Approaching its fifth anniversary, the regulated US sports betting market beyond Nevada is starting to show some real signs of maturity.
Legal sports betting is now available to more than half of the country’s adults across 33 states plus the District of Columbia, and a few more launches are on deck this year. Close to 100 individual brands have come together to create this industry from relative scratch, working within a complicated patchwork of state and federal laws and regulations.
Revenue is pouring in. Operators collected a record $7.6 billion in total sports betting revenue in 2022, and 2023 will represent another year of substantial growth by its end. People who stare at spreadsheets say this market is on its way to $20 billion or so.
Operator hold — the sportsbooks’ win percentage — is on the rise too. There is a lot of noise in the month-to-month graph, but look at the overall trend across this initial period of expansion:
There is a myriad of little reasons that can partially explain this increase, but they all center on the broader movement toward operator profitability.
US sports betting hold ticking higher
During the early days of post-PASPA lawmaking, stakeholders delivered endless hours of testimony describing the low-margin nature of sports betting. Sportsbooks in Nevada had historically held around 5.4% of their wagers, and the established industry recited that number in statehouses all around the country. Operators hoped to educate lawmakers on the financial realities of their business.
Here’s William Hill in Kansas from 2018, for example:
While sports betting will help generate revenue for the state of Kansas, the reality is that sports betting is a low margin business. In Nevada, the average hold – the amount retained by the operator after paying winning customers – in recent years has been around 5%. That margin has been trending downward due to the increase in mobile wagering and InPlay wagering, which is wagering on an event after the event begins. Both mobile and InPlay are lower margin products.
Nevada’s hold has inched upward over time, but it remains a tidy 5.7% across the five years since PASPA’s repeal.
Are we getting what lawmakers were sold?
That is not the case for the majority of the newer markets.
No other state has a lifetime hold below 6%, and there are only two (Colorado and Iowa) below 7%. New Jersey is hovering right at that 7% number.
Most of the other competitive online markets are meanwhile somewhere between 8% and 10%, while some of the retail-only markets are up into the low double digits.
Going for a ride with sports betting hold
It should be said that hold is a volatile measurement, partially due to pure variance in the outcome of sporting events. States also use different accounting methods to track their sports betting activity, which adds more noise to the numbers.
What looks like a big swing for a sportsbook in a given month is sometimes just a function of outstanding tickets on past or future events that have accrued on their ledger. And there are even some individual high-stakes bettors whose results can definitely move the needle for a given operator over a short timeframe.
Even with that fog over the data, the upward trend in nationwide hold is becoming more pronounced over time.
- 2019: 7.0%
- 2020: 7.2%
- 2021: 7.5%
- 2022: 8.1%
FanDuel pushing hold higher
This movement is becoming visible for most large operators, but it’s the market leader that is responsible for the majority of the overall increase in hold at the national level. Take a look at the Big Four national brands plotted against each other:
These brands are responsible for more than 75% of all sports betting volume in the US, with FanDuel alone accounting for at least a third. And it is the one driving the whole train to the bank: FanDuel’s hold for the last calendar year was 9.8%, markedly higher than the national average of 8.1%.
Down with the Kings?
For all the vitriol directed at its transparent efforts to thwart sharp bettors, DraftKings margins meanwhile continue to run noticeably leaner than its rival. Its hold for the last calendar year was almost a point below the national average at 7.2%.
That gap between FanDuel and DraftKings is only continuing to widen quicker as time goes on. FanDuel has held more than 10% of bets for eight consecutive months and nine of the last 10, while DraftKings has recorded a double-digit month just one time over the last four years.
Look how their lines diverge when we just plot a lifetime comparison of running hold for those two brands:
Considering the underlying causes
For the most part, it is not the betting lines.
The largest national operators that serve multiple markets are, at least for now, almost universally offering competitive prices – not amazing prices, mind you, but competitive ones. With a few exceptions in monopolized and retail markets, most betting in the country is being done at comparable odds.
Promos, however, are partially responsible for the increase.
Hold me closer, sports betting promos
The leaders have chosen to saturate new states with promotional credits, and it has proven to be a worthwhile investment for their market share. Bettors appear more eager to place riskier bets when they are not wagering their own funds, so these operators tend to reclaim a larger percentage of the bonus bets they give out. It might have been their money to begin with, but this dynamic works to inflate an operator’s on-paper hold.
This promotional front-loading for big launches like Arizona, New York, and Ohio is still working itself out of the sports betting economy. FanDuel, which spends the most on bonuses, sees the biggest effect from this mechanism.
There is also something to be said about the overall influx of newer, less experienced bettors as it relates to this trend.
In-play betting …
In-play betting could be a factor in the shift, though its impact is harder to spot in the data.
Contrary to William Hill’s testimony, case studies from international markets suggest that in-play wagers may have slightly higher margins than straight pre-match tickets. In-play betting should represent an increasingly large share of the total volume as the industry matures.
It therefore follows that hold could naturally increase as in-play betting becomes more prevalent.
Some are probably screaming at their screen about parlays and, in particular, same-game parlays. They play a starring role in this storyline too.
… and same-game parlays
These bets, which combine (potentially) correlated plays from a single game, had historically been unavailable at Nevada sportsbooks prior to 2018. But with more powerful pricing algorithms from modern operators — and in response to overwhelming demand from customers — that is not the case anymore.
SGPs are now one of the most popular formats for casual bettors, and bookmakers love to write them. Operator margins on these markets anecdotally approach 20%.
While most major US sportsbooks now offer SGPs, FanDuel was the first to really perfect them from a user-experience standpoint. If you browse around on the casual side of sports betting Twitter, you might be surprised at how much of your timeline is filled with screenshots of $20 parlays from FanDuel and DraftKings.
It is no accident that the two biggest sports betting operators are the two best at offering and promoting a robust menu of same-game parlays and in-play markets. And the rise in the popularity of modern betting formats is a factor in this narrative. But don’t confuse cause and correlation.
First chapter of US sports betting coming to an end
The broader push toward operator profitability sits at the root of this whole discussion. It was seemingly inevitable.
Phase I of this US sports betting expansion has been a resounding success by most measures, but it has been running on non-renewable fuel. Operators have combined to spend/invest/lose billions of dollars in the race to acquire customers, and they have so far been able to convince their shareholders to focus on the promise of long-term profit instead of looking at the gaping short-term losses.
Investor patience has waned, though, and the largest operators now face some particularly public pressure to be profitable. Here’s how BetMGM CEO Adam Greenblatt summarized this trend to the Wall Street Journal last year:
“I think what we’re seeing is, everyone is looking around going, ‘Hang on, it’s gone too far. We need to make money.’ The market, frankly, is expecting us and others to make money.”
This pressure is what is really responsible for the increase in hold at the end of the day. It is driving a pullback in promos in maturing markets, and fueling the investment into SGPs and other novel formats. It is forcing operators to make tough decisions, like catering to a specific type of bettor or even rethinking their entire market presence in some cases.
US market leaders profitable in 2023 and beyond?
The plan is starting to come together.
FanDuel says it is already profitable in a number of US markets and expects to be fully in the black by the end of 2023. So do BetMGM and Caesars, the latter of which finished Q4 2022 just barely in the red. DraftKings also appears to be headed toward profitability, albeit a bit slower, with a 2024 target for reaching its goal.
The natural question is how high hold will go to support this journey. Will operators find ways to return more of their proceeds to customers once they claw their way out of debt, or will that value extend exclusively to shareholders? How high can hold get without creating an untenable product?
Despite what a vocal minority might argue, the data does not provide any indication that sportsbooks are, to date, squeezing their customers too hard. And if bettors are satisfied with the way things are headed, then that path to profitability for operators starts to look more like a wide-open highway.