It’s very early days in New York, but sportsbooks in the state will have to turn to core competencies to be profitable there.
It’s finally here. New York, one of the big four states in the U.S., saw BetRivers, DraftKings, FanDuel and Caesars go live this weekend with regulated online and mobile wagering. Another five operators – BetMGM, PointsBet, WynnBet, BallyBet and, when it is ready, Resorts World – are also set to launch in the near future.
Early data shows the appetite that is present in New York for regulated sports betting. The state has already “recorded 5.8 million geolocation transactions in the state’s first 12 hours of legal online sports betting,” according to geolocation firm GeoComply. It added that this was “far and away the highest transaction total for any market’s first half day” and more than twice the total from Pennsylvania, the next highest state.
New York is also likely to “generate more tax revenue from its four legal online sportsbooks in their opening weekend than the state’s retail books have made in their first two-and-a-half years of operation.”
Click image to see animated video
The headlines are all about big numbers and New York is set to be the lead state when it comes to betting handle. With a tax rate of 51%, however, revenues will be a different story and the topic will also dominate for the coming years.
More than profits – for the moment
As I wrote back in September, being the holder of a New York sports betting license is about more than just profits at this point in time. It’s about being able to sell a story to investors, profile and visibility.
One need only look at the failure of the Fanatics-backed consortium to get licensed in the Big Apple to realise how important the optics are in that regard. As the New York Post also reported recently, Fanatics owner Michael Rubin’s decision to pass up on acquiring PointsBet and instead build its own sportsbook may prove pivotal in the company’s plans to enter the OSB space.
The difficulties involved in building such a product are hard enough, but to then acquire the customers and develop the levels of brand awareness from scratch might prove even beyond Fanatics’ very deep pockets.
Still, as the FTX-Play Up saga has shown, there are plenty of sportsbook brands that are up for sale and it is unlikely that there will be no further M&A activity from Fanatics, or others, in the space.
NY state of tax
The issues linked to the tax rates will remain, however, and as Brendan Bussman of Global Market Advisors commented recently: “We have an exceptional and I would say intolerable tax rate” in New York state.
Bussman said he was pessimistic about a tax rate reduction: “Name me one legislator who wants to reduce taxes on something and doesn’t enjoy revenue. These high-tax states are not a good model for anybody. If you want the private sector involved, you’ve got to give them the runway to do it. When you sit there and put tax rates over 50 percent, the only winners are the states. You don’t have a dynamic market. You don’t have a competitive market.”
With then-Governor Andrew Cuomo modeling New York’s regime on the monopoly setup that operates in New Hampshire, where sports betting is the sole province of the state lottery and that explains the 51% tax rate, Bussman’s pessimism is understandable.
Quality products
There is however a more optimistic case that can be interpreted from the current setup (bear with me). For a start, with nine sportsbook brands set to compete for a share of New Yorkers’ wagering spend, there will be a healthy level of competition.
And although the tax set up makes bonuses and promotions not deductible from operators’ revenues, thus making it even harder to reach profitability, it will force them to market more ‘reasonable’ free bets and bonuses, which even industry insiders agree are reaching proportions that don’t paint the industry in the best light.
Finally, and perhaps most importantly for companies that have become so used to pulling marketing levers to attract and retain players, the quality of their products – think single game parlays, odds and prices, in alliance with their trading and risk management capabilities – will have to be at their absolute best to maximize returns and margins.
SGP specials
This is already evident with regard to single game parlays (SGPs) and the importance the product has acquired in a very short space of time. The analyst team at Deutsche Bank produced some very insightful data on SGPs last week and how they impacted on leading books DraftKings and FanDuel in Illinois.
Both operators account for 65-70% of OSB handle and aggregate share of parlay handle is 80-85% in the Lincoln State, but FanDuel’s parlay mix as a percentage of its handle is 30.7% vs. 23.1% for DraftKings in the past year.
FanDuel hold on parlays is 20.9% vs. 13% for DraftKings, but aggregate hold for FanDuel has been 9.7% vs. 3.9% for DraftKings, which could be down to FanDuel’s first-mover advantage on SGPs, pricing hiccups within DraftKings’ third-party parlay product or how promotions are used to “skew hold percentages higher when used with greater frequency.” But it’s also highly likely that it is down to better trading and risk management from FanDuel’s in-house team.
For one final point of comparison, I would also point to France, where a ~54% tax on turnover in 2010 (switched to gross profits in 2020) forced operators to adapt to a new paradigm. After some tough early years, the French OSB space is now the leading vertical and, as Sportnco showed recently, companies active there have managed to be profitable in one of the toughest regulatory environments for online sports betting.
