Pennsylvania last week became the latest state to enjoy record sports betting handle in September.
But the state’s unique reporting system also helped to reveal just how frothy the current market is.
PA is currently the only state that shows exactly how much operators gave out in “promotional credit” – free bets and bonuses essentially. And the numbers in September were eye-opening.
Heavy spend on free bets, bonuses
Operators took $13.1 million in online PA sports betting revenue.
However, they gave out $12 million in promo credits, equal to 92% of online revenues.
That means taxable revenue was $1.1 million, and the state took $390,000 in tax with its nation-leading 36% effective rate.
Breaking it down by PA sportsbook
Despite being live for only two weeks, Barstool Sportsbook gave out nearly $2.2 million in credits. That was despite losing $656,000 in revenue, even before the credits are considered.
Relative newcomer Unibet also had a lot of promo credit in September. The brand had $1.28 million in online betting revenue but gave out $1.47 million in credits.
Put another way: a huge amount of PA sportsbook revenues come from recouping free money given to players, at least on their first pass through the book.
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What’s going on with promos?
Of course, the promotional credit numbers are inflated in September thanks to the return of the NFL betting and various customer-acquisition programs.
NFL results also went the bettors’ way, meaning revenue was lower than normal and therefore bonusing was higher as a percentage of GGR.
But a wider look at PA figures shows that Unibet has promo’d away 93% of its lifetime online revenue in the state. Likewise, DraftKings has given away 58% of its to-date online revenues, and BetRivers is at 41%.
That’s an enormous number. One European sportsbook told LSR its bonusing figure is around 10% of GGR in the UK. The US is a growing market and companies are scrambling to grab share, but there are other factors encouraging operators to spend big.
Death and taxes
The first is the PA tax structure. Operators are taxed on net gaming revenue after promotional credits are considered.
So DraftKings actually made a $920,000 net revenue loss last month. That loss can also be carried forward to offset tax liabilities in future months, according to the Pennsylvania Gaming Control Board.
But DK can also report the gross revenue of $1.4 million to investors:
What it means for DraftKings stock
DraftKings currently trades at around 33x expected FY2020 revenues. It recently raised almost $1 billion at that valuation. In the prospectus for that offering, DraftKings projected Q3 revenue of $133 million, with a $205 million outlay on “sales and marketing.”
It did not specify what percentage of that revenue figure was generated via free bets or promotions.
Kindred’s US SVP Manu Stan said there were two reasons for Unibet’s high spend: the return of football season and the way the firm reported bonuses.
“That second part is being worked on together with the PGCB,” Stan said. “The reality is that we had a high spend in promotional credits in September, but not as high as 90%.”
PA does not distinguish between free bets, promotional credits, and bonuses in its reporting requirements. That can lead to some ambiguity around how different mechanisms should be counted.
What does this mean for US sports betting?
One operator speaking on background suggested the PGCB was unhappy with the large disparity in gross and net gaming revenue. Sportsbooks lobbied for taxes to apply after bonusing so they could effectively compete with the black market.
However, firms appear to be pushing that allowance to the limit.
Likewise, the scale of bonusing should give investors pause. How much of the industry’s revenues are being stimulated by unsustainable promotions?
While there’s no state-reported bonusing data in New Jersey, for instance, the offers available in both states look broadly similar. What happens when the bonusing hose inevitably has to be turned down?