The size of the total addressable market (TAM) in the U.S. has been a topic of some discussion for some time, and it is easy to get lost in the amount of numbers and projections being put out by all industry stakeholders.
However, it is worth wondering how much the TAM, addressable or not, actually matters currently. This is not meant as a flippant remark. Indeed, without a TAM to size up the returns they can generate, all the operators, suppliers, starts-ups or affiliates involved in the sector would not be able to get the all the information and data points they need to produce their presentations to investors and get the sought-after funding to develop their companies.
Still, whether the U.S. has a TAM of $30bn by 2025, $300m in revenues from land-based betting after one year of activity in California (12% of the U.S. population), rising to $1.8bn should online betting become regulated, to the $1.1bn the New York market (6% of the U.S. population) should reach at maturity (whenever that is), it is easy to get lost amidst the size of the market and/or the projections that are made about how much operators or suppliers expect to generate.
Hyper-growth mode
This of course is because the industry as a whole is in hyper-growth mode, in terms of volumes, advertising, revenues (although not profits), and the wave of enthusiasm that surrounds the industry is creating wave upon wave of M&A, investments or fundraises.
However, it is worth asking whether the accuracy of the projections matters at this point since that is what happens whenever a new market, especially one the size of the U.S., opens up to regulation. The possible gains get hyped up while any underlying issues are swept under the carpet until they need addressing some years down the line. Investors are as aware of these facts as anybody else, after all they read all the information and data sources they can get on the topics, while consumers benefit from the effervescent competition that new state openings bring with them.
Deutsche Bank picked up on the issue in a note covering Florida (7% of the U.S. population), New York and California from early August. Referring to the legal challenge DraftKings and FanDuel have tabled to the compact between the Seminole Tribe and the state to operate mobile sports wagering in Florida, the analysts at DB said that despite the challenge, online mobile wagering in Florida is and will be “a monopoly” for some time yet.
This was always the likely scenario once the U.S. Department of Interior signed off on the compact in July. The compact is set to go live with mobile wagering in October, but “either way, given the importance of the Compact to both the Seminole tribe and the State of Florida, and considering the ~$500 mm of annual payments to the state that will recommence, after being withheld for several years, the prospects for a robust multi-operator OSB market in Florida appear dim, and we believe the investment community should begin to recognize some of the challenges in tribal-dominated states, as we don’t believe California is likely to be much different,” the team at Deutsche Bank says.
California dreaming
The situation in the Golden State, where the tribes’ mid-term referendum ballot proposes regulation only for on-premise betting in tribal casinos and in the state’s racetracks, does at least leave some room for negotiations. They haven’t completely ruled out the proposals put forward by commercial operators that would also include card rooms, sports venues and online licences alongside those for tribes and racecourses.
It also contains a 25% gross win tax that would be redirected towards mental health, homelessness and education agencies, with 1% going to problem gambling treatment versus 10% tax offered by the tribes.
But regardless of the good causes that benefit from gambling taxes, there is no doubt the tribes hold the upper hand and will decide on the type of betting regulations that come into force in the Golden State.
In New York, the consortia bidding for licences that will tax their activities at around 50-60% are vying to compete in a market where they are unlikely to generate profits for quite some time. The top bids appear to be the joint bid from FanDuel and DraftKings, alongside BetMGM and BallyBet and one of the bids from Kambi that includes Caesars, Resorts World, PointsBet, Rush Street and WynnBet.
NY state of mind
One industry observer recently questioned the point of “getting licensed in a state where no one will be making money anyway,” but for the industry as a whole a New York license is, at this point in time, about more than just profits. Being licensed in the Big Apple means selling a strong story to investors and, as Deutsche Bank put it, “for some, most notably the smaller operators, should they make their way into consortiums and if their consortiums are chosen, we believe entrance into New York could provide a halo for the sports betting story for the stock.”
But “for those on the outside looking in, and we do believe some will be on the outside looking in, telling a sports betting story, without the crown jewel state, regardless of the cost of entry, will be challenging,” the team at DB added.
For all the talk of actual TAM versus addressable TAM, or how the different tax structures will apply in different jurisdictions, much of this will be largely forgotten by the time industry consolidation and shakeout have taken place.
Nonetheless the addressable TAM remains a significant factor from both investment and operational perspectives, and the fact that the biggest and most appealing states are also the hardest ones in which to get favorable betting regulations passed makes that all the more acute.
