to illegal and offshore offerings while often posing as independent reviewers of gambling sites are its compliance priority.

Subsequently, the authority investigated 20 affiliate services during the period to “disrupt the marketing and supply” of unlawful offerings in Australia. These investigations found a high number of affiliate services to be in breach of the ban on advertising illegal gambling services and aiding the act of providing illegal gambling.

Authorities in New York are expected to issue three downstate casino licenses in the coming months, with Thor Equities aiming to secure one of these permits to open the new facility within the popular entertainment area of Brooklyn.

Though details of the casino are yet to be released, Thor Equities said the investment in the project would be worth in excess of $3.0bn (£2.5bn/€2.9bn) and lead to the creation of 2,500 construction jobs, as well as thousands of permanent jobs when the casino opens.

Read the full story on iGB North America.

Strike Games will use GiG’s player account management (PAM) and front-end content management system (CMS) technologies to expand to a number of international and emerging markets.

“With the strength in our solutions and our strong geographical footprint expansion, I am particularly pleased with the potential of brands such as Strike, combining with our technology, as we continue to push innovation and drive opportunity for the brands we power,” said GiG chief executive Richard Brown.

The agreement is set to last for an initial period of five years.

“Strike Games is incredibly excited to commence a partnership with GiG,” said James Pound, director at Strike Games. “The team had a precise vision for what Strike would need to present to the market to be successful, and to provide a world class gaming experience, understanding that GiG technology was what was required.”

“The market and its consumers expect a higher standard and a better service of which this partnership will be able to deliver on. We are looking forward to developing something amazing and launching a truly new age igaming platform.”

Earlier this month, GiG reported another quarter of record-breaking revenue. Revenue for the three months to 30 September grew by 35.5% compared to Q3 2021.

Growth was driven by the ongoing growth of its affiliate business and a strong showing from the technology operation, which has been aided by the acquisition of sportsbook technology provider Sportnco.

The figures were supplied through industry research from the Gambling Commission.

While this is a significant rise, the total is 0.8% below the 2019/20 numbers, which mostly occurred pre-pandemic. Despite the increase in the headline numbers since this, the Commission reports that the number of bettors in the sector have fallen.

“Since Covid-19 restrictions were lifted in 2021 and products and opportunities to gamble are available to consumers again, the overall percentage of the adult population who gamble remains lower than it was pre Covid-19 (28%),” said the Commission.

This can be explained by gaming spend increasing to a proportionally larger extent than the number of consumers. However, as the Commission outlines, there are strong signs of increased participation in gambling activities from younger demographics.

“There are signs of a return to gambling amongst younger age groups aged 16 to 24 and amongst males gambling in retail. Industry GGY in 2021-22 for products under the Gambling Act 2005 is just 2 percent below what it was pre-pandemic (2019-20).”

Online sector

The online sector saw £6.44bn in revenue for the period in question, which is a 6.2% decrease compared to the 2020/21 period. However, this is still a 12.4% rise in comparison to 2019/20.

“The movement of consumers to online has been a gradual and consistent trend which continued through the pandemic, but spend appears to have increased more quickly than the increase in consumers,” said the Commission.

“The biggest change in the gambling landscape is a shift to online play, reflecting our lifestyles in general. Technology and globalisation have meant that gambling is no longer confined to opening hours and largely local events, but instead a 24 hours 7 days a week opportunity and global event-driven marketplace.”

Online casino is responsible for the majority of the revenue at £3.9bn. Breaking this down, £3bn of the total is from slots alone. The second largest contributor to the online sector is remote betting at £2.4bn, wherein betting on football and horse racing led the vertical at £1.1bn and £768.5m respectively.

Revenue from online bingo stood at £183.5m for the year.

Land-based sector

The land-based sector has more than doubled in size since pandemic restrictions ended. GGY increased by 110% to £3.5bn between April 2021 and March 2022.

However, the sector remains significantly below its pre-pandemic strength – with revenues 21.5% down from 2019/20. Participation is also down a reduced 8% compared to the pre-pandemic trend.

The GC elaborated on concerns that the recovery that was seen in land-based and retail venues was focused on bettors younger than 24.

“While there were concerns from the industry that the pandemic would have a significant negative impact on the retail landscape, in person participation in gambling has increased in September 2022 compared to September 2021 particularly amongst males and younger adults up to the age of 24 years old.”

Premises and licences

The total number of licensed operators continued its four year decline – falling 0.9% from 2,441 in March 2021 to 2,419 in the same month the next year. The number of operators who do multiple activities fell by one from 369 to 368.

The number of operators licensed for online casino, betting or bingo fell from 599 to 591 in the same time period. Businesses licensed to provide gambling software also fell to 309 from 313.

The number of active premises in Great Britain also continued to decline; falling 3% to 8,308 total active venues. Most of this fall can be explained by the reduction in the number of betting shops. In the time period, the GC’s statistics show that there were 242 less active betting shops than there was the previous year.

The group is already active in a number of states across the US, with plans to also launch in Ohio when its market opens on 1 January and Maryland once regulated sports betting is approved in the state. It also went live in Kansas in September.

However, Gambling.com Group chief executive Charles Gillespie said the business is hopeful of further expansion in 2023 and beyond, forecasting both sports betting and igaming legislative developments elsewhere in the US and in other, international markets.

“The 2023 legislative season kicks off in January and we believe that sports betting legislation could be considered in North Carolina, Georgia and Texas,” Gillespie said. “We also believe that igaming could come up for a vote in these legislatures of New York, Indiana, Illinois and Ireland.

“Our long-term outlook on broad-based expansion of regulated online gambling in North America remains unchanged. We continue to expect states to regulate online sports betting, where retail sports betting exists and states that have online sports betting to move toward regulated igaming.”

Gillespie added that the recent acquisition of Casinos.com would support the group with its igaming growth strategy in the years to come.

“To continue to best position ourselves for the future of iGaming around the world, we recently completed the acquisition of a superstar marquee domain, which, in our view, is the single most desirable and valuable domain name for companies in our line of business, Casinos.com,” Gillespie said.

“The addition of Casinos.com to our already best-in-class domain portfolio enables us to build another powerhouse global brand alongside Gambling.com using our existing teams, technology and knowhow.”

Rocketing revenue

Gillespie’s comments came in an earnings call following Gambling.com Group publishing its results for the third quarter, during which it posted record quarterly revenue of $19.6m (£16.4m/€18.9m), up 94.1% on last year.

The quarterly high was helped by a record performance in the UK and Irish market, while North American revenue also rocketed by 299.0% year-on-year to $9.1m. The group also noted a 152.0% jump in the number of new depositing customers (NDCs) to 68,000.

Turning to costs and spending was higher across the board, with the group reporting a rise in expenses for sales and marketing expenses, technology, and general and administrative, while movements in credit losses allowance and write-offs, as well as fair value movement on contingent consideration were also higher year-on-year.

The group also reported $2.4m in net financial income, which, coupled with the rise in revenue, meant it was able to post a pre-tax profit of $2.6m, only slightly down from $2.7m last year.

Gambling.com Group paid $340,000 in tax, leaving a net profit of $2.3m, which was down 51.1% on Q3 of 2021 as a result of the business having received $2.0m in tax credit last year.

The group also reported a $6.0m negative impact from exchange differences on translating foreign currencies. As such, comprehensive net loss for the quarter was $3.7m, compared to a $2.9m net profit 2021.

However, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) was 22.5% higher year-on-year at $6.0m, while free cash flow amounted to $4.9m.

“Our consistently strong adjusted EBITDA and free cash flow, even as we continue to invest to drive further growth, is a key differentiator for Gambling.com Group,” Gillespie said. 

“We will continue to benefit from our proprietary technology, which offers us competitive advantages, a significant pathway for near and long-term growth in North America, a track record of delivering consistent growth in our established markets and an operating model that drives profitability. 

“As such, we are confident in our ability to grow over the balance of this year and extend our successes in 2023 and beyond.”

Under the deal, which was brokered by Lottomatica’s GBO subsidiary, the operator will take ownership of 100% of the share capital of Betflag.

Lottomatica said it expects to finalise the acquisition in the coming days, with the entire purchase price to be paid on the date of completion. A further €50m may also be paid in 2024 contingent upon Betflag’s financial performance in the 2023 calendar year.

The purchase will be financed with the release from escrow of proceeds from Lottomatica’s senior secured notes issued in September.

“The transaction allows Lottomatica Group to consolidate its presence in the Italian market, particularly strengthening its position in the online casino games sector and represents a key milestone for the group’s multi-brand strategy, aimed at ensuring full coverage of the different product verticals and the different player clusters,” Lottomatica said.

“Moreover, thanks to this acquisition and by virtue of the specific features of Betflag, which will continue to be a separate and autonomous brand, Lottomatica will further enrich the group’s brand portfolio and to combine the respective know-how and expertise.”

The acquisition represents Lottomatica’s first since it became a standalone business.

The group was created as a gaming multi-national IGT sold its Lottomatica-branded B2C operations to Gamesnet Group in May 2021. Gamesnet then adopted the Lottomatica brand. 

Earlier this year, upon announcing its H1 results, Lottomatica chief financial officer Laurence van Lancker said the operator would consider acquisitions, but only if it sees the right opportunity.

“We are actively monitoring the market, assessing those assets with the same approach we have previously discussed,” he said at the time.

“We don’t want to do acquisitions for the sake of EBIDTA or the sake of growth, we want to have a profitable, sustainable and disciplined growth for the right conditions – but we keep on being very active in this space.”

Scrivens will assume the role on 1 January, with Higgins to remain with Affinity Interactive in an advisory role until June next year.

Scrivens has served as Affinity Interactive’s chief financial officer since joining the business in May 2019.

Prior to this, he was managing director of the private equity investment team at Z Capital Partners, while he also spent time as a director at middle market private equity firm and boutique investment bank Chilmark Partners. 

In addition, Scrivens had a spell at Arthur Andersen LLP in its corporate finance group.

“This is an incredible opportunity to lead AI during such an exciting phase of its growth trajectory,” Scrivens said. “Since I began working with the company in 2014, I have been continuously impressed by the talent and commitment across the organisation.

“I am grateful for Mary Beth’s leadership over the past few years, and I am looking forward to building on the strong foundation we’ve put in place together.”

Affinity Interactive chairman James Zenni Jr. added: “Andrei has been instrumental in establishing Affinity Interactive as the industry-leading platform it is today, and I am confident he has the vision to lead AI to even greater success.

“We are well positioned to capitalise on the growing demand for omni-channel casino and online gaming products, and Andrei’s gaming industry experience — both as an investment professional and operator — will continue to be invaluable. 

“I look forward to continuing to partner together as we further enhance our best-in-class gaming offerings and products for customers and guests.”

This week’s column comes to you as I prepare to board a flight for a week off in the Hampton Roads region of Virginia, so what better to focus on than the idea of retreating from costly US battles?

Maximbet became the latest US operation to shut down, hot on the heels of the Fubo Sportsbook. If it wasn’t clear already, it’s fair to say now that it’s tough for second-tier and below operators to make much money, and other exits are likely coming soon.

In August, I wrote that the podium of top US sports betting operators had effectively been set, with no path for challengers to compete with the likes of FanDuel, DraftKings and BetMGM.

Recent events have only reinforced that there simply isn’t a path into the top tier for the also-rans. So the question then becomes, how do you create an operation that turns a steady profit without having to rely on achieving an unrealistic market share?

MaximBet seemingly had a model built around not trying to compete directly with the biggest players. Rather than spending a large amount on direct marketing, it focused on VIP campaigns and less traditional methods such as collegiate NIL deals.

Yet that didn’t seem to be enough, as the brand failed to ever achieve even enough market share to justify its less cost-intensive strategy.

So if a model like that didn’t work, what will?

The best thing to do might be to look at the best of the rest in the US market and see what those who have achieved a modest market share have done well, and why others have failed.

Rush Street Interactive: casino comes first

Rush Street Interactive has been an exception in the US market, bringing in solid amounts of revenue with a relatively disciplined approach to marketing. The state was already EBITDA-positive in six states in Q2, with much of its overall performance only dragged down by New York.

Importantly, Rush Street Interactive was among the first brands in the US to recognize that a heavy sports betting focus would be a losing proposition in most states. As a result. It has focused on online casino, which seems to have created a genuine path to profitability. 

The operator remains active in the sports betting market, but gets that the much more lucrative online casino should be the priority. 

Compare that to a brand like Bally’s – another regional casino operator. It had strong online casino assets through its Gamesys acquisition, but tried too hard to focus on sports betting, rebranding entire television channels to its own name. That didn’t work, and now the operator is looking to make cuts in its North America interactive division, though it still seems too proud to call it quits on the Bally’s Sports networks. With a casino-first approach from the start, the operator might have fared better.

At the same time, the operator’s international strategy appears to set the stage for strong US growth opportunities. Being the first US sportsbook operator to give live in Latin America, the brand has been well-positioned to offer a product for the otherwise-underserved hispanic US market.

It might be a long time before online casino is legal in more than a handful of states, but the vertical is lucrative enough – and casino customers seem to like having a wide range of options enough – that even a few states offer a clearer way to break even than with sports.

Much of this has allowed for a strategy that focuses more on retention than acquisition. Every operator gets the value of retention, but most have focused on acquisition in part because retention has just been too hard. But led by online casino and finding demographics that were otherwise largely ignored, RSI seems more promising.

Barstool: a loyal fanbase

The other brand that appears to be doing well by the low standards of second-tier US operators is Penn Entertainment’s Barstool Sportsbook.

Any hopes of Q4 profitability were probably scuppered by a certain Houston-based mattress salesman, but Penn’s interactive arm – which also includes theScore in Canada – was profitable in October.

To a large degree, what MaximBet tried to create was a less organic version of what Penn’s Barstool Sportsbook has.

There’s a lot that could be said about Barstool’s fans, but with most tier-two or below brands in the US market, there’s nothing that could be said about their fans because they simply have customers instead.

Plenty of other media and betting partnerships – including MaximBet – have failed because the media brand might have name recognition, but its customers have no reason to engage with a betting brand of the same name. Annoying as many of them may be, Barstool’s personalities have a loyal following and Penn has used them effectively, with most feeling like natural ambassadors for a betting brand.

Importantly, though, Penn Entertainment has also worked on creating a genuine retail sports betting experience to complement all of this. This has allowed for two completely different customer bases: the 20-something “Stoolie” bros and the older regional casino regulars.

PointsBet: Over-ambitious, but early

PointsBet might be a tougher one to assess. It does have much more market share than those who have exited – and live in only Australia and Canada otherwise it would be tough to drop the US – but its path to profitability is harder to see.

The Australia-based brand has carved out a relatively solid market share among the second tier with a marketing strategy that mostly resembled the big players, throwing money at sports partnerships and media deals throughout 2019.

Right now, the operator still loses a lot of money in the US. Maybe it will one day be added to the list of casualties, but if it survives there’s a reason: it did most of that work back in 2019 and 2020.

The operator spent a lot of money, but compared to the current going rate, many of those deals look pretty cheap. It still might have tried to hard to compete with better-resourced rivals, but the brand has at least bought a very large amount of name recognition at a solid price: there’s more of a path to profitability for them than for operators that were simply too late to get serious in the US.

That’s not really useful as advice to replicate, but it’s a warning to those throwing money into the market too late.

Messing with the sports betting system

Many of the failures, meanwhile, have perhaps been too ambitious, hoping to change betting entirely.

Fubo Sportsbook aimed to integrate betting and streaming to create a whole new kind of sports entertainment experience. The appeal seems obvious, but there’s a reason why nobody’s made it work: integrating betting into a streaming product, rather than doing the reverse, is really hard. It’s a huge tech challenge just to get video to keep up with live odds without regular suspensions. 

And many customers who are happy to bet still just don’t really want to see betting odds constantly on their screen through a match.

There’s a handful of startups hoping to offer pricing or a promise to be friendly to pro bettors as a USP – holding a utopian vision of the sector where those offering bettors the best prices are rewarded in turn. But those likely hold even less of a chance. The economics of being a challenger brand are hard enough without operators handicapping themselves. Let’s not forget that the FuboTV platform even started as a low-margin, pro-friendly option before deciding that streaming seemed like a better option.

So you shouldn’t get too excited about the likes of Jake Paul and Joey Levy’s Betr hoping to revolutionise the sector. 

If so-called micro-betting doesn’t take off, the brand will struggle. But if it does it comes down to a simple question: could one of the big players simply replicate it? Next-play markets are not the exclusive purview of Betr. In fact, European operators have handled next-point markets in tennis pretty well for years.

Ultimately, it won’t be easy for any of the second tier, but somebody beyond the top players is going to make some money out of this opportunity. But a lot more will probably leave before then.