Sports betting has become all the rage in the United States since the flood gates were opened for legal sportsbooks to operate back in 2018 when the SCOTUS deemed the Professional and Amateur Sports Protection Act of 1992 (PAPSA) unconstitutional. However, some licensed operators are rethinking their decisions to enter the world of mobile sports betting.
Making Book is Costly in New York
The nascent New York online sports betting market has proven to be fertile ground for sportsbook operators but the cost of getting early adopters has been steep. Between the relentless advertising blitzes, generous sign-up bonuses, and the onerous 51 percent owed to the state of New York to do business within its boundaries, sportsbooks are taking massive hits in the name of long-term gains.
DraftKings’ stock has taken a dramatic tumble over the past year and it didn’t help when they announced their expected losses in 2022 could be as high as $925 million, up dramatically from the $570 million initially reported. Considering that DraftKings was trading at $69.75 a year ago and has fallen to $20.69 as of this March 2022 writing, investors are understandably unhappy.
CNBC’s Contessa Brewer summarized investors’ concerns, adding, “The revenues here are beside the point because of the cash DraftKings is burning to acquire customers. Investors are really just itching to see a path to profitability.”
The prodigious losses are largely attributed to their unceasing advertising campaigns coupled with promotional bonuses for new customer acquisition. But DraftKings CFO, Jason Parks, remains confident the company’s strategy will ultimately pay off in the long run, “It is clear the business model is working. We feel terrific about customer payback and the EBITDA projections.”
But others don’t see it the same way. Jim Chanos, president and founder of Kynikos Associates, a New York City investment advisor focused on short-selling, announced last December he was shorting DraftKings because of the company’s wild expenditures to gain customers.
“You can believe in sports betting … but this business model is flawed,” Chanos said.
Some Calling It Quits Already
TwinSpires, the entity known primarily for its online horse racing betting site and whose parent company, Churchill Downs, is an iconic name in the industry is getting out of the sports betting business and focusing on what it knows best – horse racing.
Bill Carstanjen, CEO of Churchill Downs Inc., said in February, “We had high hopes for the potential to build a profitable business in this space. … We have profitable retail sportsbooks in four of our casinos. However, the online sports betting and online casino space is highly competitive, with an ever-increasing number of participants that the states have licensed.
“Many are pursuing market share in every state, with limited regard for short-term, or potentially even long-term, profitability. Because we do not see — for us — a path in which this business model delivers predictable and acceptable margins for at least several years, if ever, we have decided to exit the B2C online sports betting and iGaming space over the next six months,” Carstanjen added.
One industry executive who requested anonymity said, “Everyone is talking to everyone right now. There needs to be consolidation.”