Everything You Need To Know About DraftKings Surcharge | Sports Betting News
Legal Sports Report revenue analyst Eric Ramsey joins the pod crew to break down his analysis of how much money DraftKings could make by implementing a surcharge on winning bettors in higher-tax states. Also, a debate on whether legislators are to blame for high tax rates and whether FanDuel will follow the footsteps of DraftKings with its own fee.
Full transcript
Matt Brown (00:13):
Hello, and welcome to episode number 244 of the LSR Podcast. My name is Matt Brown, joined each and every week by the brightest minds in all of the gaming industry. With me, my man, Adam Candee, back for a ride today. If you want to follow him on the Twitter, it’s Adam Candee, two E’s, no Y. And we have a third voice coming in. Yes, you know him, you love him, you’ve read his words over at Legalsportsreport.com. He is in fact, Eric Ramsey. Eric, you don’t even use the Twitter machine, though, really? It’s not a thing that you’re really into?
Eric Ramsey (00:46):
Not unless I have to.
Adam Candee (00:46):
He has it?
Eric Ramsey (00:46):
Yeah, I have it.
Matt Brown (00:46):
But you’re not an active tweeter, and I’m not going to call it X, I’m not going to say X or whatever it is. I don’t know what you do now-
Adam Candee (00:52):
No.
Matt Brown (00:52):
… when you do it, but whatever. It’s still Twitter and tweets and stuff.
Eric Ramsey (00:55):
You guys are the only people I want to interact with, and I can do that right here on the podcast.
Matt Brown (01:00):
Oh, my heart.
Eric Ramsey (01:00):
So why do I need social media?
Matt Brown (01:01):
Why do you melt my heart at the very beginning? Save that to the end there. Guys, everything we do, absolutely free. So do appreciate the subscription. If you want to hit that little button right there, if you want to go in subscribe, rate, and review too, you can do all that. We do appreciate that.
(01:16):
So, Adam came up with a great idea and it’s one of those things — I know, look at the face, if you’re watching on video, you can see how he responded to all of that.
Everything you need to know about DraftKings surcharge
Matt Brown (01:25):
But we’re going to do a very focused podcast, instead of ping-ponging around what’s going on, have an in-depth conversation to something that is very interesting in the sports betting landscape because in theory, it could change the way business is done, or it could be a gigantic flop. And so that’s where we want to go with all of this. And if you are familiar with the industry, you know what we’re talking about, the DraftKings surcharge thing that they brought up on the earnings call.
(01:51):
And Adam, I’ll kick it to you to do the nuts and bolts of all of this to fill people in that weren’t following along with all of that, but this will be where the focus of the discussion will be today.
Adam Candee (02:03):
It made sense to me that this is the issue that everyone in the industry is talking about, and we have gone into depth over the last few days in our coverage of it. Notably today, we’re recording this on a Wednesday and I’m going to direct everybody right from the start to a fantastic piece that Eric did, running some numbers and diving into what it would mean in practice for DraftKings to put a surcharge on winning bettors in high-tax states. That is the crux of what we’re talking about here.
(02:33):
If you’ve been on some summer vacation, you don’t know of the news, DraftKings announced on its Q2 earnings presentation that it has plans to implement a surcharge of 3 to 4% on winning bets in certain high-tax states. There are four of them: Illinois, New York, Pennsylvania, and Vermont. And this comes ostensibly in response to Illinois raising its tax rate to the highest level of 40%, it’s a tiered system between 20% and 40%. We already know what New York is at, 51%. There’s been so much talk of, how will operators respond to these high taxes? Will they eventually pass the costs on to bettors? And we looked at it and thought, well, maybe they’ll do it by hiding it in futures markets or places where the hold is not so obvious, right? No. DraftKings came out and said, “We’re going to do it in a much more obvious way.” And Jason Robins talked a lot about that.
(03:32):
I’ll stop there because we’re going to get into a lot of the details of this and let you guys talk a little bit more.
Matt Brown (03:37):
Yeah. So Eric, one of the interesting things about this again, is in our previous lives there’s always been talk of like, how do you make these businesses more profitable? How do you go about it? We knew back in the poker world you could … How much rake was being taken out of various tournaments and stuff like that, was always a little gray area type stuff. Sometimes there was transparency, sometimes there was not. Sometimes your jaw would hit when you’re like, oh my God, really? They were taking that much rake? We saw the same thing in the DFS world as well, right? Where it was the, oh my God, that tournament had a 27% rake and all? It goes on, but it is the way that these companies make money, a little bit harder to hide that on the sports betting side of things.
(04:19):
As Adam mentioned, sure, you might, can kind of mask it in the futures markets and stuff like that, but bettors are going to figure that out, and once that gets out or everything, and of course if you start adjusting juice, that is very, very obvious whenever you start to see that, as well. So again, you’ve seen it kind of under the table in the poker world, you’ve seen it kind of under the table in the DFS world, this is a different approach where it’s right out in front of you and it’s like, no, this is just what we’re doing and we’re going to sit there and line item it for you.
Eric Ramsey (04:44):
Yeah, it happens to be the very same cast of characters that we saw in DFS. We’re talking about really DraftKings and FanDuel here and how they’re going to handle this notion of fees.
(04:54):
I think we learned in the DFS days that customers aren’t broadly very price sensitive until something like this happens, until an operator takes it one step too far and … Until they feel like they’re being taken advantage of. So some of the question I have out of this decision from DraftKings is, how many customers will feel like they’re being taken advantage of versus how many will believe that DraftKings has a good enough product that it’s worth the extra juice on their bets?
(05:25):
So, funny you bring up DFS because really, lots of parallels between what we saw with the sort of fee wars, the vig wars in DFS versus what we see now. And I will say one thing that has changed is the transparency. At least DraftKings is putting it right on the betslip so the bettor knows exactly what they’re getting into. That’s a little different from the previous versions of these fee wars we’ve had, but yeah, lots of parallels to the old DFS battle between these two as well.
Matt Brown (05:51):
Adam, as a bettor, I will say this before we dig into what we think here. There is, I at least do respect the transparency part of it because as you mentioned, you could have tried to do this on the low, right? Again, you just add, you build it into all these markets that an unsophisticated bettor wouldn’t understand that it’s getting built into, right? And so at least, at least, and this is not a defense of what’s going on, and we’ll get into how we actually feel about all this, but at the very least the transparency is at least nice, where we’re not uncovering this or whatever. It’s like, hey, here’s what we’re going to do, and it’s a damn line item on your ticket.
Adam Candee (06:31):
Might be some … A little bit of Hershey’s syrup and expired milk, to put it that way. But I think you look at this fee and ask, well, why is it as transparent as it is? Because in a way, it is an attempt by DraftKings to get people upset about these taxes. It is an attempt to get their customers mad about it and for DraftKings to say, “Hey, don’t blame us. We’re not the ones who put this tax structure in place.” They are essentially trying to achieve a uniform tax rate of roughly 20%, and all of these states come in above 20%.
(07:08):
Now politically, I don’t think it’s a smart calculus. I don’t know that people are going to necessarily think, I’m going to go to my legislator and say, “Why are you making the taxes on poor DraftKings so high?” No, they’re going to look around in all of these markets where they have a lot of options and say, “All right, I’m just going to use my other app if I’m worried that I’m going to get taxed by DraftKings.”
(07:31):
I just wonder if the money potentially raised, which Eric has estimated at up to $220 million annually, depending on the way this is all structured. I do wonder if the perception hit that DraftKings is going to take here will be worth it, but, big but, the question is, will anyone else come out and do the same? Did DraftKings provide cover for anybody else to implement a similar surcharge? We’ve already seen BetRivers, obviously a much lower market share operator, come out and say that they do not have plans to do that. FanDuel’s earnings call is tomorrow, and that is the big one that we’re waiting to see because if FanDuel says, “We are not doing it,” DraftKings could get left on a pretty lonely island here.
Matt Brown (08:17):
So Eric, let’s look at this kind of the big picture here. And a lot of people go, I don’t even understand, why in the hell would DraftKings do something like this? And so it is a for-profit business, right? I mean, the goal is to make money in doing all of this. And so we start to look at these tax rates and people say, “Yeah, well it’s only in those states,” but we’ve already seen states come back in and start to raise taxes. They review stuff, they raise taxes. There’s really no reason to believe that if this is a common practice and this works out, that almost every state will probably at some point come back around and revisit this and start to raise taxes. Right? Well then now, we’re looking at a business that already operates on fairly slim margins as it is anyway, having to pay these really, really crazy high taxes. And you start to then at that point wonder about the viability of the business overall. Right?
(09:07):
And so I think people step back and go like, dude, this is so stupid. Why in the hell would you ever do that? But it’s almost like trying to get ahead of it, right? It’s like trying to cut it off at the pass here because yeah, it’s just these states right now, but we still have California and Texas to come. Why in the world would Texas and California take anything less than 50% or more if they decide to pass anything if it’s working in all these other states? And then these other states that currently have it go back and they meet in their legislature and then Bob talks to Tom and Tom talks to Frank and they go, “Did you see what happened over here? Well, why the hell are we only charging this?” So it’s kind of like a deal of, they’re almost trying to play defense here, right?
Eric Ramsey (09:43):
Yeah, just a quick thought on that too. You have to wonder though, if states, if this might have the opposite impact and states might see that DraftKings is charging a fee and say, “Well, why don’t we just raise the tax rate a little bit then?” I think there’s a chance that this could really backfire in that way in some states.
(10:01):
More broadly to your point, yes, this is clearly a response to the market conditions in some of these states that make it difficult for DraftKings to have a profitable business. It’s also something that has been coming since PASPA. We’ve talked about how the market leaders in particular have chosen to operate by giving away a ton of money to customers and essentially securing their foothold in this marketplace. But that has to come back, you have to pay the piper at some point, and we’ve known for a long time that something was going to have to change in the status quo. The way this industry exists right now, it just happens to be DraftKings taking the first step here to … At its core, this is about DraftKings looking out for its future as a company and trying to find a way to be more profitable in this space than it currently is being.
Adam Candee (10:52):
Guys, I want to push back a little bit on this idea because it’s based on the concept of small margins, of profit margins being very thin, which traditionally has been the case. We know that’s what sports betting has been about for decades on decades. And of course, the history of sports betting as we know it, is generally attached to a casino as an amenity and something that has never really been the main profit center for a company, for a casino, that if you’re getting by on the historical 5%-ish margins, that yeah, you do need volume in order to make that happen.
(11:29):
Well, DraftKings et al., FanDuel pioneered this, are taking a different approach. They’re pushing everybody to much higher hold products in order to make this all work. Same-game parlays, and the fact that Jason Robins has been someone, the CEO of DraftKings, who came out there and said, “Yeah, we think parlays are a win-win, we think customers are getting the best of this too.” Well, in a way, this is a response to that where I think people are looking at it and saying, well, hold on a second. You’re telling us that this works because your margins, your hold, are more like 11, 12, 13% in good months. Right? You’re making a lot more profit than other companies are.” And the response from those sportsbooks is, “Well, that’s the cost of operating in the regulated space, X, Y, and Z.”
(12:20):
Is it, though, or is it the cost of being able to show growth to shareholders? That’s the reality. We understand that, and we respect that as well, but I do think some of the pushback you’re seeing is that DraftKings has been very forward in its discussion of pushing people to higher margin products and talking about the fact that they don’t want winning bettors, right? That long term, they don’t want winning bettors and they’re putting a surcharge now on winning bets. Eric can tell you more about the mechanics of why we think they’re doing it that way to try to avoid some tax burdens, but I think some of this is DraftKings getting the response from the public that is based on the steps they’ve taken in the past that have been to say, “Yeah, we’re trying to make more profit.”
Matt Brown (13:09):
Yeah, and so here’s the thing about that though, to me. What happens is, is the lifetime value of that type of bettor is not very long and it’s not very high, because those bettors are the bettors that flame out, and those are the bettors that don’t last a long time. So it’s kind of like, it’s a chicken and egg thing. We’re going, so it’s like they need to make the profit, as much profit on those people as they can now because again, the lifetime value of those people isn’t very long. So again, it kind of goes back, I know what you’re saying about like yeah, it’s higher profit margins and certainly they make more than a traditional sportsbook did a decade ago, brick and mortar here in Las Vegas or something. But at the same time, the business model is predicated on being able to sustain the churn that comes with that type of client. Right? And again, if you’re eating into that margin with these crazy high tax rates, then it does change the structure and certainly the future of any potential growth and/or profitability.
Adam Candee (14:09):
You’re right, churn is something that has to be factored in, but I would also say when it comes to lifetime value, look back at the last few earnings presentations from DraftKings, roughly about a year ago, especially. Where they talked about same state growth and the fact that same state growth was actually fueling their march toward profitability. Right now, some of that same state growth is because they’re pulling back on marketing costs and they already have the customers there, but the idea of churn, if we’re going to talk about it that way, if we’re going to talk about churn with DraftKings, we talk about churn with everybody and say, are we necessarily churning 12% hold players? Probably some, yeah, but if what the American customer wants is $20 same-game parlays with 17 legs, then maybe they’re not all churning. Right? I think there’s a question that’s a reasonable question that we might never get the answer to, because it’s probably deep inside the profit loss statements beyond what we’re going to hear from these publicly traded companies. But it’s a really interesting thing when we discuss, is it continually acquiring new customers to churn at that level or are you trying to retain some of these players who are losing at higher numbers than other customers?
Matt Brown (15:22):
And Eric, I want to circle this back again to kind of our past lives or whatever, and this is all I have to draw from, and so I am making … I should clarify all of this, right? I am making opinionated statements here and kind of like I am making my own forward-looking statements that aren’t backed up by any sort of scientific data and research right now, because all I’m going from is stuff we have from the past.
(15:43):
So we saw it in the poker world, we saw it in the DFS world. Right? It’s like when it’s super hot and everyone’s in and whatever, and then you see it becomes this slow attrition whenever people realize somewhere along the way that I’m not good at this anymore. Right? Then so you see, it’s like, they’re there, they’re there, they’re there, they’re sustainability, sustainability, and then it just starts trickling off and trickling off and trickling off. We saw it in poker; we saw it in DFS. I don’t know that it will be apples to apples in sports betting. I do believe there are a healthy amount of these people that are the high-hold customer, that at some point are going to look and go, “Man, I lose these things every single time I do them.” And that doesn’t mean they’re going to quit doing them, they might still do them every now and then or whatever, but I think that like, hey, doing this multiple times a week or doing them for $20 now becomes doing them for $10, and doing them for $10 becomes doing them for $5, whatever it might be.
(16:33):
I do think there becomes a point where there is at least a little bit of self-realization amongst the customer as well, which we saw in these other semi-parallel industries, not again, not apples to apples, to where there is going to be that, right? And so that’s why I just keep, it’s a guess for me what’s going to happen five, six, seven years down the road. But I do think that the reason they’re so worried about this now is because they know what this is going to look like further down the line.
Eric Ramsey (16:59):
Yes, totally agree with you on all of that. Just to restate what Adam said, we just haven’t seen it yet, as far as we can tell. In sports betting, what that means is open to interpretation. I think part of that does come down to product and the betting menu that operators like DraftKings and FanDuel have been able to provide. It’s somewhat different in DFS, and I’m not sure exactly how to describe it, but there’s a bigger entertainment component I think in casual sports betting than there ever was in casual DFS. I think there’s a lot of players who do zero research and just want to get $5 down on a multi-leg parlay and have a little sweat while they watch the game, and that certainly won’t go away as easily. But obviously a valid point you make about the long-term of this, and really, we’re talking about $220 million of revenue for DraftKings. Remember, that’s $220 million being funneled out of the sports betting ecosystem, the customer balances. So yeah, there’s certainly a big impact to think about down the road.
Adam Candee (18:06):
Matt, to that idea. I think here’s where the big difference is. The big difference is with DFS and with poker, you might realize, I’m not good at this, but the trick is, in those endeavors you’re playing against someone who is better than you and that person is the one who is beating you. And you realize eventually, I can’t beat someone who is either that much better than me or has technological advantages that I don’t or algorithms or multi-entries and all of these things, whereas with sports betting, there hasn’t really been that air quotes “enemy,” right?
Matt Brown (18:37):
Sure.
Adam Candee (18:38):
It’s just, you bet against the house and what happens, happens. DraftKings is risking creating that enemy, right? They’re risking creating that enemy of being like, “Oh yeah, we are the ones just charging you more to be able to do it.” And Jason Robins said, “We think people will be willing to stay with our product because we have a better product than others.” We’re going to find out, right? I don’t know. They’re the ones who’ve probably done the market research to know whether that’s the case or not, but if DraftKings ends up on an island here, if others don’t follow, then we are going to get a pretty clear test case of whether that idea plays out.
Will FanDuel follow the footsteps of DraftKings?
Matt Brown (19:16):
I want to shift the conversation just a little bit to maybe someone who is the real enemy in all of this, and it’s maybe these legislatures that are putting these giant tax rates out there in the first place, and get a discussion kind of going about that.
(19:29):
Eric, a guy you and I know from way back actually, kind of added his thoughts on this. Taylor Caby is a guy that is well respected in the gaming industry, a guy that has started and sold multiple different companies. Currently invested in another company within the space, as it goes, and basically his take on this is, “I don’t expect bettors to care about tax rates, but they probably should,” was kind of his whole thought in all of this, which is, here’s the deal. We are already seeing some of these smaller books fold as it is anyway in the current climate and the current landscape because they can’t make any money. Right? And so now as bettors, we have always said, and even us on this side, whether you’re a big bettor or not, competition is good. The more options you have is good. The innovation that these people will have to continue to do whenever there are other people innovating, is good for the customer. There’s all kinds of things that come along with this that are good for the customer.
(20:30):
Well, his kind of point is saying that eventually there will be a breaking point, one way or another. So it’s either you charge a tax like DraftKings is trying to do, or you have to slip it into the vig being higher or do whatever, something like that because again, if we get to a point where every state is at these ridiculously high tax rates, the only way for these businesses to survive is to do something like this. Now, his point is not saying to add a surcharge, but he’s saying at some point the rubber will meet the road as to, how do you add more money to the bottom line, right? And so basically just saying that, “I’m not saying people should support it, but I am saying that if you do care about price as a bettor, you should also care about tax rates.” Is basically kind of what he was saying in his long point. I would really recommend people going over and reading his blurb and his thoughts over there, it’s just twitter.com/taylorcaby.
(21:21):
But kind of our thoughts here just on the states and their role in all of this as well. Is it OK to say, “You know what? We’ll charge this because you’re going to pay it, so it is what it is. We don’t care it’s going to end up costing our citizens and our customers and whatever and all that stuff like that. We don’t care because you’re going to pay it regardless”?
Eric Ramsey (21:39):
I mean, my very short answer would be yes, that’s the way it is and that maybe is the way, maybe, I’m probably OK with that at first blush. There’s a little, this is one area in which these operators did shoot themselves in the foot a little bit over the course of the past five years, by boasting to investors about how big the potential was for this market and how much money was flowing through their companies. And then at the same time, the same, that afternoon, going to a state legislature and talking about how they are unable to make money in this business, and that’s difficult for a lawmaker to hear. It’s also worth considering the fact that a lawmaker’s duty to the state is to maximize state revenue. That is their entire job, is to capitalize on these businesses to the extent they’re able to.
(22:28):
So in short, I don’t fault the lawmakers for the way they’ve handled this for the rates in New York or Pennsylvania or Illinois or anywhere else. That being said, the whole structure taxing GGR is a difficult decision in this industry that really turns the screws on operators. It lowers the value to the customer. It certainly is not ideal for the industry itself, but it is the way to maximize revenue to the state, and in that sense, they’re doing their duty to their constituents. You know?
Adam Candee (23:00):
Matt, if they wanted, if the operators, if the businesses, wanted to make that case, if they wanted to make that point, the time to do it was when Governor Andrew Cuomo said, “It’s going to take at least 50% tax rate for you to play in New York.” They didn’t implement that tax on any of the operators. Every one of the operators who is in New York agreed to that tax. They proposed the tax rate of over 50%. That was the time to say, “Hey, you know what? There’s no way for us to make money if this is the way that you want to tax this thing,” because legislators naturally are going to go back now. Leave Pennsylvania out of the deal, because we used to look at Pennsylvania as, oh my god, 36% effective tax rate, and it’s still pretty high obviously. But then New York went and trumped it, and now we’ve seen other states try to come in as high or higher, like with the Illinois tiered tax structure.
(23:55):
The industry, when this was a new thing and when they were racing through state legislatures getting this passed, you found a lot of state legislators who really didn’t understand this all that well. And they were being fed information by lobbyists, by industry advocates saying, “Hey, here’s the tax rate in Nevada. Here’s the tax rate in New Jersey, where it’s 13 and a quarter on online sports betting,” and they went along with it, right? Like, we want to get this, we want to capture this tax money, we don’t want to lose this tax money. Well, legislators got smarter, right? Executives got smarter, and they said, “Well, hold on a second.” Just like Eric mentioned, “If you’re going to tell us about profit, and we are the ones who are trying to legalize this activity for the purpose of attempting to make more money for our state, why aren’t we taxing this at a higher rate?” We saw Ohio go back and double, its 10 to 20, and now we see Illinois go back and take its 15 and move it up much higher for the most profitable operators.
(24:56):
So I’m not unsympathetic to the businesses coming in and saying, “Hey, this is a lot and we need to find a way to deal with it,” but I don’t know that I would necessarily look at the legislators as being the enemies in this case because there were ways to push back on this before we got to the point we are now, before we got to the point where you agreed to the rate in New York. Then they tried to go back immediately, less than a year later, they tried to go back and get that rate changed in New York and Senator Joe Addabbo among others said, “Why would we do that? You pitched it, you agreed to it. We’re making good money off it. We shouldn’t do that.” So there’s going to be a middle ground, you’re right. Eventually we’re going to land somewhere in the middle. I don’t know that it’s going to be short or easy from the industry side to get there, though.
Matt Brown (25:43):
I look at this I guess, more selfishly, from a better standpoint, whatever, because I just know how this ends up. It eventually is going, everything ends up getting trickled down and to the customer. And so it ends up, there will be whether it is DraftKings surcharge at X percent, or FanDuel coming in and which by the way, we can speak to that, what they may or may not do. Their earnings call is actually tomorrow on that, but adding a nickel to whatever, or something like that. Some sort of extra something. I just know how this all ends, because there’s not going to be this whole, oh, yeah, whatever, we’ll just accept the extra costs and it’s fine. We’re just not going to be near as profitable as we thought we’re going to be, and this is just going be … It’s not a charitable deal that they’re doing here, right? It’s still trying to make cash. And so for me, it’s going to be worse for me.
(26:36):
And so that’s why I kind of look at these. I do look at the states and say, I have no problem charging a high tax rate, I have a problem charging what I would consider to be an egregious tax rate on some of this stuff. And because that really does affect the market writ large and the customer overall as well, and it will be past that. We will see books fold, we will see books not even get involved in certain states, we will see all these different things, it will all happen.
Eric Ramsey (27:00):
That’s OK, though. Those things are OK, that’s part of this industry. Not every mediocre sportsbook needs to succeed in this industry, just as a counterpoint to that. I don’t disagree with anything you’re saying, but I don’t think the measure of success is necessarily how many operators are able to participate in this industry. You know?
Matt Brown (27:19):
Well, I guess, but again, just for a customer, options are better. Right? I mean, if I only had a choice between Ford and Chevy and whatever, sooner or later, Ford and Chevy and Toyota are going to get together and they’re going to understand like, hey man, it’s just the three of us. So hey, under the table, this is how we should start doing business like that. And to think that that is out of the realm of possibility, I think is being a little naive in this situation. I think that would certainly be the case if we get to a point where there’s only four or five books and that’s all there’s ever going to be, then there’s going to be … it’s going to change the industry. It’s going to change the landscape of everything.
Adam Candee (28:00):
I think naive is a big word to throw around here. You’re being a little naive if you think that having competitors is what’s going to necessarily keep prices down. There’ve been competitors all the way along here and none of the competitors have given a compelling product enough to either force the big boys to change what they do, or to somehow create a product that competes with the ones at the top. I get it. The idea of worrying about collusion and price fixing is only realistic. We see it with the airlines, right? Less airlines means higher prices on the airlines, but the fact of the matter is, we haven’t had competitors who have forced anything to change in that way.
(28:42):
So I see where it’s one possible outcome, we’re down the line, it’s worse for the bettor, but we’re still in a situation where we have a fair amount of competitors. There’s still a lot of the tier three type operators who are out there who are ostensibly competing with DraftKings and FanDuel, but they haven’t forced them to change anything. Right? In fact, they’re making them take these anti-competitive kind of steps at the same time that they’re still operating without the market contracting. So I don’t know that we would say that this is definitely how it ends. It’s possible, absolutely, but I don’t know that that’s how it ends.
Matt Brown (29:21):
I’m not-
Eric Ramsey (29:21):
That’s why I think this-
Matt Brown (29:22):
Yeah, go ahead.
Eric Ramsey (29:23):
I think this exact topic is so interesting, this surcharge, because this is what you’re talking about. This is DraftKings finally saying, finally telling the customer, “OK, we have to give you worse value.” They’re admitting to the customer, “We are going to start to take more money from you, sorry,” and this is coming to fruition your fear here and the response is really going to tell us whether or not we need to be worried about it. What the other operators do, whether customers start to find they migrate away from DraftKings. So far to this point, we haven’t seen customers chased away by anything on any app. All the prices are pretty much the same, you can find what you want at a large number of apps. There’s not been any reason to really move your business somewhere else.
(30:07):
So here we are at this crossroads with DraftKings, where they finally put customers to a decision here like, are you going to stick with us or are you going to go? This is coming to fruition what you’re talking about, your points are well taken here. I’m just not sure we’re going to see it change much going forward.
Matt Brown (30:24):
Yeah, and to be clear, I’m talking, this is not like in a snapshot of the near future, type deal. Obviously I’m talking further down the line. I mean, this is, yes, there are tier-three competitors currently. I don’t think it’s crazy to think that we can pretty easily assess that a decent amount of those are going to go away over the next five years. We’ve already seen it in the early stages of this, and if it gets tougher to compete from a financial standpoint, then obviously we’re going to see more of those fold and we’re going to see more of those go away as well. And so I’m more looking at the long-term picture of an industry and what does a healthy industry look like? And a healthy industry to me, doesn’t look like three or four different choices. Right?
(31:08):
And at the end of the day, I kind of see us barreling towards that fairly quicker than I thought. I mean, maybe that was the end game anyway, 10 years from now, 20 years, maybe that was the end game as it was anyway, but it seems like this might speed up the process if we don’t give any of these tier three a shot from the get-go, right? Because if they can’t afford to even do anything at all, if they had aspirations. We thought even there’s guys waiting in the wings, we keep talking about bet365, and keep talking about whatever. Well, maybe we get to a point where they were waiting in the wings anyway and then now they’re like, see, this is why we waited in the wings because now they’re going to do this nonsense with all this and we’re not even going to give it a whirl. To hell with it, we’re out of here. And so again, don’t know that’s going to happen. This is all just speculating, forward-thinking type of stuff, but that’s where I’m coming from in this.
Adam Candee (31:54):
Sure, and that makes perfect sense. And I think what would happen is that that is when we start to get into the check and balance of the regulated market. That is not just the free-market competition part, that becomes the regulator part. Right? That becomes the part of saying you subjected yourself to regulation that is supposedly in the best interest of the consumer. And we talk all the time about consumer protections when it comes to a sportsbook not running off with your money or we just saw in New Jersey where bet365 was ordered to pay more than half a million dollars for odds that were improperly adjusted on bettors over the course of three years. I think you also can see regulators and/or legislators step in if you see the market getting to a point of collusion, to a point of price fixing that is not good for the customer. That there’s another check and balance that can be in there, even if the market does come to that point.
(32:45):
DraftKings, FanDuel, BetMGM, Caesars, Fanatics, 365, whoever it is, we are not talking about too big to fail here. Right? This is not the automakers or the airlines, it’s sportsbooks. And so I think you’ll still have that potential check on the system down the line, like you’re talking about, five, six, seven years down the line. If it gets to the point where we see companies trying to step too far, then it becomes more of a political issue for legislators and regulators to jump in on.
Matt Brown (33:14):
It’s like with healthcare, way I’m looking at this right now, where it’s like we wait for something to break before we come in and try to fix it, as opposed to being preventative and not letting it break in the first place. And so that’s why I’m kind of where I am with all this, where I’m like, we’re not, I think if we were all given truth serum right now and thought about where this is going to lead us down the line, if every state comes in and wants to charge 40 to 50% tax rate and all this stuff of that. Giving us all a truth serum, we know where this leads again, six, seven years down the line. So it’s like, do we wait for it to break and then come in and try to fix it, or can we try to fix it, or can we try to prevent it from breaking in the first place? It’s kind of where my passion in all of this is with a lot of this stuff because it’s always like, well, let’s just wait until it breaks and then we’ll come in and try to put the pieces back together, as opposed to just going, hey, here’s an idea. The pieces don’t have to shatter in the first place. Why don’t we try to do something like that?
Adam Candee (34:11):
Yeah, yeah. I see that, and just to put a bow on it, for the most part, look at who’s doing this. Right? It’s the big states that can say, “You can’t live without us.” Illinois, Pennsylvania, New York are states that can all look at the operators and say, “If you want be able to profit, you need us, and we’re going to charge you a price that is commensurate with you needing us.” And when it came to New York, they basically forced the operators to play chicken and look around at each other and say, “All right, well I’ll vote for you if you vote for me, and say we’re all not going to compete in this market.” And all it was going to take was one of them to say, “You know what? We will, we’ll go in and blow up the whole thing and lock certain sportsbooks out of the market.” So we’ll see how it all plays out, of course.
(35:00):
I’m very interested from Eric’s perspective, when you went in and ran the numbers on this, Eric, and came up with up to $220 million and of course the question of whether or not this surcharge would be taxed. Were you surprised at all by the way this played out?
Eric Ramsey (35:16):
Yeah, huge. This is one of those little nerdy details that most people are just going to have their eyes gloss over and tune out for the next three minutes, but the tax treatment on these surcharges is super interesting and really pivotal to the way it affects DraftKings’s bottom line. We arrived at an estimate of $220 million across these three states. That goes down by about 100 million if those surcharges are taxed, you’re talking about tax rates that are 40 to 50%, so you can just remove 40 to 50% of those fees. This is money that may not necessarily go to DraftKings. Depending on the way policy makers handle this, it could end up winding up in the tax coffers of these states.
(35:55):
So I don’t know that anyone knows how that’s going to work just yet. I can say that it’s very clear that DraftKings is doing everything they can to separate these fees from the actual business of sports betting that they’re in, the framing as a surcharge, the way they positioned it to regulators. On the sly, they talk about this being a separate transaction from the sports bet itself. So they’re hoping this will get tacked onto their bottom line at the end. I think there’s a real chance that this goes through the taxation process as well, and they come out with 40 to 50% of these fees that they collect instead.
Matt Brown (36:32):
All right, guys, to wrap things up here, let’s put on our prediction hats. We’re not going to have to wait very long on this one, considering as we were recording this here on a Wednesday morning, that FanDuel will actually probably have some sort of response to this on Thursday. We have seen, despite the fact with them being bitter rivals in all this, we have seen them play nice in the sandbox before, right? Because at the end of the day, there is a common goal where they’re both trying to go towards. My guess is FanDuel is not going to implement any sort of surcharge with the caveat of saying, “However, we are monitoring these rising tax rates and yada,” basically leaving the door open to be able to do something like this in the future. All but saying, “We’re going to sit back and see if this works for DraftKings and if this shit works for DraftKings, then we’re going to do it too,” right? I mean, that’s kind of my opinion on how it’s going to go.
(37:25):
Eric, I don’t know about MGM, I don’t know about Caesars. I can only imagine they would follow suit with whatever works for DraftKings or FanDuel, because considering whatever works for them seems to be what ends up being the industry standard for whatever. What do you think we come out of tomorrow getting in? And what do you think, let’s just call it whatever, six months from now?
Analysis of how much money DraftKings could make
Eric Ramsey (37:45):
Yeah, it’s tough. I think you’re right that they’re likely to take a wait-and-see approach. I think that might be beneficial to them. Look, they could have already come out and said, “We are not going to do this for the foreseeable future.” That would’ve been a little bit of a PR win at the right time, but maybe they want to let DraftKings implement this first. There seems to be a little … Robins in his comments to the investors wasn’t fully committed to this. He was presenting it and laying it out, but there was a lot of, “We’ll see what everyone else does. This may or may not work.” There was a lot of uncertainty kind of coming through the phone line there. So I wonder about that.
(38:26):
And I will say, the fact that DraftKings did this alone makes me think that FanDuel is slightly … I don’t know what kind of competitive communication there is in coordination between the people that make these decisions at the two companies, but if DraftKings made this decision without a sense that FanDuel was also going to do this, then that seems like that’s a real big, big step. My hunch is that they have some sense that FanDuel is going to follow them. I don’t know where that necessarily would come from or how that might come to be, but my sense is that at least they expect that FanDuel will follow them, if that makes sense.
Matt Brown (39:03):
Adam, let’s put that hat on for you as well. What do we come out of tomorrow with? And then, what do we come out of this whatever, 90 days, six months down the road?
Adam Candee (39:12):
Working backwards in what Eric said, the level of competitive communication depends on the endeavor, right? DraftKings and FanDuel have poured $6 million into Missouri for signature gathering to try to get that initiative on the ballot. They can coordinate when they want to coordinate. Now, are they coordinating on this? My hunch is no, because they already have a lobbying arm, if they wanted to go about this in a coordinated way. The sports betting alliance of DraftKings, FanDuel, Fanatics and BetMGM is out there in states that do not have sports betting, in some ways trying to build a groundswell to be able to get legal regulated sports betting. If they wanted to speak up through that lobbying arm and say, “We are not going to take it anymore,” then they could have all done that together and it would’ve been, I think, received a lot differently by the market if you have three of the four leading sportsbooks and a very well-capitalized billionaire and Michael Rubin, all coming out together and saying, “We’re going to have to fight back against this.” I don’t know that that’s what’s coming here.
(40:18):
I feel like DraftKings took the step it feels like it needs to take, and they’ve done that repeatedly, right? There have been layoffs, there’ve been marketing slash, there’s been affiliate spend slash. There have been all sorts of ways that DraftKings has gone about trying to improve its bottom line. To me, this feels like just another one of those. And the thing we always talk about with FanDuel that makes me think it’s not coming tomorrow, is that Flutter is a much, much larger company with many, many different revenue streams, right? DraftKings is going about this on their own, but Flutter/FanDuel doesn’t have to, right? They’ve got the ability to withstand this. Barry Jonas from Truist the stock analyst talked about that. He was like, and I’m not saying, he said, “I’m not saying that FanDuel won’t. I’m saying they don’t necessarily have to, based on their financial position.”
(41:11):
So I think, Matt, the way you said that FanDuel can take a wait and see on this if they want, they have the luxury of being able to see if DraftKings ultimately follows through on this, and maybe they come in with their own surcharge that’s a lower one, that they say, “Well, hey, you know what? DraftKings is going to charge you X percent. We’ll charge you only 50% of that because we still care about you, even though we’re trying to make money off this.” Maybe they only do it in certain markets, right? And I mean markets in the sense of betting markets, not in the sense of high tax markets. Maybe they find a way to message this in a different way than DraftKings. It’s a fascinating thing to watch overall.
Eric Ramsey (41:48):
What a spot for FanDuel. They just got handed a ton of leverage in their biggest markets. It is what it is. I don’t fault DraftKings for doing what they did, but if you’re FanDuel, you just can’t make a mistake now. Whatever you decide is you’re going to look like the good guy on the back end of this.
Adam Candee (42:05):
And Matt, before we get out of here, I have one little conspiracy theory thing to throw out there, and maybe it’s not totally conspiracy theory, but at the beginning of this year, we went through a very big discussion with DraftKings and their VIP and their head of VIP going to Fanatics. And the question of whether Fanatics would be taking some of their higher value players. I’m really curious how that factors into all of this as well, in terms of what DraftKings’ position is. Are they in a spot where they potentially are losing some of their customers who contribute more to that losing revenue bottom line? And so they’re kind of anticipating that that could happen, even if it didn’t happen immediately. Even if Michael Hermalyn can’t take VIP players immediately, he can at the end of a year. And so is that something where they look forward and say, “Yeah, our whales, who tend not to be the best players, we’re potentially looking at losing some of them, losing a chunk of our revenue, and we need to find a way to replace it?”
Matt Brown (43:05):
So we all agree they’re not going to do anything on it tomorrow, but do we also all agree they’re going to leave the door cracked at least? They’re not going to definitively say, “We’re not doing this,” right?
Adam Candee (43:14):
It’d be stupid not to, yeah.
Matt Brown (43:15):
It’s going to be, the door is cracked to say like, “Eh, we’re going to monitor these states and if whatever, yada, yada, yada.” At the end of the day, we talk about people not being price sensitive. If it was a nickel on every bet, if it was a nickel, people would be like, it’s a nickel, whatever, and people wouldn’t care. It’s like you start saying percentages and if you look and it’s now 20 something cents or 30 something cents or whatever, something like that, if you make it a flat nickel, it’s not the best for the bettor, it’s not the best for the consumer. I truly believe, though, that 99% of people don’t care if it’s a nickel, but-
Eric Ramsey (43:48):
It’s probably better than changing the odds, I think, but, yeah.
Matt Brown (43:51):
Yeah, yeah, it’s a nickel, right, right, right?
Adam Candee (43:54):
But to your point, Eric, I just want to bring up one other great point from your story, which again, go to Legalsportsreport.com and read Eric’s story. You said that it equates to the charge on winning bettors, it equates to betting at -114 and having to break even at 53.3% instead of 52.4%. Correct?
Eric Ramsey (44:14):
Yeah, the numbers are small on the page. When you look at the actual numbers in dollars and cents, they’re kind of tiny per ticket and per dollar bet. But in practice, this small 1 or 2% difference in a player’s margins can really make a slightly winning player a loser or make a slightly losing player a serious loser a lot quicker. So these relatively small taxes on the bettor do have a really big impact on their ROI in the end.
Matt Brown (44:47):
As Adam said, head over to Legalsportsreport.com, read the article that Eric wrote and let us know, we’re available. Hit us up on the Twitter machine, let us know if you like these deeper dive type podcasts here on just specific subjects and whatnot. And how often do you want to get Eric back on this thing, right? I mean, look at this guy, coming in here, dropping all of the knowledge and sparking up some really good conversation.
Eric Ramsey (45:09):
Nerding it up in here a little bit for you guys.
Matt Brown (45:11):
Yeah, it’s so good. If you haven’t done so already, we do appreciate the follow. We do appreciate any ratings and reviews and things like that. We really do. Go in, and read those and take all of that stuff to heart.
(45:21):
For Adam, for Eric, I’m Matt. Talk to you guys next week.