US online gambling: companies undeterred by losses that alarm investors
Backers will have to bring in more cash to improve the odds of their bet paying out
Every inveterate gambler in a cold streak insists their luck will soon turn. But what if the odds are stacked against them? DraftKings was once at the centre of intersecting frenzies in sports gaming and special purpose acquisition companies. Its shares have gone cold, dropping 44 per cent in the past three months. In the most recent quarter it reported an adjusted operating loss of $550m on just $213m of revenue.
Online gaming and betting companies have prioritised grabbing market share over profits. American television is littered with ads for DraftKings. Well-funded copycats offer their own pricey promotions in an attempt to build loyalty.
The companies insist marketing spend will moderate in a few years and that the competitive landscape will rationalise. That future seems neither near nor credible.
DraftKings blamed its third-quarter blow-up on temporary factors. First, punters beat the house more often than expected on games early in the season of the National Football League, America’s most popular sport. Second, legalising sports betting across America has outpaced expectations. This, in turn, demands more promotional activity. The company says fourth-quarter loss should narrow by half.
The company hopes to achieve annual ebitda of $1.7bn on revenue of $5.4bn between its sports betting and online casino units, while also capturing a quarter of the sports betting market. But the market is getting crowded. New York state has just approved nine different wagering platforms.
Key rivals include big casinos such as Caesars Entertainment and MGM, which have strong brands and customer relationships. Both can use physical casino profits to subsidise online forays. Caesars expects to generate $1bn in cumulative losses on its digital businesses. It says that eventually “cash-on-cash” returns will exceed 50 per cent.
DraftKings’ investors bought into a rosy prospect of “total addressable markets” in the tens of billions with the emergence of a stable oligopoly. That may yet develop. But backers will have to shovel in plenty more cash to improve the odds of their bet paying out.