US: post PASPA – what does it mean for European operators?

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US: post PASPA – what does it mean for European operators?

US: post PASPA – what does it mean for European operators?

Tomorrow CMS is hosting a webinar to discuss what the PASPA overturn means for European operators. Judging from the flurry of activity over the last three weeks (yes, it has only been that long), the answer must be: a great deal. Indeed, one major deal has already been announced (PPB-FanDuel), one state is almost ready to take (singles) bets (Delaware) and several supply deals and partnerships have also been announced (eg, GAN – SBTech; Sportech – SportRadar; SG-WH – Delaware Lottery, albeit the incumbents). However, so far it seems to be the PR firms that have been busiest. We have decided not to resist our usual urge to be cynical, and ask what does it really mean behind the hype?

We approach this question through three lenses:
  • What sort of regulation are states likely to pass and when?
  • What are the likely requirements of qualities of successful operators in those environments?
  • Which European operators have those qualities?
Types of state regulation
In the US each state is proud to be different and nowhere is this likely to become more apparent than in approaches to betting regulation – even the most bullish evangelists seem to recognise that fact (and it is likely a key reason why some Sports Leagues still want federal legislation). Coming up with models is therefore complex (and all models end up being only one thing – wrong), but we can discern three broad positions on three key axes:

The axis of product:

  1. Liberal: substantially all products, including in-play, all teams and college sports, light tax
  2. Cautious: restricted products and/or a taxation/integrity position that impinges price
  3. Conservative: all bets remain off
The axis of distribution:
  1. Liberal: unfettered (or lightly restricted) online and/or materially expanded landbased
  2. Cautious: very heavily restricted online or existing landbased supply only
  3. Conservative: all bets remain off
The axis of time:
  1. First wave: preparing for (or seeking to prepare for) imminent (months) launch
  2. Second wave: showing a positive approach, but with studies etc to do first (c. 18m – 3yrs)
  3. Third wave: wait and see currently, but with signs of activity
  4. Conservative: all bets remain off
We know it is more complicated than that, but we think it is a good place to start.

So how do the states shape up on these axes based upon what we already know? We have produced three handy charts (the bubbles are population size):

In the first wave we expect:
  • C. 27m Americans to get access to relatively liberal sports betting regimes (biggest single market: 13m)
  • C. 5m Americans to get access to more conservative ones
In the second wave we expect:

  • C. 52m Americans to get access to relatively liberal sports betting regimes (biggest single market: 20m)
  • C. 29m Americans to get access to more conservative ones
In the third wave we expect:
  • C. 7m Americans to get access to relatively liberal sports betting regimes
  • C. 105m Americans to get access to more conservative ones
Leaving 100m Americans without sports wagering in the foreseeable future based upon our current assumptions, growing to 140m without California.

Delaware provides a useful quick case study here. So far, all commentary seems to be focussed on the fact that the state is first to capitalise post-PASPA and that this marks an opportunity (indeed, bets are being accepted from today). However, we would make four key points to curb this enthusiasm. First, singles bets are being allowed only in the state’s three casinos – not through the 100+ retail outlets where multiples are already accepted and not online (even though poker is). Second, Delaware won’t be allowing bets on college sports (c. 20% of fixtures, some of which are very popular and high quality) and it won’t be allowing bets on home teams – not a big deal for a state of less than a million people, but imagine that rule being adopted in key states… Third, Delaware is pushing ahead quickly in the hope of attracting visitors – a bit like Point of Supply online regimes, this is typically only a driver for either very small states (with commensurately small markets) or destination casino states (of which there are only two and one is already operational). Finally, the spoils have gone to the incumbent: the Delaware Lottery, distributed through casinos, supplied (only) by Scientific Games and William Hill (through the Brandywine legacy). If this is what ‘opportunity’ looks like, European operators should probably unpack their bags and put their passports away…

Another useful state to pick out is California. It is richer and more populous than most countries and was once the beating heart of online poker. However, its gambling interests are dominated by racetracks and tribes (themselves in an awkward constitutional position on cross-border wagering) who would much rather fight over landbased scraps than allow online competition. Can we imagine a landbased-only California? It currently looks more likely than online, meaning a very long wait for some very restrictive legislation is likely, in our view.

One final note of pessimism. The two states that have current working sports betting regimes have an average population per outlet of 14.5k for Nevada (with the significant added benefit of visitor
engagement) and 9.6k for Delaware: these are roughly comparable to European retail penetration and allow for both a (relatively) successful retail presence in their own right, as well as a (reasonably) effective means of distributing landbased-mobile registration and payments (in Nevada’s case). Conversely, the average population per existing venue for all other states (state casinos, tribal casinos, racetracks, OTBs) is nearly 300k: apart from one or two exceptions (such as Connecticut), that doesn’t work in terms of either fulfilling retail demand or providing landbased-linked online access.

Therefore, this is a fiddly slow burn opportunity rather than a big bang, in our view.  Equally, we struggle to see the total market adding up to much more than US$2bn in revenue terms by the end of the second wave – not a lot to go round…

Please contact us directly for state-by-state forecasts of the potential opportunity.

What will make European operators successful?
In more conservative states, the chances of being allowed to be an operator in the European sense is slim. The key here is compliance and landbased product / venue management. Opportunities are therefore much more clearly B2B than B2C. However, it is worth considering that the US average sportbetting revenue per venue is c. US$350,000, with ‘destination venues’ possibly reaching c. US$2-3m: not bad relative to a British betting shop, but hardly a strategic driver of growth given the paucity of actual venues relative to the size of the country, in our view (especially since the licence holder/venue owner will likely take the lion’s share of post-tax revenue).

In more liberal regimes, it will be a different story. Even where direct B2C licences are unavailable (even when spelt with an s), acting as a quasi-operator through partnership is an established model likely to be adopted by all licensees who do not fancy tackling sports from a standing start (some will and some may even get it right with the right help: new kids on the block have toppled self-confident old leaders in many sports betting jurisdictions in the last decade). Here, we identify four key traits:

  • Compliance: ‘grey’ may be more ok than it was, but it will still be scrutinised closely
  • US sports capability: it is surprising how many European sportsbooks tried to crack the UK without horseracing; it will be unsurprising if products developed in and for Northern European markets are quickly unleashed on an unsuspecting and uninterested US customer base
  • Distribution: if customers have to register/deposit/withdraw in a landbased point of sale, if operators can’t aggressively market and/or significant SR controls are put in place, then the .com rule book of throw money at the problem and hope for enough heavy users to disguise a flawed business plan simply won’t work
  • Competition with the black market: the black market won’t pay tax, won’t pay integrity fees, will offer in-play / college markets and won’t go away; the battle will be to engage a new mass market (distribution) and to take share of wallet from an established illegal one – while the former is more about operations management, the latter is much more about the regulatory framework operators have to deal with
European winners and losers
Just naming all the companies which have issued post-PASPA statements would probably take up all of our self-imposed blog word count. Most are based much more on hope than reasonable expectation, in our view. However, sticking to the question, it would be appropriate to name names (and we are avoiding the supplier question because it wasn’t set – that too is a different story).
  • Paddy Power Betfair: has TVG, FanDuel and a NJ position to leverage (as well as B2B capability), meaning it is holding the strongest hand available, in our view (only existing US lottery access is missing); the group only partly controls its platform and has limited US sports trading experience (in volume), but these ‘only’ add operational execution risk to a very strong strategic position, in our view. The US is already 15% of group revenue – can this double? That would not be an unreasonable expectation, in our view
  • William Hill: has made the biggest song and dance about PASPA, and since it is currently the biggest sportsbook in the US (fully c. US$80m of revenue gets you that title: just 4% of WH’s post-Australia revenue) there is some logic. However, while WH has proved that combining the reach of three legacy US businesses with UK trading capability can dominate in-play (without serious European competition), it has been able to buy into a (now) enviable retail network in Nevada (55% share, dominating off-strip) and was then gifted retail as the only point of customer access to online (mobile only). From a B2B perspective, WH is still technologically reliant on Scientific Games (OB), which is a thoroughbred (if an old one) in this race. Can WH replicate the gift that was Nevada in other states where legacy distribution is non-existent (ex-Delaware), where competition will be (much) tougher and where greater product and/or distribution restrictions are likely? We struggle with that
  • GVC: has a Nevada B2B interest (Stadium), an NJ casino partnership (MGM via Borgata), considerable tech and trading capability and a management (CEO) with a growing reputation for getting deals done. While PPB is joining the game with a strong hand carefully played and WH is aggressively bluffing (in our view), GVC has the potential to play a moderate hand exceedingly well, in our view
  • 888 Holdings: has poker positions in Nevada, New Jersey and Delaware (tiny in terms of contribution) and its stock jumped 14% on the PASPA overturn. Its ability to offer something in gaming is clear, but its sportsbook is a Kambi turnkey, meaning either 888 would need to be an operator in its own right, or it would need to persuade a partner that 888’s customer and operations management is of real strategic value; given 888’s weak overall performance and the likely queue of other suitors, we find it hard to see this pitch working that often
  • Kindred: is one of the larger European operators looking forward to entering the US. There would be some irony in a business built on taking on protected businesses from offshore moving into the US in any great scale, an irony undiluted by a patchy track record in regulated markets; Kindred also has a highly European-centric offer and has separated its backend capability in the form of Kambi. A US partner would need to feel that a very strong dose of European .com was the remedy for this solution to fly, in our view. Further, with annual group revenue of c. US$1bn, an awful lot would have to go right for a US opportunity to be even noticeable in terms of growth and returns
  • Sportech: was a UK business, but isn’t really anymore: c. 75% of its revenue is generated within the US and it has a very compelling B2C opportunity in Connecticut (monopoly: 3.6m pop., first wave, expected to be relatively liberal), optionality in California (sports bars) and B2B potential through racing (in 37 states). The group has no fixed odds wagering experience, but its supplier SportRadar has (including some US sports rights). We therefore see Sportech as precisely the sort of special situation where the PASPA repeal not only opens up tangible opportunities but also does so on a relative scale that will be (highly) significant to the group (a benefit CT Shoreline gets to clip a material part of the ticket of for legacy SG reasons)
  • GIG: is a relative newcomer with an NJ deal with Hard Rock. On the face of it, you would expect us to be a little sceptical of a Nordic operator (with own platform and B2B capabilities) being toward the front of the queue. However, GIG’s growth (even in absolute terms) has knocked its more traditional online competitors into a cocked hat, while it remains small and nimble enough both to win deals and for those deals to matter in terms of overall corporate scale
  • Stars Group + SBG: Stars stayed in the US a lot longer than it was welcome to by the Federal government, if not US customers (a decision arguably vindicated by the subsequent ‘reinterpretation’ of the infamous Wire Act) and is now the leading poker provider in NJ (with Resorts); moreover, its proposed takeover of Sky Betting & Gaming gives it the most successful mass market online betting brand to date (albeit achieved only in the UK); as a rule of thumb, for a poker market to be credible it needs Stars, so if legislators are thinking about poker and betting together then Stars is in a very strong position, in our view. If it is just betting, and especially if highly restricted, then the opportunities narrow considerably
  • bet365: is arguably the best bookmaker in the world (there may be better regional players, and some of those regions are very big, but none has the global reach online), and another rule of thumb is that if bet365 is licensed and in-play is allowed, then it will become the market leader. The US may be different, but so is bet365…
So what are the key themes here? There is one we would draw greatest attention to: for all the talk of leveraging Old World experience, the European operators with the most to gain are those that have already introduced critical US DNA, but which also have both something clear to offer a specialist market with clear business and regulatory interests of its own.

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