Investors: Was Kambi Too Soft On DraftKings Migration Deal?

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Breakups are never easy, particularly when there’s paperwork involved. But Kambi and DraftKings recently announced terms for the end of their partnership with an agreement that seemingly benefits both.

The agreement will see DraftKings pay revenue-sharing through at least September 2021, with Kambi pledging to support DraftKings throughout the migration to its own platform.

Kambi CEO Kristian Nylén said the firm had secured a  “strong revenue stream” for the next 15 months. But some investors were less than thrilled with the agreement.

In fact, several took to social media to criticize the “soft approach” from Kambi.

Case for the hard-line approach

One portfolio manager who runs an iGaming fund suggested Kambi had leverage to push for a three-year extension to their deal as the migration to SBTech carried out.

“I think they’ve been too friendly in this case, leaving DraftKings with a contract equal to the minimum length of a migration process,” said the Stockholm-based investor, under the Twitter alias @dividendblower.

In other words, if the migration goes perfectly, DraftKings can move onto their own tech in September 2021. If it doesn’t go perfectly – a realistic outcome – then DraftKings still has optionality to extend the Kambi contract.

“In our view, it would have made sense to play hard-ball with DraftKings to secure a longer contract,” the investor said. “Especially given the recent costs of running DraftKings’ sportsbook without a proper revenue stream during COVID.”

Could other Kambi operators have prospered?

Kambi’s leverage, of course, was the power to stop providing services to DraftKings when its previous contract expired at the end of 2020. LSR understands a notice period would have been required before that termination could take place.

But even if the separation came in the middle of 2021, it would have heaped pressure on DraftKings to fast-track its migration.

It’s also important to place the agreement in the context of the wider US market. Investors argued that being less collaborative could have allowed other Kambi customers like Rush Street Interactive (BetRivers online sports betting) and Penn National (Barstool) to take market share.

Hard exit would have been “lose-lose”

However, Kambi has defended its decision, saying that kind of hard-line approach would have been worse for everyone involved.

“It’s lose-lose if you try to quickly push people off the platform,” Kambi chief commercial officer Max Meltzer said. “It’s not good for the customer. It’s not good for us in terms of revenues. And it’s not good for us from a brand perspective. If you just stand your ground and say there’s no way of working together, that’s damaging for your reputation.”

Meltzer also dismissed the idea that other Kambi operators had lost a chance to take share from DraftKings.

“That opportunity still exists,” Meltzer explained. “Think about bet365 in Europe. If you suddenly took that product away from them, the brand alone isn’t enough to retain their customer base. And for DraftKings, they have to move onto new technology and they have to retain their customers.

“And at that point in the transition, Rush and Barstool will be in a very good position. They won’t be looking to migrate, they’ll be innovating on top of what we’ve already got.”

US outlook is sunny for Kambi

More broadly, Meltzer forecasts a period of growth ahead for the supplier thanks to the uncertain economic environment.

He said operators looking to get into US sports betting would be less willing to do things in-house thanks to the associated large cost-base.  

“Outsourcing is going to become more commonplace, not less,” Meltzer said. “I can tell you that for sure based on our own experiences and conversations in the market.”

Kambi last week posted Q2 revenues of €15 million, beating analyst forecasts by 23%.