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Since the U.S. Supreme Court removed a federal ban on sports betting in 2018, we have witnessed a legalization rush. Thirty-five states along with Washington D.C. now offer legal online sports betting as they look to monetize and tax an industry long functioning without governance and regulation.
Online gaming, however, has seen much slower growth since legalization in 2011. Only six states thus far offer legal iGaming, though a handful of additional states are considering legislation—something industry experts and advocates say is well overdue.
In 2023, the legal market will reach $15 to $17 billion in gross revenue for sports betting and iGaming—with population coverage of more than 50% and 10% respectively—yet will largely remain unprofitable. The challenge for industry players is clear: in a quest to build footprint and scale, how do operators grow share efficiently and acquire and retain customers profitably?
What’s happening?
Online sports betting and iGaming have so far augmented the industry by introducing new use cases for gamblers to play and reaching previously untapped consumer segments and demographics. This helps to displace legacy brand fears of digital cannibalization.
In fact, despite the 55% increase in revenue growth iGaming and sports betting experienced in 2022, established U.S. commercial and tribal land-based casino revenue grew 8%—well above its long-term run rate.
The total addressable market (TAM) is still developing, but it is growing fast. By 2030, TAM across sports betting and iGaming is expected to reach $40 billion, likely absorbing a portion of illegal activity—which the AGA estimates at around $400 billion in yearly wagers and roughly $17.3 billion in revenue.
Large investments—and large losses
Despite the rapid growth and transformation of the sports betting and iGaming industries, most operators remain unprofitable. The current industry lifecycle demands operators make large investments to win new markets and reap future profits. Entering a new jurisdiction and acquiring new customers is costly in terms of market access, promotion and marketing spend; historically, it takes years to see a positive return.
In 2022 alone, top operators recorded more than $2.5 billion in estimated negative adjusted EBITDA. This is before factoring in capital expenditures or asset acquisition costs; Flutter, FanDuel’s parent company, reported in November 2022 that it has invested $5.8 billion in FanDuel between initial acquisition in 2018 and June 2022. For these power players, profitability is at last moving in the right direction—from June 2022 to June 2023, adjusted EBITDA losses came in at an estimated $1.6 billion. Several expect to be profitable by the end of the year.
Market concentration shrinks opportunities
The top operators own more than 70% of the U.S. market and are expanding their share at around five percentage points every 6-12 months, squeezing the addressable opportunities for others to grow. The market will further polarize between a few large, dominant players and everyone else.
There is select opportunity for new entrants that believe they have the resources and operational power to compete—like Fanatics, which recently acquired the U.S. operations of PointsBet.
With that said, even experienced and well-equipped operators are forced to make tough choices when lacking scale and a profitable outlook. WynnBET announced in August that it will cease operations “as soon as possible” in eight of the ten states where it operates. “In light of the continued requirement for outsized marketing spend through user acquisition and promotions in online sports betting, we believe there are higher and better uses of capital deployment,” said Julie Cameron-Doe, chief financial officer of Wynn Resorts.
What’s next?
Despite the difficulties, we see a path forward to profitability. It will take a function of scale, market maturity with fewer new states to launch, and more online casino availability, as well as a balanced equation of customer acquisition costs versus lifetime value. To achieve the latter, operators will need to improve spending discipline and focus on ROI-driven sales and marketing investments and find their space—or face prolonged losses and a premature exit.
Long-term growth involves a sustainable business equation, which requires operators to shift from land grabbing to boosting operational health across the B2B2C value chain. At AlixPartners, we recently published proprietary research on a similar transition from growth to profitability in the tech sector. We have helped companies across the landscape optimize their internal operations and spend, revamping their growth trajectory for efficiency.
As an example, we worked with a leading UK online sportsbook and iGaming company that was significantly underperforming against industry peers. Unable to compete with niche online providers and facing unprofitable international expansion, we helped the client reorganize its executive level, customer operations, and marketing department, as well as accelerate its mobile-based betting platform. We then segmented customers by channel, reviewed pricing, and locked in a new partnership with retail shops. Our action plan aims to improve the client’s EBITDA by more than £100 million.
For operators to achieve profitability and sustainability, they must focus on the following three areas:
1. Build differentiated, innovative products that provide user personalization
Personalization is key. Consumers now expect personalization in any experience with a brand and grow frustrated when this expectation is not met. As such, sportsbook and iGaming operators can borrow from the social media industry, providing players with their most relevant content, in real time, at the top of each app to promote engagement and extend penetration and retention.
Increased adoption of AI-based solutions for both sports betting operations and offerings can drive additional innovation and expansion. Use cases include odds setting and trading/risk management, player acquisition optimization, UI/UX and customer journey personalization, and game ideation and development in iGaming. AI allows operators to speed up processes and reduce costs in a labor-intensive cycle, boosting operational efficiency and potentially accelerating growth.
2. Participate in iGaming—as much as regulation allows
While B2C sports betting presents a challenging business equation, iGaming offers a more profitable value chain with greater player adoption and spending. When normalized for population and GDP, iGaming penetration and revenue is three to four times greater than that of sports betting, according to our analysis.
Sports betting operators can integrate iGaming offerings within their existing digital platforms, e-wallets, and CRM capabilities to drive cross-selling and leverage player overlap. iGaming also doesn’t necessitate the same promotional intensity as sports betting and allows for broad third-party content sourcing. As a result, operators with a greater stake in iGaming have a substantially more favorable lifetime-value to customer-acquisition-cost ratio and tend to enjoy healthier margins.
With that said, operators will need online casino regulation to speed up. Expansion will be the critical driver of sustainability for the entire industry.
“iGaming from six states did $1 billion in tax revenue, while [30+] states produced $500 million in sports betting tax revenue. And [the iGaming] market is just getting going,” Howard Glaser, head of government affairs for Light & Wonder, told iGaming Business.
3. Leverage M&A for consolidation and asset acquisition as the playing field grows
Middle-of-the-road operators can decide to put an end to their losses and exit the space, as in the case of WynnBET, or they may prefer to be part of increased market consolidation, as with PointsBet. Acquisition by an operator that values their customer base, brand, market access rights, or technology may make the most financial sense.
M&A will continue to propel asset reallocation (e.g., Scientific Games and IGT) as well as consolidation and vertical integration (e.g., Aristocrat and NeoGames), even in B2B, for years to come. As B2C operators and B2B providers reassess their market position and unique technological and content assets, and integrate vertically, PE and even VC firms continue to find this space attractive for their investments. Gaming brings together media, sports, and financial services elements, all of which draw extra attention to the sector.
AlixPartners can help with these initiatives, as we offer due diligence services around M&A, divestures, and post-merger integration. We recently worked with a leading B2B entertainment and gaming company supporting strategic initiatives to transform its business and operating model.
We helped the company review its portfolio of businesses and streamline and simplify operations across its supply chain and logistics, IT, finance, procurement, facilities, and administrative departments. This allowed the company to reshape its portfolio via the strategic sale of non-core assets, while delivering a pipeline of around $100 million in cost improvements for the retained operations.
Continued adoption and increased penetration of sports betting and iGaming accelerate investments pay back. Larger operators are making progress in streamlining their go-to-market cost structures and benefitting from scale. A few more prominent operators will break even in 2023 or 2024.
The iGaming and sports betting industries are not short on future growth opportunities. Those who maximize iGaming and best optimize product and UX innovation, operations and marketing spend, and assets acquisition stand to win big.
