There is a growing sense that consolidation will at some point hit the online sports betting business — economic conditions permitting, of course.
In comments made at the SBC Summit North America conference in New Jersey last week, FanDuel CEO Amy Howe suggested that maintaining even 12 to 15 operators would be difficult in a thriving economy, much less one where inflation soared to 9.1% in June (the largest such increase in the U.S. in 40 years).
"We do think there's going to be consolidation at some point," Howe told the audience. "When that occurs, how that occurs, is still to be seen. I think the big question is, if you look at some of the operators right now, to what degree are they going to need financial backing and capital to continue to get them through this period of time?"
Howe added that FanDuel is in a "very good position" at the moment, as it remains part of Irish-based bookmaking giant Flutter Entertainment PLC. Yet her remarks come in the wake of her previous statements in an October 2021 interview with the Financial Times, where she noted that the U.S. gambling market is overcrowded and that there will be an eventual shakeout within the industry.
I've got a feeling
Howe's assessment also reflects a widely-held view in the financial markets that there will be a day of reckoning once the current wave of advertising and promotional offers reaches its peak.
Jim Cramer, the highly influential CNBC market guru and host of the long-running Mad Money investment show, advised investors in January to lay off gaming stocks whose stock market valuations soared early in 2021 before plummeting later in the year — a trend that has continued in the wake of the overall stock market downturn this year.
"These online gambling companies are throwing money at people in order to win market share," Cramer said. "Until we see fewer promotional deals and more M&A deals, these online sports gambling stocks... they're very difficult to own."
Cramer added that the reality is there is plenty of competition for market share — and little profit to be had.
"Too bad, because profits are what this market wants right now. That’s why every single one of these stocks has been obliterated," Cramer said. "Before you can think about buying the sports gambling stocks, I think we do need to see consolidation. We need to see some companies taken out."
Massive ad spend favors major sportsbooks
So, if consolidation is coming, who is getting consolidated?
The bigger players seem likely to be the acquirers, rather than the acquired. And, in the years since legal sports betting became a reality more broadly across the United States, FanDuel and DraftKings have emerged as the major players in the industry.
According to figures reported by Eilers & Krejcik Gaming, FanDuel led all major sportsbooks with a 36% share of gross online sportsbook wagering revenues in the U.S. in 2021. This compares to a 24% market share for DraftKings and 15% for BetMGM. Caesars Sportsbook trailed the big three with a 7% stake.
What's more, a main feature of the U.S. sports-betting business has been that operators have flung mountains of cash at consumers to try to get them to sign up and start wagering.
Operators have dug deep into their wallets to promote themselves as well, as figures reported last month by MediaPost show sports betting television ad spend grew by a staggering 281% over the previous nine months. The major sportsbooks accounted for over 90% of the total amount spent on TV spots, led by FanDuel (34% share), Caesars (21.7%), and DraftKings (18.6%), followed by BetMGM with 13.4%, and FOX Bet at 7.5%.
"The sportsbook business, it’s not a high margin business," Dan Etna, co-chair of the Sports Law Group at Herrick, Feinstein LLP, said to the Las Vegas Review-Journal last October. "It’s a profitable business, but the real way to make hay is to have a large following of customers because this is such a scalable business in terms of revenue generation."
There are still major expenditures to come for operators as well, especially with the NFL season approaching and the expected loads of money that will be spent on TV spots to convince California voters to back Proposition 27, the bill that would legalize online betting in the state.
Another play for Entain?
But there is a limit to how much operators can spend, and especially so for smaller brands. Such advertising expenditures continue to negatively impact the sportsbooks' bottom line, in the face of a weak stock market conjuncture where investors are demanding that the major operators show profits — and not merely revenue growth.
Last December, Bill Miller, president and CEO of the American Gaming Association, characterized the current level of sports betting advertising as "an unsustainable arms race." More recently, Caesars has curtailed its spending on traditional media, as it aims to deliver more of that profitability craved by investors.
In this environment, speculation abounds about possible takeover targets. For example, CNBC reported in June that sports-merchandising company Fanatics was discussing an acquisition of bookmaker Tipico.
Another possible shakeup in the sports betting sector could well be another takeover attempt by MGM Resorts International of U.K.-based Entain PLC. They currently each own a 50% stake in BetMGM as part of their joint venture agreement, but by bidding for Entain, MGM could prevent rival DraftKings from becoming an industry juggernaut.
In October 2021, DraftKings abandoned a proposed $22.4-billion takeover of Entain, the owner of brands such as bwin. The DraftKings proposal followed a prior bid by MGM, which was dropped in January of 2021.
However, with Entain noting that its net gaming revenue declined in H1 2021, its share price falling nearly 40% in the last 12 months, and the U.S. dollar soaring against the pound, at least one industry analyst believes that the British gaming giant is ripe for the taking.
According to Citi analyst Monique Pollard, MGM Resorts is in a prime position to make another bid for Entain. Any such bid would reportedly involve acquiring a majority stake in the U.K. betting giant and likely place a 50% premium on Entain's currently depressed share price.
Some consolidation has happened in the industry already, as Barstool Sportsbook-owner Penn National Gaming Inc. bought Toronto-based theScore last year. Since then, Penn has tightened up the focus of its sports-betting brands, which may be something its rivals could do after any acquisition as well.
"If you look at other e-commerce industries, the big-scale players ultimately will emerge as the leaders," FanDuel's Howe said last week.
-with files from Geoff Zochodne
