Old wives’ tales and ancient myths

Old wives’ tales and ancient myths

  • Ken Adams, CDC Gaming Reports
May 15, 2022 1:54 PM
  • Ken Adams, CDC Gaming Reports

DraftKings announced its first-quarter results on May 6. CEO Jason Robins forecasted over $2 billion in revenue for the year. Revenue for the quarter was $417 million. In the same period, DraftKings lost $467 million, as compared to $346 million in 2021. Some would be discouraged by the loss, but not DraftKings. It has always tried to frame its narrative in terms of revenue and new players, not profit and loss. By those measures, it was a great quarter: Revenue was up 34 percent and new players up 29 percent to 2 million. The quarter was so good that Robins proclaimed DraftKings felt no impact from inflation, COVID, war in Ukraine, or anything else.

Robins said, “Gaming has generally been very well performing during economic downturns, recessions, inflationary periods, and the like. This has been well known about the industry for quite some time. And we’re certainly seeing the same thing materialize in our numbers.”

Yes, that was the conventional wisdom when casinos existed in only a few states. Today, however, except for an occasional outlier, no gaming executive, analyst, or observer believes it. The Great Recession, the events of September 2001 and most recently the pandemic exposed the fallacy in that thinking.

In a recent call, Jim Allen, CEO of Hard Rock, had quite another thought. He said, “We look at gasoline anywhere from $5 to $6 a gallon. There’s no doubt that in most regional gaming markets, that customer is a day-tripper. When gas is up 30% to 40%, that’s going to be problematic.”

Allen also said that while the company’s properties in Florida were doing well, business is softening. However, DraftKings lives in alternative universe and has not yet been forced to see the reality that other gaming business have learned to accept.

In the first place, DraftKings lives in cyberspace, relatively free of brick-and-mortar problems. Secondly, it is a sports betting company. While casino business in Florida may be softening, sports betting is exploding nationally. In the first quarter of this year, $25 billion was wagered on sporting events, generating $1 billion in revenue. Currently, 35 states have legalized sports wagering. That is DraftKings’s world and for the moment, it does seem recession proof. DraftKings is and always has been a horse of a different color.

DraftKings burst into the national consciousness in the fall of 2015, along with its archrival, FanDuel. They offered a fantasy sports service. It was before legalized sports betting swept the country. DraftKings and FanDuel were competing for new fantasy sports customers. They raked in customers by the thousands month after month, but spent all that cash to attract more customers. In one week in September 2015, DraftKings spent $20 million on television advertising. Besides gathering converts to fantasy sports, the two companies also collected attorneys general wondering about the legality of their version of fantasy sports. In general, the AGs thought fantasy sports as practiced by those two was not legal in their states. It was not the best time for DraftKings or FanDuel and it looked as if they might simply disappear.

The situation improved dramatically after the Supreme Court ruled in 2018 that federal legislation banning sports betting was illegal. Less than a month later, New Jersey legalized betting on sporting events and other states followed suit in an unbroken streak that has continued in 2022, with Kansas being the latest.

The enabling legislation usually left a loophole for companies like DraftKings to operate a retail sportsbook, provided it was under an established casino license. As a consequence, DraftKings and FanDuel are everywhere sports betting is legal, usually with the top two positions in market share. They know what they are doing, or at least they know how to acquire customers. However, as in 2015, they spend more on acquiring customers than they make from them.

Although it produces huge gross revenues, sports betting is a tough business for making a profit. In the four years since sports betting became legal in the United States, $125 billion has been wagered. The monthly handle is intoxicating; more sobering is the hold. In that same period, sportsbooks generated just $8.8 billion in gross gaming revenue, seven percent of the handle. Worse yet, taxes have to be paid based on the GGR. Taxes generated since 2018 are $1.2 billion. From the remaining $7.6 billion, all expenses must be paid, including advertising, bonuses, free bets, normal operating expenses, and for DraftKings and FanDuel, a share is paid to the host casino. Some states allow promotional expenses to be deducted before taxes are paid. That certainly eases the tax burden. But it does not put any more money in the bank.

In 2021, the gaming industry experienced record revenues. The trend continued in the first quarter of 2002. But like Jim Allen said, gaming revenues are softening and there are signs that trend will continue as the year progresses. Gaming is not recession-, inflation-, war-, or pandemic-proof. It is a national industry and like all other industries, gaming suffers from the ills and challenges of the economy. In the 1960s, ‘70s and ‘80s, gaming was believed and proved to be recession-proof. It was not a national industry, but drew its customers from a national database. By the mid-1990s and beyond, gaming was a national industry and that belief was reduced to the status of an old wives’ tale, a myth from our ancient, primitive past.

One day, DraftKings too will experience that reality, if it does not drown first in a sea of red.