The NY sports betting market was supposed to be one of the crown jewels of the US.
It was the first of the ‘Big Four’ states to go live, featuring 20 million people, a vibrant sports culture and the wealthy risk-takers of Wall Street.
To date, though, the tax structure and competitive start to New York sports betting has been more nightmare than dream for sportsbooks.
What’s the damage in New York?
A sampling of some entrants shows the grim picture:
- Caesars Digital posted an EBITDA loss of $500 million in Q1, with the majority of that loss coming from New York.
- BetMGM cut its investment in the state, saying the effective tax rate was more than 100%. “The house cannot continue to play if it is always going to lose,” BetMGM CFO Gary Deutsch said.
- Bally Bet, one of just nine license holders, has not even launched yet because the competitive environment is so “insane.”
No surprises here
Of course, the market structure is no surprise to anyone.
“Yeah, of course they weren’t going to make money,” said Shaun Kelley, an analyst at Bank of America. “It’s not rocket science on the numbers. Anyone who knew gaming knew they weren’t going to make money.”
Regardless, the two consortia featuring nine operators agreed to the 51% tax rate, lack of promo deductions and other heavy terms up-front. They then launched with four-figure free bet offers to fight for share.
Analyst firm Regulus Partners called that bonusing strategy on opening weekend “mutually assured destruction.” Penn CEO Jay Snowden said before launch “no operators will make money in New York.”
New York government played its hand well
So what were sportsbooks thinking? Why did they agree to the tax terms and then launch as normal anyway?
For one, the license bidding process was a stroke of genius from the state, with bidders required to match the highest bid on tax rate to qualify. The five-operator consortium led by Kambi, Caesars and Rush Street, bid a 67% tax rate for a five-operator market or 51% for nine operators. The second consortium including FanDuel, DraftKings and BetMGM then agreed to that 51% rate.
“They had almost no choice but to accept,” said gaming attorney Jeremy Kleiman. “It’s the largest active market in the United States and larger than some countries.”
New York also has strategic value. Its media market is so large, it can tip the economics of national marketing in favor of the operator.
Wiggle room in NY sports betting tax rate?
Execs also hoped – rightly or wrongly – there might be some wiggle room in the tax rate once it became clear no one could make money.
As DraftKings CFO Jason Park explained to investors in May:
“Back in January, we built in a probability of a 2022 tax reduction in New York, which did not happen.”
There was indeed some movement towards lower taxes. Assemblyman Gary Pretlow and Sen. Joe Addabbo introduced legislation that would have brought in more operators, thereby reducing the tax rate under the current matrix.
Addabbo later retreated a bit, saying he did not want to reduce the state’s bumper tax revenue haul.
Genie out the bottle
One reason for that inertia is the sheer amount of tax revenue coming in the door. New York has already generated the most sports betting tax dollars of any state at around $267 million.
On that front, sportsbooks did themselves no favors coming out the gate with bonuses north of $3,000, helping to artificially pump up handle.
“Caesars $3,000 offer was the most insane thing I’ve seen in 20 years in this industry,” said one gaming exec.
Doing the math on NY sports betting bonus
Consider the economics: someone deposits $3,000 with Caesars and gets the $3,000 bonus. They then lose the entire $6,000 back to Caesars.
However, Caesars pays $3,060 in tax on that $6,000 GGR, thus putting them d0wn $60 on the customer. That’s before even factoring in paying JB Smoove and other marketing costs.
“It does send an unfortunate message when operators rush into that market,” said Jeff Ifrah, gaming attorney and founder of trade group iDEA.
‘Shut off the taps’ in New York sports betting
Caesars reacted quickly, cutting their promo offer in half around two weeks after launch. CEO Tom Reeg later said the company accomplished its goals with that aggressive early spend.
“To their credit, Caesars pivoted,” Kelley said. “I can’t answer why they didn’t see this coming. But I can say they pivoted pretty quickly. They saw they had to shut off the taps midway through the quarter.
“I also give credit to BetMGM. They realized you simply cannot run the same playbook and not lose gobs of money. Everyone is losing money but New York is next-level losses.”
It is also worth noting operators agreed to terms in a different market environment. In the middle of 2021, stock prices were soaring and operators were rewarded for growth at all costs. In that environment, getting into New York was a no-brainer.
In the current market focused on profitability, New York is an albatross.
Indeed, the market has a detrimental effect beyond just the losses. For one, New Yorkers who used to cross into PA, NJ and CT to bet can stay home and bet with 51% tax rate instead of 14.25% in New Jersey, for example.
What’s more: NY sports betting has had a major cannibalization effect on DFS revenues in New York, according to DraftKings. In essence, the company has moved revenue from the high-margin DFS business to the negative-margin sports betting business.
Time for a change in NY sports betting?
So what next? How can sportsbooks make sense of New York?
The obvious solution is getting that tax rate changed. The industry argues that a lower tax rate creates a more sustainable environment in the long run, by allowing books to offer a better product. Promo and marketing also brings in players from offshore.
“You hope states view this as a partnership rather than a money grab” Kleiman said. “This structure is paying dividends in the short-term, but long-term it creates a terrible situation.”
Hope for 2023?
In that context, Kleiman “likes to believe” New York legislators will change the tax rate next year. Kleiman argued the first effort to do so was simply too much, too soon.
“The fact they considered a change as part of the budget two months after the launch shows New York knows this market can’t work in the long run,” Kleiman said. “I believe it is a matter of time.
“It was just too early in March but now we are starting to see the consequences of the market.”
Not everyone is convinced the state will give up its position, however. Kelley predicts operators will blink before the state does.
“I would bet a lot more on operators pulling back than the environment actually changing,” Kelley said. “Even if there’s math behind taking a lower percentage of a higher number, it’s hard to see the state going back. The number one thing you’ll see is other operators follow that lead from BetMGM and pull back on marketing. It’s the only rational economic thing to do.”
Indeed, if all nine operators cut spend at once, market share could be relatively unchanged while everyone makes a little extra money.
What’s more: if handle continues to decline over the summer months as the sports calendar slows, tax take will start to drop. Then operators have some data to back up the argument about a sustainable market.
No collusion in NY sports betting
However, what are the chances everyone falls into line with this plan? FanDuel, for one, has deep pockets and has pledged to keep spending to press its advantage among US sportsbooks.
“I don’t think the industry is going to jump on board as one and copy BetMGM,” Ifrah said. “They are not unhappy if someone falls on their sword and they can take up share. These guys all have shareholders that only care about one thing.”
Instead, Ifrah said change will come from advocacy and demonstrating the economic argument. As already noted though, that might be an uphill battle.
As Kelley put it: “Once the money is coming in the door, it’s very hard to go back.”
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