Cutting marketing budgets is a major cost saver for U.S. operators hoping to hit their profitability forecasts in the near term. But the move also brings with it questions around player signups, exposure and brand awareness.
With the majority of the large operators having reported their first quarter figures, one key theme that came out of their financial statements was that the marketing taps would most definitely be turned off, or significantly cut back, in 2023, and, if all goes to plan, for as long as they are able to keep them offstream.
The reason is simple. Marketing and advertising budgets represent the single biggest direct cost operators incur when they are recruiting players. Promotional and bonus spend also eats into their revenues, but at least part of that can be recouped through wagers and, in the longer term, customer service teams maximizing player lifetime values.
Marketing lifeblood
The fact that many operators are stating so clearly that they will be cutting off the marketing taps is striking for the simple fact that marketing in many ways is the lifeblood of the online gambling industry. It is how operators raise their brand awareness levels and are able to get new players to sign up and open accounts.
One counterpoint to that argument might be that operators can raise the notoriety levels of their brands through in-house content that can be quirky, funny and, importantly, much cheaper than any number of multi-million dollar advertising campaigns. The material can be produced to generate controversy, eyeballs and/or attract outraged press coverage.
A number of gambling firms dabble in such strategies. For many years now Flutter Entertainment’s UK betting brand Paddy Power has produced content that can be funny, clever and controversial. But as with any company wanting visibility, whether voluntarily or not, that content has at times been crude or plain rude towards professional athletes, coaches or fans.
For all the talk of reducing advertising spend, in the U.S. this mainly applies to the firms chasing FanDuel and DraftKings, the two market leaders. In fact, such is the former’s dominance and ability to ‘lean in’ whenever rivals signal plans to reduce their ad and marketing budgets, one could even argue that it applies purely to those chasing FanDuel.
Tale of the tape
In any case, the increased focus on these costs is because EBITDA profitability, or at least break-even status, must be reached in the near term.
As Caesars Entertainment CEO Tom Reeg noted during the group’s first quarter report, with digital revenues of $238m, compared with negative revenues of $53m and a drop in EBITDA losses of just $4m compared with $500m in the previous year, the “chief driver” for those improved figures had been the pullback in marketing and promos, which he said was “dramatically lower” than its rivals.
For Penn Entertainment, losses from its interactive divisions were also minimal at $6m in the first quarter with revenues coming in at $234m. CEO Jay Snowden pointed to the launch of the group’s proprietary platform in Ontario with theScore Bet and the leadership it has assumed there since the province regulated just over 12 months ago.
For all the upbeat talk, however, it’s also worth remembering that Penn spent $2bn to acquire theScore Media and Gaming group in 2021, while the market share for its U.S. online sports betting brand Barstool continues to drop.
Previewing Penn’s results, the analysts at Roth MKM said Barstool’s first quarter “in key markets was nearly half” the level it was two years ago and “we still don’t believe Penn is willing to incur the level of investment needed for taking meaningful U.S. market share”. In other words, Penn is not willing to spend on marketing to gain market share.
The analysts added that “rather than sit on high-value Barstool/Score assets, we believe management will eventually resort to strategic alternatives” and a transaction could value Penn’s “digital segments at $3.3bn”.
For Penn there is the added complication that comes from owning a Millennial-attracting media/bookmaking company such as Barstool. The controversy and scandal that ended in the group sacking its host and influencer Ben Mintz last week, followed by founder Dave Portnoy’s reactions to it, certainly gave the group much visibility, “but not the type parent company Penn would have wanted”, said the Roth MKM team. From a business perspective, it is also unlikely to drive consumers to sign up to open accounts at Barstool.
In addition, if its digital units really are valued at $3.3bn, it begs the question of who would be willing to pay that much to acquire what is still low market share in the U.S.
Another firm that has acted on marketing spend is Rush Street Interactive, as its first quarter EBITDA losses improved by 80% to -$9m thanks to a 26% drop in advertising and promotional spend.
Different revenue scale
But for all those firms, especially Caesars and Penn as the larger corporates aiming for significant share in the U.S., lower advertising spend will surely mean less signups, account openings, exposure or brand awareness and will require them to sweat their existing players.
It’s also worth remembering that market leader FanDuel parent Flutter recorded £2.4bn in turnover in Q1, with close to half that total, £908m, coming from the U.S. Even second placed DraftKings at $770m is some distance ahead of Penn and Caesars when it comes to revenues and is making progress in iCasino, albeit with losses of $211m, while BetMGM’s net gaming revenues came in at $470m and losses were $82m.
For all the talk of taps closing and costs being watched, without marketing there is only so much operators can do to recruit players and keep revenues ticking over. That is why it will be fascinating to see which of the operators closing those marketing taps will be successful in sweating their player base, or, as they say in corporate speak, maximizing player lifetime values.
Things could also evolve much more quickly than imagined. With BetFanatics waiting in the wings and potential sustained progress from bet365, the marketing wars may restart sooner than anyone thought.
