State of the US Online Gambling and Sports Betting Industry — 2021 – The Average Joe

    State of the US Online Gambling and Sports Betting Industry — 2021

    Victor Lei — Head of Research

    December 11, 2020

    December 11, 2020

    Good investment opportunities are rare to come by but once they do, they don’t last long. 

    These opportunities are often created by market factors that occur every couple of decades —  technological advancements, geopolitical shifts and government regulations. 

    We’ve seen this with bigger trends including the internet, e-commerce and electric vehicles. 

    Markets have also been moved with smaller trends like the legalization of cannabis, mobile technology enabling the gig-economy and technological advancements in plant-based foods. 

    In 2018, a key US regulatory decision created a potential $150b market — the legalization of online gambling and sports betting. 

    For investors, this created the perfect investment opportunity. 

    The rise of the US iGaming industry 

    The rapid growth of the iGaming industry over the past two years has primarily been driven by the legalization of online gaming (notably in the US in recent years), COVID pandemic impacts, and technological improvements.

    The iGaming industry is made up of companies that enable the betting of a game or event through the internet. This includes online sports betting, casino games, poker and other betting games (i.e. slots, lottery, etc).

    Within the online gaming industry are two major sub-sectors — online casino and online sports betting.

    • The online casino industry includes operators that enable games like virtual roulette, craps, etc.
    • The sports betting industry includes operators that enable betting on the outcome of sports matches.

    As of Nov. 2020, only 5 states have legalized online casinos: Delaware, New Jersey, Nevada, West Virginia and Pennsylvania. The first state to legalize online gambling was Nevada in 2013, followed shortly by Delaware and New Jersey.

    The path to the legalization of online casinos has been slow and will likely remain slow.

    For online sports betting, it’s a different growth story…

    On May 14, 2018, the US Supreme Court voted to remove the Professional and Amateur Sports Protection Act of 1992, which had limited legal sports betting to Nevada.

    The decision to remove the bill gave individual states the option to legalize online or offline sports betting.

    As of Nov. 4, 2020, 26 states have legalized or are in the process of legalizing sports betting. However, only 13 states allow online sports betting — the remainder must have bets placed in authorized retail locations.

    The industry is moving in the right direction and the legalization of sports betting has given hope that states will be more receptive to legalizing online gambling as well.

    Source: American Gaming Association

    2020 state of the industry — finding opportunity in a state of crisis

    Since June 2018, US consumers have wagered over $31b through online sports betting and sportsbooks have taken over $2.1b in revenue (as of Nov. 30, 2020)

    All that came to a stop in early 2020. The COVID-19 pandemic had spread throughout the world — shutting down nearly every major sport in the US.

    During the early months of COVID, all casinos and major sports were shut down in the US to prevent the spread of COVID. The US commercial gross gaming revenue (GGR), the revenue of gambling companies, had fallen nearly 80%.

    With both casinos and major sports temporarily shut down, iGaming took the spotlight.

    • In the second quarter of 2020, iGaming GGR grew 253.8% while sports betting GGR fell 46.3%.
    • In the third quarter of 2020, iGaming GGR grew 232.4% while sports betting GGR grew 47.1%

    By the third quarter of 2020, sports betting had begun to recover with the resumption of major sports leagues including the NBA and NFL. The industry had also been supported by the legalization of sports betting in Colorado, Illinois and Michigan in 2020.

    The gambling industry had also picked up — by September 2020, more than 90% of US casinos were once again open for business.

    By the end of COVID, one thing that was clear in the industry — iGaming was here to stay. COVID has inadvertently accelerated the growth of the iGaming industry and will likely continue into 2021.

    Source: American Gaming Association

    There would be another tailwind for the industry as a result of COVID — states were in desperate need of funding from fighting the pandemic. The iGaming industry had a simple solution for them — legalize sports betting or online gambling and collect tax revenue off each wager.

    New Jersey, one of the earliest adopters of legalized sports betting, collects 8.5% tax on all sports bets made in person and 13% from those placed online. In its full-year of offering legal sports betting, the state had generated $36.5m in tax revenue.

    Seeing the early success of New Jersey, many other states have moved towards legalization. Gaming industry research firm, Eilers & Krejcik, projected 37 states to have legal betting by the end of 2023 — with 29 allowing online bets.

    Suddenly, everyone’s an iGaming company

    Besides legalization, two factors accelerated the push towards iGaming: the success of DraftKings’ IPO and a global pandemic that shut down casinos across the world.

    DraftKings went public on April 24 through a merger with SPAC, Diamond Eagle Acquisition. Within 6 months, DraftKings’ stock had surged over 200% and the industry immediately took notice. Casino operators, sports teams and even media companies are all looking to get in on the growth.

    Sports media companies like Fox, Barstool and theScore have all launched or are in the process of launching their own sports betting apps.

    Traditional casino operators have also partnered with different sports betting companies to launch online iGaming offerings.

    • MGM ($MGM) partnered with GVC holdings ($LON:GVC), a British sports betting and gambling company, to launch its online sports betting app — BetMGM.
    • Wynn Resorts ($WYNN) chose GameAccount Network ($GAN), a supplier of internet gambling software, to help launch its sports betting app — Wynn Online.

    Other casino operators like Bally’s Corp have chosen to bring the technology in-house. On Nov. 19, 2020, Bally’s acquired Bet Works, a software provider for the iGaming industry.

    Casino operators have traditionally viewed online gambling as competition to its primary venue business. Many have been reluctant to accept online gambling — that is, until the pandemic turned their business upside down.

    In the beginning of the pandemic, casino operators saw their revenue fall as much as 97% in their second-quarter 2020 revenue. In the midst of the pandemic, several casino operators have announced their entry into the iGaming business. 

    How difficult is it to start an iGaming operation?

    Compared to other capital-intensive businesses (i.e. electric vehicle industry), setting up an iGaming operation is relatively inexpensive.

    iGaming may be relatively new to the US but the industry has been around for decades in Europe. The 3 largest gaming companies are all European based (Flutter, GVC Holdings, and Bet365).

    Unlike the early days of legalization in Europe, US casino operators have access to dozens of turnkey software providers — who specialize in developing the software that powers online gambling. While some casinos choose to develop their own technology, most use a third-party provider.

    One of the first iGaming websites by InterCasino (Source: Online Gambling Websites) 

    But building your technology stack is only one part of the equation. The other — acquiring licenses to operate.

    Casino operators have part of the work cut out for them. In addition to acquiring state licenses, iGaming companies must enter into an agreement — known as a “skin” — with a land-based casino operator to legally run an iGaming operation.

    • I.e. In July 31, 2019, DraftKings entered into an agreement with Penn National Gaming — giving DraftKings the option to own, operate and brand real-money sports betting in 7 different states.

    Since iGaming companies are required to partner with a land-based casino to legally operate, casino operators have an advantage here by already operating their own casino. They don’t have to go through the process of negotiating partnerships — which often include giving the land-based casino a share of revenue or equity stake.

    US iGaming market size

    According to a report by Graphical Research, in 2019, the total US iGaming market was estimated to have generated $7b in revenue — including sports betting, casino games, poker and lottery. This is expected to grow at a rate of 20% per year to reach $20b by 2026.

    Within the larger iGaming market is the fast-growing online sports betting subsector. In 2019, Morgan Stanley estimated that the online sports betting industry generated $833m in revenue, just 10% of the total iGaming market. 

    Morgan Stanley had also projected that the online sports betting industry will grow at a faster rate than other forms of online gambling, hitting $8b by 2025 — with a high range of $15b if legalized in all states.

    Although several states are legalizing iGaming, many of these have limited it to only sports betting — while online casino games (e.g. Slots, blackjack, roulette) remain illegal.

    The legalization of online casinos has been more challenging than online sports betting. In many states including California and Florida, gambling is owned and operated by Indian Tribes who are heavily opposed to the legalization of online casinos — fearing greater competition against their businesses.

    While other states like Utah and South Carolina, which have a strict stance against any form of gambling, are unlikely to legalize anytime soon.

    Who’s leading the US iGaming market? 

    According to research firm Eilers & Krejcik Gaming, DraftKings took in 16% of the US Gross Gaming Revenue revenue share in the 3 months ending October 31, 2020.

    Who’s leading the US online sports betting market? According to research firm Eilers & Krejcik Gaming, FanDuel controlled 35% of the online sports betting market in the third quarter of 2020. DraftKings came in second with 30% market share.

    SPACs dominated the EV market, now it’s taking over the iGaming industry

    In 2020, SPACs (Special Purpose Acquisition Company) became a popular tool for companies to go public. The “sponsor” of the SPAC would raise large sums of money under a publicly-traded “blank check” company. The sponsor would then go and find a target company to merge with. Through the merger, the target company will become publicly traded and will also receive the cash raised through the blank check company.

    Learn more: What is a SPAC?

    The popularity of SPACs became one of the primary methods for companies in emerging industries to go public, most notably in the electric vehicle (EV) space. For many of the companies in the EV space, it was a much easier way to go public, even if the company hadn’t generated any revenue yet.

    We’re now seeing several SPAC investors targeting the iGaming space. In the last few months of 2020, dozens of SPACs popped up with a focus on esports, iGaming or related technology.

    In the past year, we’ve seen dozens of SPACs launch along with several SPAC merger announcements: Skillz (via Flying Eagle Acquisition Corp), Golden Nugget Online Gaming (via Landcadia Holdings II), Rush Street Interactive (via dMY Technology Group ), Genius Sports (via dMY Technology Group II) and Lottery.com (via Trident Acquisitions Corp).

    Source: The Average Joe

    As of Dec. 2020, dozens of SPACs holding over $4b are looking for acquisition targets. As states continue to legalize and the market opportunity moves mainstream, we’ll likely see a greater number of companies opt to go public via an IPO or SPAC. We’ll also likely see lower and lower quality companies hit the market, especially those that choose to go public via SPACs — which require less reporting requirements.

    We’ve already seen several EV companies blow up after going public — i.e. Nikola and Kandi — and it’s very possible that we could see similar events in the iGaming space. Opportunities to capitalize on emerging industries and the early stages before laws are in place can often encourage unethical behavior.

    This doesn’t mean that there won’t be attractive investments in the space. However, investors will need to be extra cautious of potentially fraudulent or high-risk companies taking advantage of the opportunity to go public.

    Learn more: See our list of sports betting and online gambling-related SPACs here

    Lessons from Europe

    The European Union (EU), which consists of 27 countries within Europe, is the largest iGaming market in the world. Online gambling and sports betting laws are different within each of the members of the group but nearly half have some form of legalized online gambling.

    Various countries have adopted some form of legalization over the past 20 years — some countries only allow specific types of games (i.e. Horse racing, poker, casino games, sports betting, etc.). Others will only give licenses to domestic companies while others have more relaxed policies (France, Italy and ex-EU, United Kingdom).

    In 2018, the European Union iGaming industry generated €22.2b (US$24.6b). This made up 23.2% of total gambling (online and offline) revenue in the EU and is expected to grow to €30b by 2022.

    Within the broad iGaming industry, sports betting made up 42.5% of the market, casino games and slots (32.4%), lottery (12.6%), poker (5%), bingo (4.3%) and other skill games at 3.2%. Sports betting represented the biggest opportunity with casino games coming in at a close second.

    Here’s what investors and operators can learn from nearly 20 years of online gaming development within the EU.

    • Mobile-first 80% of betting activity comes from mobile apps. Two of the earliest states to have legalized — New Jersey and Pennsylvania — see 9 of every 10 sports bets placed via mobile.
    • Responsible gaming practices — one of the largest operators in the UK, 888, was fined over £7.8m for failing to handle vulnerable customers. Implementing practices such as self-exclusion to allow players to block themselves will become more important over time.
    • Diversified products — in-play/live bets, those that are placed after a game has started, make up nearly 50% of all wagers in the European market. In the US, this makes up a small portion of all bets.

    Challenges in the industry

    In addition to obtaining state licenses to operate, online betting companies must attain a separate license known as a “skin” — which are given out by land-based casinos through partnerships. In some states, casino operators are only allowed to issue a single skin — limiting the supply and making it more expensive to attain a skin.

    But going through regulatory hurdles is just one of many challenges:

    • Resistance to legalization… States like Texas and Utah are heavily against gambling and are unlikely to legalize anytime soon.
    • Attracting customers away from illegal sites…. Despite being legal, Americans are still placing bets on illegal sites, without knowing they’re illegal in many cases. Americans illegally place over $150b in sports bets per year.
    • Millennial habits… Surveys have shown that younger generations watch fewer sports and have less interest in gambling — a study by Stockton University showed that millennials would rather gamble on a game that involved skill.

    Moving wagers away from the illegal market will take years and reaching full legalization across all states could take even longer. The US iGaming space has a long way to go to reach its $150b potential.

    Market outlook

    It’s definitely easier to get something done when money is involved. For state governments, legalization means more tax revenue. COVID impacts on government budgets have made additional tax revenue harder to pass up. Momentum is in favor of legalization, which will continue to drive growth amongst iGaming companies.

    While FanDuel and Draftkings control the majority of the US market today, the competitive landscape could look very different in a couple of years.

    • Traditional casino operators have launched their own iGaming platforms.
    • Foreign competition from both Canada and European countries have entered the US market.

    Competition will ultimately drive up the cost of acquiring new customers and retaining old customers. In the iGaming industry, this becomes an even bigger issue where the cost of switching online gaming platforms is low. A user could choose to play amongst multiple platforms or easily switch over to a competitor.

    An expanding industry will benefit all companies but competition could become one of the biggest limitations to growth.

    Companies will prioritize capturing market share in the early days of legalization but profitability will slowly become more and more important.

    Investors will eventually shift their focus from growth to operating metrics like profitability, efficiency and customer acquisition costs. Those that can grow while controlling these metrics could become the market winners.

    Source: DraftKings

    Finding investment opportunities

    In 2020, the hottest pure-play online gaming company has been DraftKings, one of the leading sports betting companies in the US.

    Since going public on April 24, its valuation has soared to $20b returning shareholders over 200%. But losses have also become a growing concern for the company — losing nearly $578m on $293m of sales in the first 3 quarters of 2020. DraftKings trades at a nearly 24.8x price-to-sales multiple — implying that the majority of the growth is already priced in.

    For investors, many of the opportunities could be found amongst the lesser-known but fast-growing iGaming companies. These include:

    • Online casino/sports betting operators — Rush Street Interactive Golden Nugget Online, Score Media and Gaming.
    • Technology providers — Scientific Games, Bragg Gaming, Neo Games, GameAccount Network

    Additionally, the Roundhill Sports Betting & iGaming Exchange Traded Fund ($BETZ) provides broad exposure to the industry.

    See our full list of potential investment opportunities in the online gambling/sports betting industry here.

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