Tottenham Report: Herding cats

February 21, 2023 10:00 PM

Tottenham Report: Herding cats

  • Andrew Tottenham — Managing Director, Tottenham & Co
February 21, 2023 10:00 PM
  • Andrew Tottenham — Managing Director, Tottenham & Co

I understand the strategy of throwing as much money at acquiring customers in the hope that you’re one of the last companies left standing. Sports-betting companies that have strong cash flows from other sources (Entain, Flutter, Bet365, etc.) can withstand the losses. Those such as DraftKings need to get to cash-flow positive before the cash in the bank runs out.

The market liked what it saw when DraftKings announced its results, demonstrating that it could become cash-flow positive and still have roughly $700 million left in the bank. For good measure, it emphasised its focus on profit by laying off 140 people. Those employees at, say, an average cost of $150,000 a year, won’t make a dent, but the markets liked it and the share price has risen 15%.

With all the hype around and promotion of online sports betting (OSB), it seems that the long-term goal has been forgotten.

The amounts spent to acquire customers compared to lifetime value make no sense. The people attracted by large signing-on bonusses are not necessarily the most loyal. They tend to be the people who will stay with you for as long as you keep supplying some form of bonus. It is like a drug; as soon as you turn it off, they move on to the next “pusher”.

This is exactly the same as in the early days of Atlantic City. Customers who arrived at the casino and showed a bus ticket from New York or Philadelphia were given a $10 roll of quarters, occasionally more. They all used to talk amongst themselves and spread the word about which casino was offering the best arrival bonus. I know this, because sometimes after work, I took the bus to New York and overheard the stories they told one another.

Sometimes the controls were so weak, it was possible to walk into multiple casinos, show the ticket, and get the quarters at each one. Not my idea of a way to make a living, but you would be surprised what some people will do.

No casino wanted to be the first to stop giving away the quarters. Ultimately, though, they had to stop; there was no profit in customers who were happy to travel two hours each way on a bus to get a roll or more of quarters, but not spend much more in the casino.

The heavy promotion of online gambling is not winning the industry any supporters. The Super Bowl was wall-to-wall OSB advertising.

Because of the saturation of advertising and sponsorships, initiatives are already under way in several states to curtail or even ban advertising. It is doubtful whether any of these initiatives will succeed, but now is not the time for the industry to be upsetting people.

The prize is not legalised OSB, but online casino games (iCasino), which are much more profitable. To get iCasino legalised, the industry will need strong political support.

During the legalisation process, the industry made much about the tax revenue from OSB and how it would be a good source of revenue for the states. The problem is that few people, including the politicians, understood that the tax was on gross gaming revenue, not the handle, and the industry did not do enough to disabuse them of that notion. They thought it suited their interests to let people think the tax revenue would be higher than it actually was.

OSB launched and the headlines shouted about the success and size of the handle generated, though a not-insignificant portion was the operators’ money being recycled. When the tax receipts were announced, some were extremely disappointed and others felt they had been duped.

In New York state, the tax is 51% of gross betting revenue and, not surprisingly, the operators would like to see it reduced. It did generate almost $700 million for the state. At the same time as lobbying for a tax reduction, they are pushing for iCasino to be legalised. This is why they need friends. Without more than a few friends in political circles, the chances of either of these happening are very slim.

True, State Senator Joseph Addabbo has introduced a bill to legalise iCasino with a tax rate of 30.5% and a potential 24 licences up for grabs. But he is just one state senator and he has tried before.

If you think about it, the optics are not good. To get OSB legislation passed, the industry makes a big song and dance about how it will be a good opportunity for them. Secondly, people who have been betting with illegal operators will switch to licenced operators. And third, it will generate taxes for a state government in need of revenue.

New York passed the sports-betting legislation in April 2021 (and in February 2022, state Senator Addabbo introduced an iCasino bill, which failed). The first online sportsbooks went live in January 2022. And here we are, just over a year later, and operators have already been lobbying hard for a big reduction in taxes and legalisation of iCasino. Otherwise they might not survive.

State Senator Addabbo has duly obliged and has introduced another bill that would reduce taxes, but the reduction is dependent on more OSB licences being issued. He needs to build a coalition of senators to support his bills and once passed, get Governor Kathy Hochul to sign them. This is anything but an easy ask.

Some OSB operators are withdrawing from states, because they cannot see a path to profitability. Even if Addabbo’s bill is passed, who knows if there will be enough operators still in business for the tax reduction to take effect?

If iCasino legislation fails, the industry has only itself to blame. In the crazy world of politics, sometimes it is a good idea to take a step away and think how others see you.