Reassessing the US opportunity

The 2018 edition of the Global Gaming Expo in Las Vegas, better known as G2E, was oddly reminiscent of its European cousin, ICE. The huge conference hall at the Venetian Casino was lined as ever on all sides with towering racks of slots from the usual suspects, but nearer to the entrance it was hard to miss the decidedly sports betting-heavy feel. Stands from Kambi, SBTech, Playtech, Inspired, Genius Sports, Betconstruct were first up and eager to sell a version of sports betting quite different to the one those of us on this side of the pond are used to.

The US, it should be noted, is no sports betting ingénue in either the land-based or online space. Indeed, the European egaming industry was in part built on the back of the pre-UIGEA grey market in the US space. Nevada is in some ways the spiritual home of sports betting and there is a substantial offshore market that is worth billions annually at a conservative estimate. That’s not to mention the probably even larger ‘locals’ market that comprises friendly neighbourhood bookies with apps and markets not always entirely unconnected to the offshore world.

The US then is already a large sports betting market, it’s just very little of that activity takes place in a regulated context. As such, the conversations around the topic are very mixed bunch ranging from “what is sports betting?” to “what is the best approach to maximising trading revenue from AI tools?” Topics can flip from the fundamentals of how a sports betting business operates and the role of the platform and content providers within it, to the real minutiae of the business generally covering all points in-between.

But one unified trend was clear. With the US regulated market outside of Nevada now very much up and running the talk has shifted from what if to what now? And this broadly fell into one of three categories. What’s happening? What is going to happen? And who is winning? The first was easy to answer, the second near impossible and the third really depends on how you set the parameters of success in this market. Because right now there is a distinct lack of convergence on just how exciting this sports betting business really is.

A divergence of opinion

While everyone is interested, not everyone is convinced sports betting is the second coming just yet. A large swathe of the audience at G2E is used to sports betting being a low profit-centre, land-based product that generates fairly small revenues and has limited attractiveness as a use of valuable casino floor space. As such, the pending slow rollout of sports betting over a fairly small numbers of land-based properties isn’t filling them with wonder at the pending revenue explosion. This as much as any other factor is what is allowing the European firms to steal a march.

European operators see flashing dollar signs where others see a money pit and they have surged into positions of power in the early stages of this market. Kambi and SBTech dominate the supplier market, with IGT and SG Digital, the new owner of Openbet, looking behind the pace at the current time. While on the operator side, GVC’s deal with MGM provides the European operator with a staggering level of access, Paddy Power Betfair is already a power player in New Jersey and William Hill is busy signing up as many market entry points as it can.

For the likes of Kambi and SBTech, this has already given a surprising level of authority in this emerging market, and they are already becoming one of the first names mentioned for any new deals ahead of the US incumbents. On the operator side, the net result of this frenzied early deal making is this is already beginning to feel like a market that has been sewn up for just a handful of operators. As one executive from a rival firm put it, “the parking spaces are rapidly filling up”, and this is some years before the show even kicks off.

So with all this taken into account, what does the near term look like? The answer is nobody really knows. The pace of change is entirely limited by the regulatory outlook and that is less than predictable. Eilers & Krejcik Gaming (E&KG) estimates, as of October 2018, four potential “waves” of states coming into play, with the first wave of Delaware, Mississippi, New Jersey, Rhode Island and West Virginia now nearly complete.

The second wave from 2019-2020 is when the real action begins with states including Pennsylvania, Illinois and the big prize of New York with around 17% of the US adult population able to access legal regulated sports betting. By wave three in 2022, we reach 33% of the US population, which is very substantial indeed. But at 17% we have a market more than worth fighting for at just a little below the size of the UK. Although the relative attractiveness of this will largely depend, yet again, on the regulatory outlook and the availability of online and, specifically, mobile betting.

And to hark back to the differences between Europe and the US, this is far from a given. As E&KG’s latest report puts it: “We do not expect states to reach a clear consensus on the question of mobile/internet sports betting… [and] we could easily see a world where several states launch land-based sports betting only, at least initially.” This tallies with the conversations being held both on stage and in the halls of G2E where there appears to still be a real mountain to climb in terms of mobile betting being accepted as a normal part of a regulated market.

There is a natural resistance from the predominately land-based stakeholders to this, but also a much broader antipathy towards online gambling in general. Anyone looking from the outside at the US sports betting sector as a greenfield opportunity for the online gambling sector should certainly pause for thought. Although it’s not stopping the money from flooding in.

Big deals and big questions

Metric Gaming made headlines in September with a $10m Series A funding round for its attempt to break the US with a platform that feels some way beyond a phase 1 solution for a nascent market. Alongside this we’ve seen the likes of Genius Sports and Sportradar trying to skip the European market and head straight to the US to begin their shift from content provider to platform provider. And there are no shortage of online and mobile platform suppliers competing for a market that is basically New Jersey and perhaps Mississippi and Pennsylvania in a few months’ time.

Certainly, there is a lot more excitement among the suppliers than there is in the wider US gambling sector, at least if a not very scientific gauge of public interest and popular opinion at G2E is used. This is leading to some surprising deals being struck, such as the recent tie-up between Wynn and relatively unknown mobile betting operator BetBull, which operates on a white-label of Vbet on the BetConstruct platform. For one of Nevada’s largest gaming operators to throw its lot in with what is effectively an app on a white-label of a third-party provider not even licensed yet in the US is quite the head scratcher.

But that is really where this market is at right now. Surprising deals are becoming almost commonplace. The major US-based suppliers have been caught slightly flat footed, with neither IGT nor SG Digital offering a market-leading solution at the current time and all the momentum undoubtedly with the likes of Kambi and SBTech. It bears repeating that this is a very early stage market, however, and things can change a great deal over the next couple of years, but for now you’d have to say the supplier space appears to contain real opportunities for firms to punch above their weight.

And the same can be said for operators. Many of the land-based giants have been very slow to market in New Jersey, and the latest numbers from New Jersey give DraftKings a 65% online market share, according to E&KG data, with FanDuel on 22% and the Kambi-powered SugarHouse brand from Rush Street Interactive group on 5%. This was not really how anyone expected the early stage US sports betting sector to shape out.

The September numbers gave us the first real glimpse at the latent potential in the US sports betting sector, with total revenues of $24m for the month from a turnover of $184m. Some US observers have described the numbers as underwhelming considering the relatively small leap from August, which is a traditionally a very slow month for US sports betting, but this still suggests a nine-figure annual market even without further growth from a state with a population of roughly nine million.

If you add in a few more states, such as Illinois, Pennsylvania or even New York, you quickly get to a market worth talking about. The bigger question, of course, is how do you get there? The answer is… slowly.

Getting to the next phase

Nobody at G2E or in the wider US market appears to be falling over themselves to predict a rapid and comprehensive roll-out of online sports betting in the near-term. In reality it’s much the same as we’ve seen in regulated Europe over the past decade. Periods of optimistic excitement followed by long periods of waiting and then another gold rush when a new market finally kicks open the doors. The US is no different, and should be viewed more as 30+ individual countries with their own idiosyncrasies. Progress will be slow and frustrating, and it’s possible some of the early cheerleaders will not have the energy to last until the final whistle.

So the question becomes who has the market presence, the land-based revenues and the will to bed in for the long haul? GVC and William Hill clearly fit that mould, as does Paddy Power Betfair with its FanDuel brand and existing US horseracing business, while DraftKings has made its position very clear with more to come on the sports betting front in any and every market it can enter. Beyond this on the operator side, it’s tough to look past the big US casino groups, with Penn National, MGM, Boyd and Caesars dominating the market access picture and very little space seeming to be left for operators not in bed with one of these.

That said, the US gaming sector is perhaps being a little too circumspect in these early stages and some land-based giants could find themselves fighting for parity when they should already have been a way in front, not least if some of the DFS or European operators find routes to market through the lotteries, the tribes, the racetracks or some other means. This could all change of course, and nobody should expect the market in 2022 to resemble that of today, but for now the European firms and DFS operators will continue to make hay while the sun shines and try and make this unexpected head start count.