Sports betting companies face pressure from new companies as NFL season kicks off

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NFL season kicks off this weekend amid what’s expected to be another record year for online sports gambling. While bettors debate which team will win the Super Bowl this year, the companies providing the markets for most of those wagers are duking it out for customers.

DraftKings (DKNG) and FanDuel had more than 75% of the market through the end of the first quarter of this year, per analysis from Macquarie research. But two of sports business’ premier brands, ESPN and Fanatics, are entering the gambling world, setting the stage for a fall that could once again be defined by heavy promotions.

DraftKings, for its part, says it isn’t worried about the competition.

“We’ve seen this in pretty much every digital product in existence, the best product wins,” DraftKings Co-Founder and CEO Jason Robins told Yahoo Finance. “On the internet, it’s easy to compare. People talk and they see. I think that we really invested there, and I think at this point in time we’re the best product in the market and it’s only going to get better.”

Destabilizing the landscape

On August 8, Penn Entertainment ditched Barstool Sports and signed a $2 billion deal with ESPN, the self-proclaimed worldwide leader in sports. Penn is aiming to launch ESPN Bet in November and hopes the new brand can earn it double-digit market share, up from it’s current low single-digit share.

Penn CEO Jay Snowden said at an industry conference this week that Penn is now operating its own tech stack and believes the company has “great product,” which could be a meaningful development with primetime ESPN exposure expected to draw more eyes to the app.

Meanwhile, Fanatics has a massive database of sports fans and their favorite teams from years of order placements. The company sends targeted emails to sell merchandise around team events. It could leverage a similar strategy with online gambling and promote bets to customers based on their favorite teams.

“I think there’s a real opportunity to do some things differently in the category, some things that look a lot more like a consumer technology company and a lot less like a sportsbook” Matt King, CEO of Fanatics Betting & Gaming, told Yahoo Finance.”

King spent nearly six years at FanDuel, including almost four as CEO, before leaving in the fall of 2021. He likens the new approach he’s taking with Fanatics to American Express, where customers pay year-after-year to be a part of the reoccurring rewards program. The e-commerce giant is currently offering a free jersey to any Massachusetts user that bets $50 or more on the platform. It also plans to integrate its collectibles business and build out fan experiences where bettors can interact with players.

“The question for the Fall is will PENN’s launch of ESPN Bet (and Fanatics’ launch too) destabilize what was a rationalizing competitive landscape,” Shaun Kelley, Bank of America research analyst, wrote in a research note on Tuesday.

Macquarie Securities managing director Chad Beynon, who covers the sports gambling space, believes DraftKings and FanDuel have long been the market leaders with the most visually appealing platform and the best selection of betting options.

“The big question is, that gap is probably going to close with the others, but will people transition over?” Beynon said.

LANDOVER, MD - JANUARY 20: FedEx Field Opens the first Fanatics Sportsbook betting lounge inside an NFL Stadium on January 20, 2023. Credit: mpi34/MediaPunch /IPX

LANDOVER, MD – JANUARY 20: FedEx Field Opens the first Fanatics Sportsbook betting lounge inside an NFL Stadium on January 20, 2023. Credit: mpi34/MediaPunch /IPX

Return of promotions?

The heightened competition raises the question of whether companies will double down on promotions that previously hurt their margins.

“Let’s say we get to week five or six of the NFL season and people aren’t happy with their market share or how they’re stacking up,” said Joel Simkins, a managing director in Houlihan Lokey’s technology group. “Do we see those marketing wars kind of remerge, do we some more aggressive re-engagement activities?”

Promotions have been the flashy way to bring bettors onto an app. At their best, companies use them to bring new customers onto a platform with the hopes to retaining bettors long-term.

At their worst, promotions play out like Caesar’s (CZR) 2021 New York launch, which offered $3,000  deposit matches but failed to maintain customers. Caesars Digital, which includes the sportsbook, lost $560 million in net income during the quarter it launched in New York. Its market share in New York decreased from 24% in February 2022, to just under 10% in August 2023, per New York State Gaming Commission Data.

The industry has improved its margins this year. FanDuel achieved profitability on an adjusted EBITDA basis through the first half of 2023. DraftKings cut losses throughout 2023, recently announced quarterly profits and is aiming for full-year profitability in 2024.

But if either Fanatics or ESPN Bet is successful, another customer acquisition moment might heat up in the sports gambling space and could threaten the progress gambling companies have made toward profitability.

“The easiest way to grow, and even frankly, defend share at times is marketing [which includes promotions],” King said. “But…the longer you do that, the more there’s a compounding effect in kind of just the business strategy, that kind of makes you continually dependent on spending billions of dollars in marketing to maintain that share position.”

“Once you scale marketing it’s like a drug that’s hard to get off of.”

Josh Schafer is a reporter for Yahoo Finance.

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