Volume 41 | May 20, 2021

WEEKLY EDITION
May 20, 2021

How to Think about the Valuation of US Sports Betting Companies

by Stephen Crystal

Founder, SCCG Management

For years, sports betting has been considered an exciting but low margin business for US casinos, who typically realized around a 7% profit margin for their handle.

In today's sports betting environment, blazing across the United States, financial markets view these new companies as hyper-growth businesses, valued like cloud-based Software as a Service (SaaS) companies with multiples over 20x. These are companies that also typically project their Compound Annual Growth Rates at around 30%.

Mature sports betting companies outside the US, which have been running retail and online sports betting operations, have indeed outperformed their partners in the US, maintaining regular margins of over 15% of the sports wagering handle, more than double that of their US counterparts.

How have they done this? In addition to the operational efficiency of a mature operator who benefits from significant investments in modeling and automation, they also put more betting products in front of their customers. On a solid day, if a US sportsbook would have 350 to 400 betting options, or markets, overseas operators would have four times that number of markets available to bettors. This includes in-play betting, which represents well over 50% of the mature operator's handle.

However, the performance of these mature operators cannot begin to justify these US sports betting companies' valuations. These companies are not only reinvesting all their earnings into their growth companies but buying revenue, spending three to four dollars in marketing and promotions for every dollar in the handle they generate.

Let's further consider that while US sportsbooks have been operating without "official league data" for decades, the largest US sportsbook companies have all negotiated with the major sports leagues who now charge for access to their "official league data."

This new business for the leagues is projected to be a new USD 89M revenue stream for both data and video and a further USD 4.23B in direct and indirect revenues due to their collaborations with legal sports betting operations. These represent new operating expenses to sportsbooks.

So, how do US sportsbook operators believe they will deliver the kind of value investors are expecting?

Direct collaboration with leagues should drive larger shares of wallet in terms of sports betting spend from consumers. They have intensely loyal fans due to the league's massive reinvestment in their fans in advertising and promotions.

Access to high-speed "official" league data will allow US operators to expand the delivery of live, in-game wagering markets, creating more products to put in front of consumers.

The proliferation of high usability online and mobile sports betting channels will increase the access of products to sports bettors, increasing their share of gambling wallet spend.

The US is a vast and rich consumer market with enormous opportunities for companies delivering wagering products that have never been available in most US states.

US sportsbook operators with solid brands, highly available betting platforms, and large available betting markets should be able to claw back some or most of the estimated USD 150B in illegal gambling in the US.

Last, like their high valuation SaaS technology equivalents, these massive US sports betting brands will be able to harvest and sell the precious consumer data their sports wagering systems will generate. These high-quality worldwide consumer databases will collect and profile millions or billions of consumers with very few regulatory limitations.

In Florida, Republican Senator Jennifer Bradley sponsored failed legislation that would have allowed people to opt-out of having their financial data retained for marketing. In fairness, this isn't unreasonable when you consider how much personal data is already accumulated for marketing purposes from new social media companies to the profoundly entrenched credit card and insurance industries.

When considered as a whole, these are advantages that mature sports wagering companies recognize and are driving their entry into the US market en masse.

If you are interested in talking with us about how companies recognize the value of the US market and how your company can join this movement, reach out to us. We're ready to talk.

Client Partners related to Today's Feature Article

SCCG Management works with our clients to bring best in class solutions to the entire gaming vertical, including client partners such as:

Bettorlogic - AI and Data Driven CRM platform that gives bettors a reason to place a bet.
LSports - Realtime sports data API solution.
Scout Gaming Group - Premium social/fantasy sports wagering content and platform.
Triggy - Live score messaging provider.
Picklebet - Full featured online esports betting platform
Shank Marketing - Multichannel digital marketing strategy and traditional advertising services.
Hollywood TV - A network of studios creating live games, deployable in a multi-channel experience.
Spinmatic Entertainment - Online HTML5 casino games with the highest standards for data encryption.

Check out these and our other related client partners below!

Related Client Partners

Liked the article? Check out our Client Partners below.

New Hampshire’s Sport Betting Monopoly: Weighing the Pros and Cons

Most states have allowed multiple operators to run sportsbooks in their state in the new sports betting environment. Still, New Hampshire elected for a one-player system and introduced a bidding war that was won by popular service DraftKings. I wanted to look into New Hampshire’s decision to utilize a monopolized sports betting model, find out just how effective it has been for them, and see if it will be a beneficial plan going forward.

Pros:

Immediate tax revenue for the state

State Rep. Tim Lang says that, “Sports betting has been hugely successful in New Hampshire.” The state lottery oversees sports betting, and has taken over $225 million in wagers since July 2020. Since launch, the state has collected over $15.5 million in tax revenue.

The only real Pro I can see with New Hampshire’s current operation model is the immediate tax revenue they are collecting under their current agreement with DraftKings. DraftKings agreed to give up a 51% cut to New Hampshire's state to win a highly- competitive bidding war, which is a significantly higher rate than bookmakers give up in other states for mobile wagering. For example, the state of Tennessee collects taxes closer to 20% range. New Hampshire has a relatively low population compared to the rest of the country (they rank 41st nationally), so this 51% take can be seen as a pretty large victory for the state. New Hampshire is most certainly cashing in on DraftKings’ exclusivity deal, but the downside to this is for the time being, all competition is virtually eliminated.

Prioritizing online wagering over retail betting

For the last three months of 2020, New Hampshire saw Gross tax revenues that were almost double the amount that New York gained. This is a staggering statistic given the population of both states. The main difference between these two states is that New Hampshire allows mobile betting, whereas New York will not have mobile wagering until later on in 2021. There is no argument against the convenience of placing bets from your mobile device, and New Hampshire was right to prioritize this over setting up a retail infrastructure.

Cons:

Eliminates competition

The main downside to the current setup in New Hampshire is that there is no more room for DraftKings’ main competitors. While this may be a win for DraftKings, it is a huge loss for the people of New Hampshire. No other bookmaker is authorized to operate within the borders of New Hampshire, which means if you are looking to place bets with another company, you’d be out of luck unless you went to a different state to place your wagers. Seeing as how none of New Hampshire’s neighboring states have passed sports betting legislation, this essentially leaves New Hampshire residents without any additional legitimate offerings. There is a stipulation in the DraftKings deal that if New Hampshire elects to provide one or two more operators, that 51% cut would decrease to 21%, but as it stands, there is no indication that they will do so.

This begs the question: Would New Hampshire be better off economically if they gained 51% of DraftKings’ profits or gained 20% of the entire competition’s profits? While I can see the short-term benefits of having a single operator within the state, I believe this will hurt New Hampshire in the long term. Giving consumers options is a good thing and limiting the number of services may bottleneck their tax revenue long-term. Boston-based DraftKings does have a top-notch product, but there will always be cases where technical issues arise. If you are a New Hampshire resident, this leaves you without a legal betting option during that time. There were instances throughout April where New Hampshire players could not place bets due to one technical issue or another. When there are service outages, your only other options to make wagers are to cross state lines to a legal state, inconvenient for New Hampshire residents, or play offshore, which is technically illegal.

Another common betting practice is line shopping, where players will look between different books for price discrepancies. A single-payer system eliminates this practice, which may turn off some of the more advanced gamblers. Regardless of the outcome, the state of New Hampshire and its residents will be hurt most under these circumstances. Suppose I am a state passing sports betting legislation. In that case, I want to be sure to supply my constituents with the best experience possible, while also gaining a significant share of bookmaker’s profits in the form of tax revenue.

Verdict

While New Hampshire has made impressive strides with their sports betting legislation, more work is to be done on their end if they want to keep up their trend of increasing tax revenues month-to-month. They will most likely need to allow other companies to obtain their licenses to operate in the state, to keep their player base interested. Their neighboring states will inevitably allow sports betting in some capacity. New Hampshire residents could look to bet out of state for various reasons, whether to take advantage of promotions run by other companies or get more favorable odds. Adding competition would also ensure a better player experience, which is vital if you wish you retain your player base.

While New Hampshire got some things right when laying out their sports betting infrastructure, they need to take a step back and look at the bigger picture. They will have competition from other states in the not-too-distant future and will need to have a solid plan to keep up the momentum they have from being an early adopter of online sports betting. I think players will soon be privy to some generous promotions as new operators inevitably begin to enter the area. While New Hampshire has one of the lowest populations of any state in the US, there is no reason they cannot see success long-term if they implement the right measures, including expanding a retail presence, and eventually scrapping the DraftKings monopoly they currently authorize.

WELCOME TO YOUR ROUNDUP OF EUROPEAN IGAMING NEWS

Our European weekly iGaming feature article summarizes the thoughts of Jake Pollard, an experienced journalist and editor who has covered the online gaming and betting industry for many years. He has written for the leading media outlets as well as operators and suppliers in the igaming space. His areas of focus are wide-ranging and include regulatory developments in the US, emerging markets in South America and how European countries are adapting to a decade of igaming regulation.

UK retail betting to consolidate

A major shakeup of the UK retail betting landscape could soon be on the cards as Ladbrokes Coral parent company Entain considers a bid to acquire the UK retail estate of its historic competitor William Hill.

With Hill’s new owner Caesars Entertainment wanting to dispose of the group’s non-US assets, Entain CEO Jette Nygaard-Andersen recently told Bloomberg that such a deal “could be an interesting opportunity”. Ladbrokes and its stablemate Coral already make up 40% of the UK’s high street betting shops, although any deal to buy William Hill’s estate would be subject to a competition enquiry.

Entain is moving aggressively on the corporate front, it recently turned down a $11bn bid from its US joint venture partner MGM and is in the running to acquire Australia’s Tabcorp for $2.7bn. It also recently bought Enlabs AB, a strong operator in the Baltic region. FanDuel parent company Flutter and the UK’s largest independent bookmaker Betfred could also be in the running for more UK retail shops if the opportunity suits them. It seems certain that further major consolidation will be taking place in the UK this year.

Is sustainability sustainable?

Excuse the poor wordplay, but as bookmakers and casino operators announce their sustainability charters and environmental social and governance (ESG) strategies, it’s easy to be cynical about such initiatives.

Think DraftKings signing Brazilian supermodel Gisèle Bundchen to head up and advise on the group’s ESG efforts and thoughts of ‘trophy signings’ (in soccer parlance) come to mind. It might seem overly negative to doubt the industry’s efforts, but whenever a gambling company puts out a press release highlighting its corporate conduct or sustainability credentials, worries about the next regulator fine or news item about levels of problem gambling spring to mind.

Maybe old habits die hard; and in fairness there have been no bad news stories of operator misconduct recently. The industry is also taking steps to (finally) address female representation and increase diversity levels across the board. Let’s hope the effort is sustained (sorry).

New world moves

Super affiliate Catena Media’s Q1 results once again emphasized how much European iGaming actors are looking to the US and newer markets and beyond their original shores. Catena said it now classified the US, Japan and Latin America as new ‘incubator’ markets and Germany, UK and Sweden were in the mature column. Of course, the ‘Old World’ markets are still highly valuable. Although it’s interesting to note that Catena mentioned Italy, definitely a mature iGaming market, as one of the newer countries where it’s been growing.

SCCG Management: New and Upcoming Events

STEPHEN CRYSTAL IN LAS VEGAS THROUGH END OF MAY

Stephen Crystal will be in Las Vegas at the SCCG office through the end of May.

If you are interested in meeting with in Steve in Las Vegas during this time, please contact him directly at stephen.crystal@sccgmanagement.com.

SCCG Management is located at 105 E. Reno Avenue, Suite 8, Las Vegas, NV, 89119

Stephen Crystal of SCCG Management announces the extension of its business development partnership with Scout Gaming Group to bring fantasy sports wagering technology to North America.

Las Vegas, NV, United States – March 16, 2021 / sccgmanagement.com / -- Stephen Crystal, SCCG Founder, announced today that the company has extended its partnership with Scout Gaming Group, the industry-leader in premium fantasy sports technology solutions, for a further year.

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Stephen Crystal of SCCG Management announces a partnership to bring SUZOHAPP sports betting technology to US Sportsbooks.

Las Vegas, NV, United States – March 16, 2021 / sccgmanagement.com / -- Stephen Crystal, SCCG Founder, announced today that the company had joined forces with Suzo Happ, an industry-leading technology solutions provider, bringing best-in-class industry solutions since 1955. Said Crystal, "We see Suzo Happ's offerings for North American sports betting operators as the kinds of technology that allow companies to deploy their services to customers through robust, reliable, tested hardware solutions."

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SCCG Weekly Newsletter Volume 41