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Sports betting is a big business, but it can also be a brutal business if the conditions aren’t right

Sports media app theScore's chair and CEO John Levy (left) and president and COO Benjamin Levy.Christopher Katsarov/The Globe and Mail

The windfall John Levy had been praying for arrived, of all times, in the middle of the COVID-19 pandemic.

Ten years ago, the founder and chief executive of Score Media and Gaming Inc. sold his family’s crown jewel, a sports TV station, to Rogers Communications Inc. for $167-million. But rather than unload every aspect of the operation, Mr. Levy and his sons, who work for the family business, held on to the company’s smartphone app, known as theScore.

At the time, the digital revolution was still in its infancy and the app itself was pretty basic, mostly providing sports scores and news. But the Levys hoped to monetize it one day. The ideal opportunity to do just that fell into their laps in August, 2021.

Although theScore app was rather popular, with 3.6 million users in Canada and the United States, the family hadn’t figured out how to make money off of it – in fact, their company hadn’t turned an annual profit since selling the TV business. One logical extension, if governments would allow it: integrate the app with online betting.

By 2019, theScore had caught the eye of a major U.S. gambling company, Penn National Gaming Inc. The two agreed to work together on sports betting in the United States, and Penn also bought a 5-per-cent stake in Score Media. By 2021, Penn was so smitten that it put in a takeover bid for the whole company worth US$2-billion in cash and shares.

Like many digital businesses, Penn had seen its valuation soar during the pandemic, fuelled by incredibly low interest rates and a growing belief among investors that the digital economy would trump real-world experiences after the pandemic. Flying high, Penn also wanted to seize on Canada’s potential. In August, the same month the acquisition of theScore was announced, Ottawa legalized sports betting on individual games through digital casinos countrywide.

Under the new regime, each province is allowed to develop its own rules and ecosystems for sports betting. British Columbia was the first out of the gate, offering it though its provincially run PlayNow lottery system. In Ontario, however, where Score Media is based, Doug Ford’s Progressive Conservative government chose to open the floodgates to the free market, starting April 4. To date, dozens of companies have registered to launch.

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The opportunity is tantalizing. Sports betting has long been legal in Britain and Europe, and it’s a big business. In 2020, Denise Coates, the founder and head of the U.K.-based Bet365 platform, took home £421-million ($699-million).

But it can also be a brutal business if the conditions aren’t right. For a taste of just how troublesome a hyper-competitive market can be, glance at the United States. The digital sports betting industry there is a tad more developed than in Canada, having been legalized in 2018, and what’s transpired since has to be disquieting for anyone who thinks Ontario’s shift will be a digital gold rush.

DraftKings Inc., one of the first and biggest U.S. online sports betting platforms, reported its 2021 earnings in February, and investors were flummoxed. The company lost US$1.5-billion, and its cumulative loss dating back to 2019, the year it went public, now totals US$2.9-billion. DraftKings shares have plummeted 73 per cent from their peak in March, 2021 – including 29 per cent this year.

One huge drain on earnings is the costly promotions these companies shell out to attract new customers. Bonuses can run as high as US$3,000, but there’s no guarantee the users they attract will stick around. “The industry wants everyone to think they’re going after profitable customers,” Alan Woinski, chief executive of Gaming USA Corp., a consultancy, said in an interview. The reality: Once promotions subside, “they’re going to realize there’s no loyalty.”

At the same time, share prices of unprofitable tech companies are crashing en masse because rising interest rates hurt growth stocks the most. Penn’s share price has plummeted 32 per cent since theScore deal was announced, extending a rout that has wiped out most of the company’s pandemic stock market gains.

Facing investor pressure, some companies are already pulling back in the U.S. market. Industry giant Caesars Entertainment Inc. is cutting its promotional spend, and there are rumours that Wynn Resorts Ltd. is looking to sell its nascent – and struggling – sports betting business.

Horse racing specialist Churchill Downs Inc. is pulling the plug on its online betting platform altogether. “Many are pursuing maximum market share in every state with limited regard for short-term or potentially even long-term profitability,” chief executive Bill Mudd said on the company’s last quarterly conference call for analysts.

For Canadians, this evolution may sound eerily familiar. When the federal government legalized recreational marijuana use in 2018, dozens of companies joined the green rush, hoping to get in on the ground floor of a revolutionary business.

Four years later, licensed producers are awash in red ink – including the industry giants – and their share prices have crashed. All the lofty expectations about the potential market size proved to be wildly inflated. Lately, struggling cannabis companies have merged with each other to have a chance of surviving.

There’s no denying that online sports betting is wildly popular with users. But the question is whether it can be a lucrative business. Because, at the moment, it looks much more likely to morph into something that resembles the cannabis industry’s crash.


Former Cincinnati Reds manager Pete Rose got a lifetime ban from Major League Baseball in 1989 for betting on games while he was the team’s manager.The Associated Press

Not so long ago, single-game sports betting was still frowned upon in Canada and the U.S. The pervasive fear on this side of the Atlantic was that it would tarnish the beauty of sport. “We’ve been very open about our position that we oppose legalized sports gambling,” NFL commissioner Roger Goodell said in 2015. “We think the integrity of the game is the most important thing.”

The origins of this view were multifaceted, but often rooted back to some high-profile cases in which coaches or referees were involved in betting scandals. Former Cincinnati Reds manager Pete Rose got a lifetime ban from Major League Baseball in 1989 for betting on games while he was the team’s manager, and in 2007, NBA referee Tim Donaghy was convicted for betting on games in which he officiated.

Because of these fears, any sports betting in Canada had to be offered through multigame parlays, in which bettors try to predict the outcome of several games at once. A common bet made through Ontario’s Pro-Line system would require choosing the winners of three NFL games in a weekend. The thinking was that it would be far too difficult to fix multiple events.

But in May, 2018, the U.S. Supreme Court overturned a federal ban on sports betting, and 30 states have since legalized the business, including heavyweights such as New York, which opened up at the start of this year. In Canada, a private member’s bill put the issue before Parliament, and the federal government legalized single-game betting last August.

While there are fears that sports betting will cause a spike in gambling addiction, possibly leading to financial ruin for some users, Canada’s legalization has broad support, including from organizations such as the Responsible Gaming Council. “A regulated market is better for a consumer than an unregulated market,” chief executive Shelley White said in an interview.

Annual sports wagering in Canada

2019

$10-billion

$4-billion

$500-

million

Through offshore online

sports wagering sites

Through illegal book

making operations,

mostly operated by

organized crime

Through legal

provincial

sports lottery

products

the globe and mail, Source: Criminal Intelligence

Service Canada​

Annual sports wagering in Canada

2019

$10-billion

$4-billion

$500-

million

Through illegal book

making operations,

mostly operated by

organized crime

Through offshore online

sports wagering sites

Through legal

provincial

sports lottery

products

the globe and mail, Source: Criminal Intelligence

Service Canada​

Annual sports wagering in Canada

2019

$10-billion

$4-billion

$500-million

Through illegal bookmaking opera-

tions, mostly operated by organized

crime

Through offshore online

sports wagering sites

Through legal pro-

vincial sports lottery

products

the globe and mail, Source: Criminal Intelligence Service Canada​

One of the main reasons, she explained, is that single-game sports betting has existed in Canada for years in the grey market. Foreign platforms such as Bet365 have been able to offer single-game betting because of a quirk in the law that says provinces have the right to govern gaming within their own borders, but computer servers for online betting are often based in countries beyond their control.

Quebec tried to ban its citizens’ access to unauthorized gambling sites, but in 2018, the Quebec Superior Court ruled the legislation unconstitutional because it infringed on the federal government’s oversight of telecommunications and the Criminal Code.

Because the grey market has proliferated, millions – if not billions – of potential tax dollars have disappeared offshore. In 2019, Criminal Intelligence Service Canada, an inter-agency organization, estimated that $10-billion was wagered through illegal bookmaking operations that were mostly operated by organized crime, and $4-billion was wagered through offshore online sites. For comparison, $500-million was wagered through legal provincial platforms.

With so much already being wagered, many governments have concluded that it’s best to bring online gambling under their purview and tax it.

Sports leagues also now embrace single-game betting. Fantasy sports – in which users assemble imaginary teams of real players – have shown that engagement spikes when fans have even just a little skin in the game. To get in on the gold rush, the NFL partnered with four approved sportsbooks last year, and the league said it expected to bring in US$270-million of revenue from gambling deals last season – a figure that could rise to US$1-billion by the end of the decade.

Caesars Sportsbook, which has partnered with the NFL, advertises in Times Square in Manhattan shortly after the state legalized online gambling in Jan. 2022.Brittainy Newman/The New York Times News Service

With those obstacles out of the way in North America, the market for sports betting is expected to be big. In Britain, where single-game sports betting became legal in 2005, the market has grown from £300-million annually to £2.5-billion in 2020, according to H2 Gambling Capital, a data service, and the U.K.’s Office for National Statistics.

Because so much activity now takes place instantly on smartphones, betting during games has become extremely popular, which expands the opportunities.

If a March Madness U.S. college basketball game goes to overtime, for instance, a new game bet with fresh odds will pop up. Betting lines are also available on all sorts of sports worldwide, so someone sitting in Canada can bet on, say, Aussie rules football.

Yet it’s still very possible it will be a bloodbath for operators in Ontario and other provinces during the first few years as the market shakes out.

In Ontario, dozens of companies have registered to launch, and they range from giant U.S. platforms such as BetMGM and Caesars to local startups such as NorthStar Bets, run by the new owners of the Toronto Star.

The major struggle all providers face in competing against one another is the cost of customer acquisition – how much it takes to lure a new user. With each platform offering a relatively similar service – bets are bets, after all – they often have to dangle goodies in front of users to get them on their platforms.

Investing a lot in customers can pay off if they stay loyal to the brand, but there’s nothing stopping any of them from downloading a competitor’s app and doing the same thing once their free money runs out.

Caesars Sportsbook has been one of the most generous with promotions, at times offering a US$300 sign-up bonus, as well as a dollar-for-dollar match on player deposits up to US$3,000. Caesars lost US$1-billion in total in 2021, and its digital betting arm lost US$580-million of that.

DraftKings, meanwhile, reports its earnings using a made-up metric it calls “contribution profit” – that is, earnings before its marketing and promotional costs. Even then, the company doesn’t expect to be “profitable or close to it” until 2024, CEO Jason Robins said on its most recent earnings call. The company did not respond to a request for comment for this story.

Robert Fishman, an analyst at New York-based MoffettNathanson LLC, which does research on media companies, has more dire expectations. In a recent note to clients, he projected that DraftKings will not break even on adjusted earnings before interest, taxes, depreciation and amortization until 2025 – but even then the company still won’t be profitable.

An extra wrinkle in Ontario is that betting companies can’t market the way they do in the U.S., where they advertise their sign-up bonuses. In Ontario, they are only allowed to market their brands. “Ontario wanted to have a reasoned and measured approach to the introduction,” said Paul Burns, CEO of the Canadian Gaming Association.

To adapt, betting companies have signed up athletes as spokespeople, with BetMGM nabbing Wayne Gretzky and Connor McDavid for their commercials. Sponsorship deals with leagues are also expected to enhance brand recognition. PROLINE+, the single-game sports betting outfit run by Ontario Lottery and Gaming Corp., announced a multiyear partnership with the NHL earlier this month.

Yet no matter how much they advertise, there will be a tilted playing field at the outset because the grey-market platforms have existing users they hope to keep in the legal market. Bet365, for one, has been offering its users $25 in bet credits if they download its new legal app. And if they do, they can use it to keep betting in the grey market until the province’s legal system goes live on April 4.


North Carolina State's Anthony Barber, right, dribbles across the FanDuel logo during an NCAA basketball game in the Legends Classic in New York in 2015.Kathy Willens/The Associated Press

With so much competition in a newly legalized market, and with new entrants facing off against existing grey-market operators, the parallels to Canada’s experiment with recreational cannabis are striking. But it isn’t the only road map. Just look at what happened in Atlantic City, said Mr. Woinski, the industry consultant who spent most of his life in New Jersey, but recently relocated to Florida.

“This is what happened in Atlantic City for years. They gave these promotions, so they couldn’t make any money,” he explained. Eventually the introductory offers had to end, and then multiple casinos closed, including ones Donald Trump owned at various times. “It’s going to be the same with this,” Mr. Woinski said, referring to digital sports betting.

That doesn’t mean online sports betting won’t work as a business long-term, it’s just that many companies likely won’t survive. Mr. Woinski said those that do are likely to be the ones that also offer online casino gambling, such as poker and blackjack. “Online gambling is a completely different animal. That’s where you make money,” he said.

Only a handful of states have legalized online gambling such as poker or blackjack, and that has made it even harder for online betting companies to make money so far. “Sports is a very low-margin product,” said Mr. Burns from the Canadian Gaming Association. Profit margins are often just 5 per cent to 6 per cent. “Sports books can lose money on a weekend if things don’t go well.”

Online casinos, meanwhile, can be quite profitable. There’s a reason for the saying: The house always wins. Already, some U.S. companies are trying to venture into this market to subsidize their sports betting losses, with DraftKings buying Golden Nugget Online Gaming Inc., an online platform in New Jersey and Michigan, last year.

“Sports betting should act as the top of funnel acquisition tool to bring users onto the platform,” suggests Mr. Fishman, the analyst at MoffetNathanson. The real money can then be made by cross-selling higher-margin online casino services.

Silquia Patel, 29, celebrates during Super Bowl LIII in East Rutherford, N.J., on Feb. 3, 2019.EDUARDO MUNOZ/Reuters

But adding online gambling may not be the only path to success. Score Media, for instance, hopes to convert many of its existing users by targeting them through an app they already open. In other words, Score may not need nearly as big of a promotional spend.

Aubrey Levy, the company’s senior vice-president of content and marketing, also hopes the app’s ecosystem will help users stay loyal to the brand because it will allow them to bet, check scores and read sports news all in one place. “Our job is to bring the betting as close as possible to them by integrating it seamlessly, so as to not disrupt their experience,” he said.

Rush Street Interactive, which operates online casinos and sportsbooks in several U.S. states, meanwhile, marketed its BetRivers platform heavily in Canada during the Beijing Winter Olympics and hopes to differentiate itself here through legitimacy and ease of use.

“We’re a company you can trust,” chief operating officer Mattias Stetz said, noting that Rush Street has only ever operated in legal and licensed markets. The company also wants to make a name for itself as the platform that makes it easy for users to get their money – which can be quite a tricky endeavour in the grey market. In the U.S., the company approves more than 85 per cent of withdrawals instantly.

Still, if the U.S. experience is a relevant one, it won’t be possible for every competing company to make it out alive. Amy Howe runs FanDuel, one of the major U.S. fantasy sports and betting platforms, and she recently spoke frankly about the situation. “Ultimately this market is going to settle out with three, four, five competitors,” she told the Financial Times. “There are too many competitors right now to sustain this level of spend.”

If she’s right, there will likely be consolidation across the industry. And if there’s one thing that can be learned from Canada’s cannabis crash, where consolidation was also necessary, it’s that it doesn’t pay to be proud. Many cannabis producers weren’t willing to merge – for far too long – so they competed to the death. The losses eventually grew so large that investors all but gave up on the sector.

With sports betting, investors are already losing faith. Which means sportsbooks should ask themselves early and often: Even if they make it out as one of the last companies standing, will it be worth it?


The endless scope of sports betting

Newcomers might think sports bets are only popular for major events, but the industry has grown extremely sophisticated and it’s now possible to place bets on outcomes during games, and on sports, leagues or pastimes you didn’t know existed. Some examples:

World Table Tennis

The name says it all. The league is a big deal outside of North America, but smartphones allow you to bet on it from here

Super Bowl national anthem

The game is fun, but the national anthem too? That’s where the real action is. Bet on the length of each year’s rendition

ESL Pro League

A professional league for video games. Bet on teams playing Counter-Strike: Global Offensive

Marble racing

Think Formula One, but with marbles that race on a downhill track. Really


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