Get Your Shit Together Sports Betting Industry - 12/12/22
(In case you don’t watch The White Lotus, the headline is a reference to “Get your shit together Portia” - an amazing line, delivered by Jennifer Coolidge at the end of a seemingly nonsensical monologue.)
[By way of disclosure, I am slightly in favor of legalized sports betting everywhere, and I am also short a tiny amount of Draftkings stock. None of this is financial advice. Also very little of what follows is material to my short position.]
Things Were Going So Well
The slide below is excerpted from Draftkings (DKNG) 2022 Investor Day Presentation. It lays out some simple methodology to get to a U.S. online sportsbook (OSB) total addressable market (TAM) of ~$26 billion.
This is a testament to the power of optimism. It’s also all based on extrapolating from New Jersey numbers.
I can think of a few problems.
First, New Jersey led the legalization push. Would we expect states that have waited several years to legalize OSB to be more or less enthusiastic about sports betting?
One of the points that DKNG makes is that state markets mature over time, so that’s why they use New Jersey for their estimate.
Although even that seems to be cherry picking. I found this report which also offers some numbers on OSB gross gaming revenue/adult by state.
According to that report, not only is New Jersey at the high end of GGR/adult. They’re multiples of the other mature states.
Also, New Jersey borders New York, and during the period used for this analysis, probably benefitted from New Yorkers betting in New Jersey. Since New York has legalized OSB, New Jersey numbers for 2022 are actually down.
Keep in mind that DKNG knew that the New Jersey numbers were probably inflated by New York when they made the decision to frame the TAM issue that way. They have KYC requirements so they know customer addresses. Also, DKNG loves to hype their data science team.
In case you’re thinking that this slide is just typical puffery meant to illustrate very large potential, but they don’t mean it literally… no, I think they mean it literally. Here’s a tweet from Draftkings CEO Jason Robins where he mentions getting to a $1 trillion market cap in 10 years. They need their OSB estimate, and a lot of other things to go right, to achieve this goal.
But aggressive projections with cherry picked data are probably par for the course in the age of SPACs, so let’s move on.
How Much Money Laundering Goes on in Here Anyway?
The gaming industry is always lobbying for more states to legalize sports betting. I always wonder how that effort would go if the operators started their pitch with:
You know who loves sportsbetting? Money launderers. We are up to our eyeballs in these guys. Actually, they keep us so busy we don’t have time for anything else. They’re everywhere.
I don’t actually think sportsbooks are up to their eyeballs in money launderers. More likely is that sportsbooks have taken a page from the casino playbook, and they use money laundering as a pretext to take a shot at customers.
Rufus Peabody has been a guest on the podcast before, and here’s a tweet where he says that BetMGM gave him the run around on cashing out.
If you click through you can see that Rufus actually tried to start this withdrawal process a year ago, but the onerous requirements discouraged him so he forgot about it.
Former podcast guest Spanky released an emergency podcast on Saturday to talk about getting kicked out of Sporttrade. The incident doesn’t make a lot of sense on the surface, since Sporttrade is an exchange. In theory they need liquidity and the relationship with the gambler shouldn’t be adverse. But it turns out the problem can be traced to Sporttrade’s land based partner, Bally’s Atlantic City. Here’s a tweet with the clip of the podcast where Spanky reads the letter from Bally’s.
So Bally’s implies that the reason Spanky is getting the boot is because of money laundering fears. Spanky sent them a bunch of documents to show that he’s engaged in the business of betting, but no luck. He’s still banned.
I don’t think that anyone begrudges gaming companies taking money laundering seriously, as long as they act in good faith. But how much time do you think they spend trying to figure out if the losing bettors are money launderers?
That’s a rhetorical question.
So the books allow deposits, then allow bets to be made, and then decide to do a little due diligence? That sequence doesn’t pass the laugh test.
In the Sporttrade example they apparently wanted to keep Spanky as a customer, but they need Bally’s as a land-based partner to do business. And casinos hassling advantage players, while relying on money laundering as a pretext, is taught in Casino Management 101.
But it seems like acting in good faith is a challenge for gaming companies.
Here is a somewhat famous clip of Draftkings CEO Jason Robins where he manages a 2-for-1 bad faith argument. He trashes short sellers of his stock, along with sharp sports bettors. This is c-minus political spin.
It turns out that Robins struggles with messaging. He once tweeted about how he was going to make sellers of DKNG stock regret their decision, only to be quickly dunked on by people pointing out how much stock he had sold.
The Bait and Switch
Robins also went to a Goldman Sachs conference and bragged about getting to write California Prop 27, which would have legalized OSB. The opponents of Prop 27 used his words in attack ads.
I actually voted for Prop 27 although I never understood the homelessness angle. If you want voters to imagine gambling as some kind of idealized, recreational, and costless activity, you don’t also want them thinking of destitute people out on their asses.
Prop 27 went down in flames.
The New York Times published a piece last week saying that some legislators are experiencing buyer’s remorse over sports betting. Here’s an excerpt from the article:
Other Kansas lawmakers said they intended to introduce legislation to curb the flood of promotional bets that gambling companies use to attract customers. Kansas permitted such promotions — including offers of supposedly risk-free wagers — to be deducted from companies’ taxable revenue. The volume of the promotions has been so large that, as of October, some major sports-betting companies had not paid any taxes on mobile bets placed in the state.
“Why on earth are we incentivizing these free giveaways?” said Representative Paul Waggoner, Republican of Kansas, who said he was startled to learn from the articles that in the first two months of sports betting in Kansas, gambling companies handed out $43 million in tax-free bets. “I wish we would have known all this stuff” before lawmakers voted on the package in April, he said.
…
“You can’t turn on the radio or can’t turn on any sporting event without being inundated with offers of free bets,” Mr. Harckham said. He compared it to someone handing out free samples of cocaine to entice people to buy larger quantities and said the state should consider outlawing “free” sports bets, just as it prohibits promotions featuring free alcohol or marijuana.
The “free samples of cocaine” emphasis is mine. That’s the Pete Campbell moment.
In Massachusetts an application from Penn Entertainment hit a brief speedbump when the company’s ownership of Barstool Sportsbook and its partial ownership of Barstool the media company became an issue. The executives from Penn said, with a completely straight face, that the Barstool Sports personalities are good for Responsible Gaming, because they talk about how much they lose. It was mind boggling. These are guys who are paid to go out and continuously push picks, and it’s good that they are pushing a culture of degeneracy!
There have been some other wild stories lately, like the school teacher who bet a quarter of a million dollars on the World Cup, and also one sportsbook killed Drew Brees.
But my point isn’t to go through a hodgepodge list of sportsbooks doing dumb stuff.
Let’s go back to the DKNG slide deck from the beginning of the post. In that presentation they make some projections based on getting to 65% of the U.S. with legalized OSB.
But if we fail to get to 65% of the U.S. with sports betting, who will be to blame? How about: the actual legalized sportsbooks!
They’re supposed to be the “good gambling companies” - as compared to the very evil offshore bad guys. But the good guys in this case are kind of scummy.
They hassle legitimate players and hide behind money laundering regs.
They pump up legislators with ideas about new taxes and then don’t deliver.
They make a joke out of responsible gaming, and then claim actually no they were being serious.
The leading public company in the industry acts like a penny stock shitco1.
So to return to the title of this newsletter, this is an industry deeply in need of getting its shit together.
If I told you about a money-losing company, that pumps their stock with b.s. projections, attacks short sellers, while insiders line their pockets, amid a very casual attitude toward regulatory compliance, you would assume that I’m talking about an operation headquartered in Boca Raton. I’m exaggerating but only to illustrate the point of how silly it is that Draftkings is the market leader. None of this is meant to be a “short report.” I have some reasons that I am short DKNG (which only overlap slightly with what I’ve written above), but I could change my mind at any moment.