Igaming Focus: Illinois tax rate hike, first of many?

May 30, 2024 8:00 AM
Photo: Shutterstock: Illinois State Capitol
  • Jake Pollard, CDC Gaming Reports
May 30, 2024 8:00 AM
  • Jake Pollard, CDC Gaming Reports

Hello and welcome to this week’s Igaming Focus newsletter.

On the slate this week:

  • Progressive raise? We look at the fallout from Illinois’ gradual tax raise on online sports betting operators.
  • In-house simples: We have more color on why DraftKings is set to follow up its Sports IQ acquisition with a deal to buy Simplebet.
  • Delaware and Alberta to legalize icasino in 2025? It’s in our Q1 recap.
  • Gaming Innovation Group signs Primero Games as first sweepstake solution client.
  • Plus: Rev. Al Sharpton bemoans U.S. duopoly, regulatory roundup, news shorts.

Illinois’ sports betting tax hike 

Sliding scale of taxes to impact market leaders as other states look to Land of Lincoln’s move for potential inspiration.

Progress unchecked: This week’s industry news has been dominated by the sports betting tax hike that looks set to be signed off by Illinois Gov. JB Pritzker. The state’s senate approved the bill last Sunday, the House of Representatives passed it yesterday evening and it will now head to the governor’s office. The gradual tax is set to impact FanDuel and DraftKings the most; as market leaders they will have a rising tax scale imposed on their gross gaming revenues.

As the only betting brands likely to reach $200m in GGR in the state they would be disproportionately hit as the tax scale goes from:

  • first $30m GGR at 20%
  • next $20m GGR at 25%
  • $50m-$100m GGR at 30%
  • $100m-$200m GGR at 35%
  • above $200m GGR at 40%

Reaction time 

When the pros are antis…: Industry trade group the Sports Betting Alliance said the decision was “extremely disappointing” and “counterproductive”, that it would imperil jobs at downstate casinos, make licensed operators’ products less attractive and in the process would boost the appeal of unregulated sportsbooks.

  • … and the antis are pro: On the other side of the debate, the anti-gambling lobby group the Campaign for Fairer Gambling said the industry had pumped out dubious claims about the impact of the tax rise and was over-reliant on the threat of the “black market bogeyman”.
  • The CFG was founded by the British gambling entrepreneur Derek Webb and has been a long-time campaigner behind moves to limit stakes on online slots and on fixed odds betting terminals in the UK.
  • The markets: Deutsche Bank said the tax structure was similar to that applied to Illinois’ casino industry and was in fact suggested by the casino operators “as it serves to leave the smaller players relatively unharmed by the rate increase”.
  • Chain reaction: The target was to raise $200m and, based on figures from the past 12 months, the new regime is expected to raise around $170m. But, DB added, with taxes from sports betting broadly below expectations”, several states are likely to follow Illinois’ lead “when budget needs arise”, including New Jersey, Michigan, Iowa, Indiana, Arizona and Kansas.
  • Flat tax outspenders: JMP said business models will adjust “through lower promotions and marketing expenses”, which it said will impact the size of the market, and pointed to FanDuel and DraftKings gaining “a structural advantage through product, scale, and willingness to spend” on marketing in New York state, with its 51% tax rate.
  • Gradual changes: However, the new tax system “changes that equation” because the largest operators “can’t structurally gain a strategic foothold” due to its “graduated” structure, thus “creating a more even playing field”.

Source: Citizens JMP

Shake ‘n bake: Commenting on DraftKings, JP Morgan noted that with its shares down across the board on Tuesday morning, “investors were already baking in a degree of risk related to increased tax rates”.

  • The analysts added that the group’s scale and ability to leverage its scale “to realize promotional efficiency and operating expense rationalization” should help it as it forecast a “$35m to $44m negative impact to 2024 gross profit and a $101m to $134m impact to 2025 gross profit” from the new tax structure.

Paramount Pictures: Forrest Gump

DraftKings’ simple is as simple does 

DraftKings’ mooted move to acquire live betting odds provider Simplebet would fit with its aim to cut down on third party costs to drive revenues and increase EBITDA.    

LOIs signed: As news surfaced that DraftKings is in talks to acquire Simplebet, CDC Gaming Reports has learned that the two companies have signed letters of intent to complete a deal worth around $200m. But, with Simplebet valued at the $200m-mark back in 2021, investors were looking for close to double that amount.

  • No paper tiger: That valuation will not be reached and it is understood that payment would be largely in DraftKings stock.

DraftKings share price LTM

Source: Google Finance

Deal rationale: Acquiring Simplebet would enable DraftKings to save millions in monthly fees to third parties, while paper payments would mean not having to take on debt.

  • The Simplebet deal would fit with DraftKings’ stated aim to focus on live betting and  follow the recent deal the group passed with Sports IQ Analytics.
  • CDC Gaming Reports understands that as part of its strategy to bring as many of these providers in-house as possible, it also had its sights on Angstrom before Entain acquired the OSB provider for £81m.
  • Jack in the pack: The Boston-based group also announced the completion of its $750m acquisition of the lottery messenger group Jackpocket last week.

Quarterly recap: Q1 up on 2023, icasino likely in two markets   

Two more states are expected to legalize icasino by H225 as OSB and icasino grow in Q1.

Two for four: In its Q1 industry recap the team at Macquarie named Maryland and Alberta, Canada, as the most likely jurisdictions to legalize online casino by the second half of 2025, while four new states are expected to regulate sports betting within the same timeframe.

  • During the quarter, North American online sportsbooks’ GGR grew 26% YoY to $4.8bn as hold levels stayed flat YoY at 9%, while icasino was up 28% to $2.4bn.
  • Commenting on FanDuel, the team at Jefferies said Q2 trading had been encouraging for the group as its state-by-state tracker suggested “+30% headline NGR growth” during April, with OSB up 25%, igaming +54% and sports margins rising to 12% from 9.5% in March.
  • FanDuel continues to enjoy the highest rate of parlay wagers at 35% of handle vs. DraftKings’ 25% and its parlay margins continue to lead the market at 19% vs. 14.3% for DraftKings and 13.5% for the rest of the operators.

Gaming Innovation Group signs with Primero Games in online sweepstake push

New partnership sees GIG launch new solution with first sweepstake client.

Sweep the board: The new partnership will see the rollout of SweepX, GIG’s new social casino-sweepstake solution that combines the group’s igaming platform with a bespoke sweepstake back office. Sweepstake gaming allows players to purchase virtual currencies with which they play to earn prizes and cash rewards.

  • Sweeping growth: The pandemic saw the sweepstake social gaming market explode as consumers sought gaming options. Eilers & Krejcik Gaming estimates that the vertical generated around $3bn in revenues in 2022 and forecast 31% CAGR by FY25, with the market set to reach $6.9bn by the end of next year.
  • GIG chief business officer Andrew Cochrane told CDC Gaming Reports that the launch of the sweepstake solution enables the group’s B2B partners “to access a highly profitable and growing vertical”.
  • “The strength of our technology allows us to add content aggregation, free-to-play or real money components and combine them with new product streams such as social sweepstakes. This ensures speed to market in regulated markets such as the U.S. and is proving of great interest to stakeholders such as tribal groups.”
  • Prime numbers: Founded in 2009, Primero Games is a U.S. group that manufactures sweepstake machines and operates a 50,000 installed base in the country. It also owns Storm Games, a UK retail operator and content studio.
  • Primero will leverage its “extensive player database to quickly expand into the online social sweepstakes casino market”, GIG said in its press release.

Al Sharpton warns FTC about OSB “duopoly”

Rev. Al Sharpton has written to Lina Khan, chair of the Federal Trade Commission, expressing concerns about a “gambling duopoly” involving DraftKings and FanDuel. 

Right on: The civil rights leader believes the market share concentration threatens consumer protection, particularly for Black Americans, who make up a large portion of their user base. He wrote that the companies had a combined market share of 75%, while the Sports Betting Alliance lobby group they have established with BetMGM and Fanatics controls almost 90% of the market.

  • Sharpton added that 68% of Black Americans engage in sports betting, more than any other demographic. He said vulnerable consumers are the biggest losers when a duopoly takes hold.
  • The letter called for the FTC to investigate and address these anti-competitive practices to ensure a fair and competitive market that protects all consumers.

Regulatory round up

Delaware’s House Bill 365 to expand igaming is now with the House Appropriations Committee. The bill would allow the state’s three casinos to partner with up with two online sports betting operators.

Louisiana Senator Thomas Pressly has withdrawn an amendment to House Bill 906 after backlash for inserting it without public input. The amendment would have lifted restrictions on casino donations to political campaigns.

The Massachusetts Senate has rejected Sen. John Keenan’s budget amendment proposal to raise the sports betting tax from 20 to 51 percent to fund problem gambling efforts.

Congress is considering a countrywide standard for handling online customer data. The American Privacy Act would establish data privacy rights and security standards, potentially affecting igaming operators.

News shorts 

Canada’s North Star Gaming saw revenues rise 64% to CAD$6m in Q1 as its reverse takeover of Baden Resources and its Canadian property business Midway Property and its online rollout across all Canadian provinces helped push up revenues during the period. The number of active players was up 42% and CPAs were down 9% while a new marketing agreement with Playtech was also playing its part, CEO Michael Moskowitz said.

UK horse racing odds and markets provider SIS will supply Stake.com, one of the largest online casinos and sportsbooks in the world, with its library of live racing and early pricing and derivative markets supplied by Racing and Sports (RAS).

BetMGM is now the official odds provider to Associated Press, the largest news agency in the U.S.

What we’re reading 

Penn Entertainment’s yin and yang.

See you in two weeks!