New York’s 51% sports betting tax rate will give operators nightmares for some months yet and once again show why online casino is such a key product in U.S. igaming.
Sports betting continues to dominate the headlines, and with New York volumes showing the potential on offer once the biggest U.S. jurisdictions are regulated, this is understandable. But a more detailed look into figures recently released by BetMGM reveals why having a regulated online casino industry makes such a huge difference to U.S. operators.
During the group’s most recent trading update, CEO Adam Greenblatt spoke confidently and with much assurance about the group’s business case, performance and – very importantly for investors who seem to be getting increasingly anxious as to when this will happen for the industry – BetMGM’s path to profitability.
Greenblatt said 2023 would be the year when BetMGM will be EBITDA-positive, ahead of investor and analyst expectations.
He added that New Jersey was already positive in 2021, and Michigan had turned contribution positive halfway through last year, and that for BetMGM, “many months of positive EBITDA (lay) ahead of 2023”.
Analysts reacted positively to the company’s update. “Today’s update not only suggests MGM has an actionable plan, but also clearly defines a path to profitability,” said the team at Credit Suisse. “We think this clarity around profitability timing is both unexpected and ahead of expectations, and directly eats away at the bear case.”
The news that New Jersey and Michigan are EBITDA-profitable states for BetMGM is not surprising. New Jersey is the most mature jurisdiction in the country for online gaming and betting, and both have low(ish) tax rates. Most importantly, operators can offer online casino products to players there.
“Winds are turning”
In terms of product verticals, it’s well established that the lifetime revenues generated by online casino players are much higher than those of sports bettors. This has enabled BetMGM to become the overall market leader in combined share of online sports betting and casino gross gaming revenues in Michigan.
Its aggregate OSB and icasino GGR was $56m there, which implied an overall market share of 35.5% according to the analysts at Wells Fargo and, tellingly, icasino made up $46m of that GGR total.
This is all very positive for BetMGM, but one can not assume that the scenario is replicated across other operators in the space. This is because MGM can leverage its huge casino brand and its millions-strong M Life rewards database to coordinate its land-based assets and provide a powerful omni-channel offering to its digital customers.
Greenblatt also commented optimistically about the potential for new icasino regulations to be passed in the coming years, with bills already introduced in Indiana, Ohio, Iowa and Ontario, Canada.
Underpinning his optimism is that “the long term opposition that came from incumbent land-based operators” has largely dissipated and the reality of digital gambling is broadly accepted.
Michigan has shown that “land-based and igaming can coexist, and not only coexist but thrive when that reality is pervasive and the accepted position,” he said during the analyst call covering the group’s trading update.
“I think we will see support from incumbent operators and lawmakers looking at the tax revenues from Pennsylvania, New Jersey and Michigan and more substantial trends for ongoing regulation. The winds are turning and for me that’s the biggest takeaway,” he added. Greenblatt’s optimism is to be commended, but it doesn’t mean online casino regulation will now speedily spread beyond the five states in which it is already regulated.
Still, the fact that 40% of BetMGM’s customers used the company’s online sportsbook and casino products shows how important the cross-sell options from casino to sports and sports to casino are. To these can be added the 30% margins Greenblatt said the group recorded on the single game parlays its bettors wagered on.
High tax rates = strong tax takes
Talk of regulation and tax rates brings us back to New York and its 51% tax rate on online sports betting. It has been broadly criticized and many observers have said operators will not be profitable in the Empire State.
Of the four brands that are live, Caesars, DraftKings, FanDuel and BetRivers recorded $150m of handle when mobile betting launched on the weekend of 8-9 January and BetMGM’s figures are yet to be included in the total, and overall New York operators have recorded $600m in handle since launching.
In addition, Governor Kathy Hochul’s 2023 budget document outlined its expectation that New York state would collect $2.59bn in taxes from 2022-2027, which works out at around $500m a year in tax revenues. By way of comparison, New Jersey’s December handle was $1.2bn but its tax take in 2021 was $102.6m.
But as New York Senator Joseph Addabbo recently said in reply to a question on whether the 51% tax rate was sustainable, “if the product in New York is so competitive and the volume of bettors stays for the long term, then the issue of tax rate is not an issue at all.”
The flipside to that New York set up is an industry that will inevitably consolidate into a top three or four likely made up of FanDuel, DraftKings, BetMGM and Caesars. Indeed, it seems inevitable that brands like Wynnbet, which the Wynn group has already put up for sale, or Resorts World Bet will not compete meaningfully there.
This will lead to less competition for consumers and less pressure on operators to innovate. And even though Senator Addabbo also mentioned plans to put forward icasino regulation in the state’s budget this year, there is no guarantee they will be approved. Even if they did, many of those smaller operators likely will not be operational in New York by the time they were launched.
