A failed effort to legalize online sports betting in California this election cycle could cost bookmakers some financial gains — but it could also help them dodge some short-term financial pains.
Operators of online sportsbooks have pumped tens of millions of dollars into an effort to legally offer mobile wagering in the Golden State. And while those sums are significant, they would be a prelude to even more spending by bookmakers to acquire customers if their ballot measure passes, which at this point appears unlikely.
The chief executive officer of U.K.-based Entain PL acknowledged last week that recent polling suggests Proposition 26 and Proposition 27 are headed for defeat in November, when California voters will weigh in on the two legal sports betting-related initiatives.
Prop 26 would allow in-person sports betting at Native American casinos and horse-racing tracks. Prop 27, meanwhile, is the online sports betting initiative backed by sportsbook operators such as DraftKings, FanDuel, and BetMGM, which is 50% owned by Entain.
Asked if a “potential pullback” in marketing could maybe lessen its losses in the U.S. for the year, Entain CEO Jette Nygaard-Andersen noted during an earnings call on October 13 that the measure is still on the ballot for November 8.
Still, Nygaard-Andersen, like some of her peers, sounds like she is preparing to take an L in California. She told analysts and investors that they do eventually expect California to legalize sports betting, but that operators could "have another go" at getting online wagering passed in 2024.
“While that is, of course, disappointing that we'll not go online, that will, of course, be a positive overall for [earnings before interest, taxes, depreciation, and amortization] and on our journey for profitability as, otherwise, if California did come online, we, and everyone else, would have invested significantly into growing that market," Nygaard-Andersen said, according to a transcript.
An expensive proposition
The amount of cash being thrown around in California is considerable, especially for operators that have grown increasingly concerned about their profitability and as companies and consumers have been under stress throughout the year due to higher inflation and interest rates.
Almost $170 million had been pumped into the pro-Prop 27 campaign as of Monday by its corporate backers, including $25 million from BetMGM. There is also more than $200 million that has been raised to oppose the online sports betting measure and to promote the retail-wagering initiative by California’s Native American tribes and their allies.
To put that into context, Entain PLC reported last week that BetMGM booked net gaming revenue — not profit — of more than $400 million for the three months that ended September 30. Entain, which is a co-owner of BetMGM with Las Vegas-based MGM Resorts International, also provided guidance that suggests BetMGM will become profitable in the latter half of 2023.
Today, we updated the market on our trading in the third quarter and we’re keeping up the momentum and delivering for our customers.????
— Entain (@EntainGroup) October 13, 2022
You can learn more about our latest results on our website. ????https://t.co/O6rNyA2ps6#ItsYourGame
Yet if California were to legalize and launch online sports betting next year, that would likely cost BetMGM and its backers even more money, which could make consistent profitability more of a challenge.
So, while the California market could provide plenty of new customers to acquire and revenue to generate, the failure to crack that market this year could make positive earnings more achievable for operators over the short run.
“Despite sportsbooks spending meaningful dollars on lobbying efforts, it appears as though legalized online sports betting in California is still a ways away,” wrote Will Hershey, CEO of investment adviser and ETF sponsor Roundhill Investments in an October 15 newsletter. “On the one hand, this represents a clear setback for the likes of FanDuel and DraftKings, both in terms of sunk costs and, at a minimum, a delay in reaching what may eventually become the largest market globally. On the other hand, a failure on this year’s ballot may prove to be beneficial to operators like DraftKings that continue on a path towards profitability.”
Hershey said the launch of a “highly competitive market” in California would have probably prompted online sportsbook operators to spend big money on acquiring customers, such as by offering attractive sign-up bonuses. But fewer near-term marketing expenditures, he noted, could provide a better path to profitability for DraftKings in the final six months of 2023.
“The same can be said for BetMGM, FanDuel, and Caesars, although those sportsbooks have the benefit of self-funding via profit centers outside of U.S. online gaming,” Hershey added.
Slimming down the spending
Operators may be trimming their spending already. For instance, the Wall Street Journal reported last week that the pro-Prop 27 campaign recently scrapped around $11 million in planned television advertisements.
But, as Entain’s Nygaard-Andersen noted, the 2022 ballot battle isn’t over yet. And, with around three weeks left, more recent polling suggests public opinion may not be as bleak as previously projected.
Indeed, a recent poll done by SurveyUSA for KGTV 10News and the San Diego Union-Tribune suggested “a relative lack of voter familiarity with [the] two ballot measures related to gaming may be contributing to high numbers of undecided voters, leaving any outcome possible."
In other words, it still looks like Prop 26 and 27 lack the support they need from voters. There is, however, still time to obtain that support.
There is also the possibility that the customer acquisition-related spending in California has merely been delayed for operators, not dodged entirely.
“Let's see where it goes in November,” Nygaard-Andersen said last week. “If not, we have another shot to put it back on the ballot in two years' time. I think that states like California, with sports, will legislate at some point.”
