Lean Dregs And TAM: Why The Addressable US Sports Betting Market Is Bleeding

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US sports betting

It has not been a great month for US sports betting operators.

The leading publicly listed companies have seen their market caps cut almost in half. And a key concern for investors is a shrinking total addressable market (TAM) in the country.

Here’s a quick rundown of some negative news in recent weeks:

Those four states account for a third of the US population. All now look like tough — perhaps impossible —  places to make money in the near-term.

US sports betting TAM ain’t what it used to be

BetMGM recently called for a “long-term” US sports betting TAM of $14 billion. DraftKings called for a mature market TAM of $22 billion

Yet these projections do not come with specifics about which states will legalize. And it is hard to reach those numbers without the ‘big four’ states.

“It’s becoming increasingly clear that the basis for many of the more optimistic TAMs is questionable,” said Regulus Partners analyst Paul Leyland in a recent note. “New York and now Florida present far more problems than opportunities for the queue of US digital stakeholders”.

Worst to come for US sports betting TAM?

It could get worse too. Deutsche Bank warned clients recently that other states might mimic the NY model if it proves to be good for the state’s tax take.

Similarly, Florida could be a template for California and other tribal states looking to legalize sports betting.

As gaming consultancy Eilers & Krejcik put it in a newsletter:

Past in US sports betting policy (e.g. the New Jersey model) is no longer prologue.”

Too many mouths to feed

A shrinking TAM is not the only problem for operators. The recent legislative movements highlight another issue facing firms: everyone wants a slice of the pie.

New York wants its 50% cut, the Seminole Tribe wants a 40% cut, and the NFL is getting $120 million a year for its official league data rights. Then sportsbooks must pay market-access fees and fund giant advertising deals with networks like CBS and NBC.

Those costs help explain why regulated sportsbooks are not laying $20,000 a pop on golf matchups like their offshore counterparts.

“The market is going to be huge but there are so many people looking for a slice of the same pie,” said Gavin Kelleher, a gaming analyst at stockbroker Goodbody. “If we look at the market over the next 10 years, I question the sustainability of being in one or a handful of states. It’s so hard to compete without pan-national scale.”

The importance of scale

The importance of scale is not new. But it is only becoming more important as costs rise and opportunities shrink.

For example; a well-capitalized giant can afford to bid 50% of GGR for a license in New York and lose money for five years. But many can’t afford to subsidize the future like that.

Similarly with market-access fees: every casino in Michigan (for example) wants to work with FanDuel or DraftKings, and is willing to take a smaller cut of revenue to do so.

It is the same with marketing. DraftKings has said previously it is three times more cost-efficient to advertise nationally than locally. As a result, smaller firms are finding it hard to cut through the marketing firewall put up by the big operators.

Not easy being sub-scale

This is the case even in theoretically wide-open markets.

Colorado sports betting, for instance, recently reached 20 operators. But only the usual suspects are making an impact.

Eilers noted:

“According to our proprietary tracking, the Colorado market remains top-heavy as none of the smaller brands have been able to capture meaningful share.”

Over in Michigan, the top four firms had an 84% share of handle in April. The remaining eight operators split 16% among them.  

A route forward in US sports betting market?

So what next?

Consolidation is perhaps inevitable, especially as share prices dip and it is no longer so easy to raise free capital.

The current environment might favor the US casino chains like Caesars, Penn, MGM and Bally’s, who all see cash flow from their retail properties.

No white knights on the horizon

There is also not much help coming from online casino.

Returning to those operator TAM estimates, BetMGM called for $13.4 billion in annual iGaming revenue at maturity. DraftKings called for $40 billion from iGaming when including Canada.

Those projections, as much as anything, helped drive massive valuations for US operators. But the iGaming momentum has not materialized as many envisaged during COVID.

“Other than Michigan, no state has legalized iCasino in the aftermath of the pandemic,” said Deutsche analyst Carlo Santaralli in a note this week. “And Michigan was approved for iCasino prior to the pandemic.”

Online cannibalization?

Santarelli’s research found that the brick-and-mortar casinos in Pennsylvania and New Jersey have been slower to rebound than other regions.

A regional subset of casino properties tallied by Deutsche grew GGR by 19% in April 2021, compared to 2019. But properties in NJ and PA actually declined.

To Santarelli, that suggested some cannibalization from online gaming.

After all, PA online casino has been generating $65 million per month over the last 13 months. That is a huge amount of money to be entirely new gambling spend, though the pandemic’s limiting effect on the overall economy cannot be dismissed.

“As such, we think the rollout of iCasino is likely to be a lot more challenging than most expect,” Santarelli wrote. “We think there is some merit to cannibalization of traditional casino operations, which would thereby lessen the desire of certain casino operators to push for legalization.”

More TAM trimming

Subsequently, Deutsche called for a 2027 iCasino TAM of $4.9 billion, including $3.3 billion from currently legalized states. That’s a far cry from the operator-generated projections.

To sum up then: the online betting and gaming pie now looks smaller than many hoped. And it is being divided into many pieces beyond operators themselves.

Small wonder, then, that valuations are coming down across the board.