- Gaming, media, and tech companies are clamoring to corner pieces of the US sports betting market, which Morgan Stanley estimates could generate $7 billion in revenue by 2025.
- The opportunity pierced the US about a year and a half ago, when the US Supreme Court struck down a federal ban against sports gambling, and opened the door for more states to legalize it.
- Three investors, from early to later-stage companies, broke down the biggest opportunities in sports betting, at the Sports Betting USA conference in New York City last week.
- The “toll takers” who specialize in key pieces of betting operations are profiting most today, but daily fantasy sites like FanDuel are snatching up market share, and VCs are still waiting for the Google or Amazon of sports betting.
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Gaming, media, and tech companies are clamoring to corner pieces of the US sports betting market, which Morgan Stanley estimates could generate $7 billion in revenue by 2025.
The opportunity pierced the US about a year and a half ago, when the US Supreme Court overturned a federal ban against sports betting, and opened the door for more states to legalize the gaming category.
Three investors in early to later-stage companies broke down the companies that are making money and the startups that stand to win most in sports wagering, at the Sports Betting USA conference in New York City last week.
Daily fantasy sites like FanDuel are snatching up market share, but traditional gaming and media companies are profiting most, and the media and data industries around sports gambling are ripe for disruption.
Daily fantasy sports companies like FanDuel and DraftKings have an early lead
Daily fantasy sports companies like FanDuel and DraftKings, which were mired in scandal a few years ago, have emerged as the early leaders in legal sports betting in the US, said Mohit Kansal, partner at Toronto-based private-equity firm Clairvest Group, which has holdings in a number of gaming companies, including casinos and racetracks.
There are four types of sports betting operators in the US today, Kansal explained:
- Daily fantasy sports companies like FanDuel and DraftKings
- Established European operators that are pushing into the US, like William Hill, Bet365, and 888 Holdings
- Incumbent casinos defending their grounds in gaming
- Other players like the media-bookmaker hybrid, theScore, and online sportsbook operator, PointsBet
The FanDuels and DraftKings of the world have been able to snatch up market share early because they already had huge audiences of sports fans who were interested in gaming.
In New Jersey — the biggest new market for sports gambling since PASPA, the law banning sports gambling, was overturned — FanDuel and DraftKings control about 80% of the market, CNBC reported in April.
Neither company’s sports betting operations are thought to be very profitable today. (DraftKings is private and FanDuel is owned by betting giant, Flutter, a UK-based public company.) Sports betting is a low-margin business, and FanDuel and DraftKings are still expanding in the US and reinvesting their profits into improving their betting platforms.
But the investors said FanDuel and DraftKings are well-positioned to take a chunk of the supposed $7 billion revenue opportunity around sports wagering.
“People don’t need to make money today because they see the prize,” Kansal said. “If I’m a DFS player … I will make investments and hopefully, knock on wood, I’ll make money down the line.”
The “toll takers” profit no matter who wins
Other companies in the sports-betting ecosystem are already profitable, said Adam Rosenberg, the managing director leading the gaming and leisure business at Fortress Investment Group’s credit fund. The firm manages more than $40 billion in assets globally. Rosenberg’s side of the business invests in later-stage companies.
According to Rosenberg, the early money makers in legal sports betting are:
- The “toll takers” that specialize in key pieces of gambling infrastructure. Examples include:
- Geolocation software companies like GeoComply or LocationSmart that ensure online bettors are within the borders set by state regulators. In New Jersey, mobile gamblers must place bets within state lines. Other states may require bettors to be in licensed casinos, bars, or restaurants.
- Affiliates that drive customers to sportsbook operators and get a cut of each player they deliver. They could include SEO companies, sports and gambling sites, or media companies.
- Traditional media companies like Sinclair, ESPN, and Fox. The latter partnered with online gaming company The Stars Group on a betting platform, Fox Bet.
- These media companies are already profitable. Their sports broadcasts and programming geared toward gamblers are finding new audiences among bettors and advertisers, regardless of whether the media companies have sportsbooks like Fox.
- Traditional casino companies that have launched sportsbooks are generating profits from food, beverage, table games, slots, and other services, after they get bettors in the door.
The toll takers stand to profit the most. “No matter who wins in the land war that we’re going to see play out between the incumbents and the newcomers, they get a piece of the action because they’re a necessary part of the delivery of the value chain,” Rosenberg said.
Rosenberg also highlighted another, similar group that is not currently profitable, but is in a good position to benefit from sports wagering. It’s suppliers like International Game Technologies and Scientific Games that deliver other pieces of technology to gaming companies, such as kiosks for betting on the casino floor, or pricing and trading tools.
“Many of those companies are not profitable by design,” Rosenberg said. “They’re reinvesting in their business for growth for later profitability, which is a sensible strategy.”
VCs are still waiting for the Google or Amazon of sports betting
VCs who invest in early stage startups, like SeventySix Capital’s Wayne Kimmel, are betting that the US sports betting landscape will be totally transformed by entrepreneurs.
“There’s some incredible incumbent companies,” Kimmel said, “some of which are going to innovate and they’re going to be great, and then others are going to get knocked out, totally knocked out by entrepreneurs and their ideas.”
SeventySix Capital, founded in 1999, invests in companies at the intersection of sports and technology, including companies like basketball stats startup, ShotTracker, sports analytics and prediction company, Swish Analytics, and VSiN, a media network for sport bettors.
When it comes to sports betting, Kimmel said he has his eye on a few key sectors:
- Data collection and analysis companies that can rip stats off the court, field, or raceway in real time, assess the odds and predict outcomes, or enable new kinds of in-game bets.
- Media companies designed for sports gamblers that are changing the way sports are covered or broadcast.
- Integrity firms that offer fraud prevention and other monitoring services to identify suspicious bets, which is an area many sports leagues, regulators, and sportsbooks are spending heavily on as more US states legalize gambling.
“We’re super early and why we’re here is to meet the next entrepreneur who will become the next William Hill, who will become the next DraftKings or something like that,” Kimmel said. “Think about what happened with the internet: Where did, Amazon, Facebook, Google, where did they come from?”
As for the big tech companies themselves, the three investors in the room felt it was inevitable that one would move into sports betting if more states move toward legalization.
Amazon, in particular, loomed large at the conference. One attendee asked the panelists whether they were worried that Amazon would swoop in and change the game as it did with Whole Foods in grocery.
“I truly agree with you that there will be an Amazon, an Apple, a Google, somebody coming off the sidelines that is watching right now, a media company that’s sitting in this room right now, a league that has an opportunity to do something really special — that’s going to happen,” Kimmel said. “Those entrepreneurs will need to compete with those big guys or, in some cases, maybe those big guys will buy some of our companies.”