The rapid expansion of sports betting in the United States has been remarkable. Currently, 32 states have legalized some form of sports betting, with 28 of those states offering mobile or online access. Among these, five states only allow betting through tribal operators. The market has become increasingly stratified, with many operators gaining entry primarily through partnerships with land-based casinos, both tribal and commercial.
Eight additional states are evaluating the possibility of legalizing sports betting and may enact legislation in the upcoming year. Meanwhile, a group of states, including major tribal gaming players like Minnesota, Oklahoma, and California, remain resistant to legalization, although some are actively exploring the issue.
The astonishing growth of sports wagering is largely fueled by fierce competition among operators, exemplified by the substantial sign-up bonuses targeting new players, often reaching into the thousands of dollars. This promotional landscape has led to considerable customer acquisition costs (CAC) that can exceed $1,000, resulting in significant profitability challenges for major sportsbooks. For instance, DraftKings reported a loss of $1.5 billion in 2021, following a loss of over $1 billion in 2020. Caesars Interactive faced an EBITDA loss of $476 million in 2021, with an even steeper loss of $576 million in Q1 2022. Meanwhile, Flutter Entertainment's U.S. division recorded a negative EBITDA exceeding $320 million, although CEO Peter Jackson stated that spending reductions were not immediately necessary. Such losses are proving unsustainable.
Recognizing these challenges, many companies justify their current financial struggles as part of a long-term strategy aimed at securing market share during the initial phases of market entry. The overarching goal is to future-proof profits by decreasing customer acquisition costs while maintaining market dominance through effective brand recognition.
In contrast, lower-tier operators like Wynn Resorts, Las Vegas Sands, and Churchill Downs/Twinspires, who lack the extensive financial resources of their larger competitors, have either exited the sports betting landscape or reduced their efforts. Observers believe consolidation among operators is likely under these circumstances.
The U.S. sports betting sector is a complex and dynamic environment that has evolved swiftly. To better understand the landscape, it is useful to categorize sports betting operators into tiers, each influenced by different factors.
**Tier One: DFS Kings (DraftKings and FanDuel)**
These leaders began in daily fantasy sports before transitioning into sportsbooks and multi-product gambling operators. Known for aggressive marketing strategies, they collectively hold over 60% of the U.S. sports betting market and face mounting pressure to streamline operations.
**Tier Two: PLC Challengers (BetMGM, Barstool/Penn National Gaming, Bally’s)**
Operators in this tier aim for top-five market positions across the board. BetMGM, a joint venture with Entain, is well-positioned to rise to the top. As more states approve various online gaming options, these companies stand to benefit significantly.
**Tier Three: Omnichannel Converters (Caesars, Golden Nugget, Resorts, Hard Rock, Rush Street)**
Linked to land-based casinos, these operators encounter similar pressures as tiers one and two but have less capacity to compete on customer acquisition costs. They focus on conversion and success across multiple channels, benefiting from potential new online gaming expansions.
**Tier Four: Newcomers (PointsBet, Kindred, Bet365, PlayUp)**
These international brands are introducing their services to the American market. Most are relatively unknown to U.S. consumers and have diverse market strategies. Only Bet365 possesses sufficient resources and tested products to emerge as a major player, although it adopts a cautious stance awaiting market developments.
**Tier Five: Land-based Operators**
This category includes tribal and commercial entities with localized, recognizable brands. Notable examples include Mohegan Sun and Foxwoods. They focus on enhancing business within their physical premises while serving as gateways for higher-tier operators. They struggle with customer acquisition costs and must deliver positive outcomes for their traditional operations.
**Tier Six: The Ghost Tier**
This tier highlights the persistent issue of black market operations in sports betting. Long-standing relationships with bettors allow these illicit operators to provide competitive odds without the burdens of taxation, making them difficult to eradicate. A recent tweet lamenting the delayed launch of an Arkansas mobile app reflects the reluctance of bettors to leave black-market options.
Regulators have been slow to address this challenge, with only Atropos Intelligence developing a product aimed at "market protection." The surge in advertising post-legalization has increased interest in betting, complicating the landscape for legal operators.
Four key areas of turbulence are anticipated in the U.S. sports betting market:
**Area 1:** The extensive losses reported by leading companies will force them to reassess unsustainable spending habits on gambling promotions and marketing. This reassessment could create opportunities for innovative marketing strategies focused on efficient customer acquisition and return on investment, potentially benefiting other competitors.
**Area 2:** The growing venture into tribal gaming markets might present hurdles for prominent sportsbooks. In Arkansas, for example, a newly launched sports betting initiative requires a 51% revenue share for land-based operators, compared to the lower percentages common in other states. This new structure will challenge the pursuit of profitability amidst scrutiny of tribal market access.
**Area 3:** The relatively low tax revenue generated by sports betting compared to igaming could lead to disappointment among state legislators. History indicates lawmakers may push for expanded mobile sports and igaming options, which could provide significant benefits to smaller companies not dominated by the top-tier operators.
**Area 4:** As operators strive to optimize their marketing investments while returning to profitability, the need to address the black market becomes more pressing. Mere legalization may not suffice given the entrenched position of illegal operators, necessitating efforts toward "market protection" to disrupt these operations and safeguard stakeholder interests.
