After crunching the numbers on New Jersey’s online sports betting (OSB) and internet casinos, Deutsche Bank analyst Carlo Santarelli has determined that “we can further dispel the notion that gross revenue, not to mention handle, is a relevant metric for anything beyond simply being a means of modest directional comparison amongst operators.”
Santarelli’s conclusions were “somewhat draconian, especially considering New Jersey launched OSB in 2018 and has had time to mature, while New Jersey icasino launched in 2014.”
Still, he reached the determination that igaming would, as it matures, “be a reasonable, though likely disappointing, cash-flowing business for some.”
The path to profitability would be through icasino games by a considerable margin. Santarelli had harsh words for those who report OSB handle and gross revenue, “both of which are essentially bogus and easily manipulated metrics, [which] will simply elongate the process to a steady state, as operators attempt to continue to show gross revenue and handle growth, to satiate investor expectations.”
Those operators would, he continued, make money steadily, but at a rate that is “currently overstated” and hostage to icasino legalization (which is proceeding slowly in the U.S.). That steady market would “represent a net revenue market that is considerably below the hypothesized market size at present.” He blamed that on “gross” estimates of total addressable market (TAM) scale and promotional offsets that are “materially lower than the current reality,” which is causing exaggeration of gaming-revenue models.
For his study, Santarelli took a deep dive in New Jersey’s OSB and icasino reports, choosing the Garden State in part because it taxes online gambling on gross gaming revenue, not permitting tax deductions for promotional offerings, an offset that has put other states at a tax disadvantage. He wrote, “As such, the state does not care about the level of promotions being deducted for tax purposes.” (New Jersey sports betting revenue is taxed at 15 percent and igaming GGR at 13 percent.)
An instance of a state where OSB revenue was negative year over year is Pennsylvania; unlike New Jersey, the Keystone State provided detailed information on promotional allowances.
“This data point was surprising, to an extent, and got us to dig a bit deeper and explore New Jersey a bit more.”
What Santarelli learned, or more accurately reiterated, was that Wall Street and the media have “focused on metrics such as handle and gross revenue to articulate the size of the industry and to lend credence to future TAM forecasts,” predicating other market projections on how New Jersey has performed.
Specifically, Santarelli singled out DraftKings (a frequent adversary) for using a New Jersey-fits-all model. Speaking generically, he said, “As things stand, the equity market believes each adult in New Jersey spent ~$320 in 2021 betting sports on their mobile phones and playing casino games on their mobile phones. We believe the actual spend is closer to $125.”
What DraftKings did was project a $26 billion OSB U.S. market at full maturity, plus $48 billion in igaming revenue. The sports-betting operator assumes that 65 percent of Americans will have access to OSB and 30 percent to online casino gambling, assigning itself a 24 percent market share and $7.5 billion in gross gaming revenue. Once promotions, at 22 percent of gross revenue, are deducted, DraftKings leaves itself with $5.8 billion in income. Santarelli noted that most studies of igaming have promotional spend, which is above 50 percent in many markets and higher than 100 percent in a few, such as Pennsylvania, tapering off to between 20 and 30 percent of revenue.
Santarelli wasn’t buying it. In his summation, he wrote that he was “highly confident” that promotional giveaways would never hit those lower benchmarks or that “gross revenue will be decidedly lower than expected, particularly the latter.”
“Said differently, we believe extrapolating New Jersey gross revenue and then simply extracting what currently amounts to a very large slug of promotions that are producing phantom GGR, with no impact to gross revenue, is an impossible dynamic to achieve,” Santarelli summarized.
