Recent analyst notes on DraftKings, alongside findings from a player survey, give some indication on the industry’s potential direction of travel, as U.S. online sports betting operators look to create products that generate more player engagement, betting volumes and margins.
In a recent note on U.S. sports betting giant DraftKings, analysts at JMP Securities revealed the operator’s senior leadership team, including CEO Jason Robins, senior director of finance Michael DeLalio and VP of investor relations Joe DeCristofaro, plan to develop their live betting product as a near term priority. The product is expected to boost margin levels, increase differentiation credentials to U.S. bettors, and the DraftKings team told JMP it was “confident in [the company’s] ability to improve gaming margins to be more in line with FanDuel.”
DraftKings’ move is understandable, live betting is much less widespread in the U.S. than it is in Europe, where the product first became popular around 20 years ago and can represent more than 60% of some bookmakers’ volumes. Nonetheless, and maybe as a result of the industry’s heavy focus on parlays, there seemed to be an element of surprise in the way the JMP team reported DraftKings’ decision.
The analysts suggested the strategic move would be “a positive catalyst” for data suppliers like Sportradar and Genius Sports as operators would push players to increase the legs on their pre-game parlays. But ultimately “in-play betting is a lower-margin offering with the inability to build multi-leg parlays; therefore, we would expect players to continue to increase legs on parlays pre-game, but [this would be] slightly offset by a lower margin in-play,” JMP said.
Still, “the impact on revenue will be positive as players increase time on device, leading to higher average revenues per monthly user, reinvestment rates and lifetime values,” JMP added. Volatility levels from DraftKings will also be lower as a result of the focus on live betting and its ability to provide a broader range of products to players will also be a way of hedging against “more volatile events and protecting margins,” as it did during the Super Bowl.
Runaway threat
In addition, trading teams would not be subject to what is known as “running up money”, which, as partner at the sports betting consultancy Propus Partners Matt Howard explains, is when parlay selections keep coming in, and up to (for example) 17 or 18 legs of a 20-leg parlay win, causing nerves to fray as the potential pay-outs reach into the millions of dollars.
“Many operators’ systems are not built to handle that kind of probability and they prefer the trade-off of regular and less volatile live betting, even if, as mentioned, it does not boost hold levels to any considerable degree,” notes Howard.
Rather, the focus on growing live volumes leads to “improvements in turnover, recycling of funds, customer retention and therefore profits would be achievable as the operator would get more share of volume. In-play margins are lower (than parlays), so margins will drop as in-play volume rises.”
The in-play focus is also more pronounced for online bookmakers, as historically U.S. retail bookmakers have had “a heavy mix of parlay action, some of which will be transferred online,” adds Howard. “But if you operate purely online, practical issues like the size of a mobile screen, web performance-related issues and rolling markets like handicaps move at the same time as the game develops and that requires lots of capacity” when assessing same-game parlays.
Parlay levels drop but still dominate
Parlays in the U.S. remain prevalent among sports bettors, but their use is dropping compared to a year ago. Truist Securities’ latest player survey, carried out with Juice Reel, revealed that “74% of users are betting parlays, though respondents indicated parlays were declining moderately on a bet mix basis – 39% bet fewer parlays than they did a year ago, vs. 20% betting more and 41% betting the same amount.”
Still, as the Truist team says “the front-page story for online sports betting in 2023 was manufacturing higher hold by pushing parlays”, while the overall number of parlays tracked in the survey sample “rose +95% YoY” compared with around 60% for straight bets and the growth in on-shore parlay bets was 118%, “translating to on-shore parlay bet mix of 33%, speaking to the more casual nature of on-shore bettors,” Truist added.
Usual caveats apply with regard to a sample size of just over 2,000 respondents, which Truist pointed out will also tend to be more sophisticated than more recreational players. But it’s worth noting that the percentage of parlays as part of the overall bet mix is still low at 33% and this is despite the player base betting more often (+69%) at a higher average bet size (+55%) than in the 2022-23 findings. In addition, currently parlays are used by sharps to bypass or get around operators’ spending limits and account blocks. Therefore, there is still ample room for revenue and margin growth from parlays.
Hold the front and back pages
DraftKings’ move towards live betting can also be set within a broader context of negative headlines about the industry. Recently there have been calls by U.S. politicians for operators to shed light on how they treat problem and high value gamblers, National Collegiate Athletic Association (NCAA) president Charlie Baker has called for a ban on prop bets, which Macquarie said could cost bookmakers around $300m of gross win.
A number of states, including New Jersey and Illinois, have also made statements about raising tax rates on operators, while articles detailing the abuse NCAA athletes get from disgruntled bettors do nothing for the industry’s image.
Howard says operators will always want the business from real “recreational bets, whether in-play or with parlays, as the regular income from in-play gets boosted by the increased margins that parlays generate.”
He adds that “pricing on major U.S. sports has much more room to improve in quality and therefore doing so would lead to increased margins, or to compete more aggressively on overrounds,” while “reduced suspension times or bet delays can lead to significantly improved UX and a competitive edge when looking at retention.”
It goes without saying that DraftKings’ move to develop its live betting product is not related to all the topics raised in this article, but it can be seen in that wider context. What observers will be looking out for is whether the move enables it to overtake FanDuel.
