Learn more about our Sports Betting ETF
The global gaming industry has
generally been fast growing over the last decade, pre-COVID, due to exceptional
growth in Asia, notably in Macau and Singapore. New casino projects globally
have also fuelled growth, given strong untapped demand in most markets. Looking
forward, Fischer Gaming, our partners for the Sports Betting ETF, believe that growth is likely to come from Asia and online wagering
on a global basis. On the other hand, the bricks and mortar market in the US is
relatively mature. The convention and group travel market is also expected to
take time to recover which impacts locations such as Las Vegas.
The online gaming market
generated around $63b in revenues in 2019, according to H2 Capital. This is
expected to grow by around 11% CAGR to 2025. The US is expected to grow at 21% CAGR. Despite changing regulations in some markets, Europe and Asia are also
expected to record solid growth.
Source: H2 Capital
Goldman Sachs have
even more aggressive estimates. They expect the US market to expand 23x from
$2b in 2020 to $53b in 2033, representing a 27% CAGR.
Source: Goldman Sachs. Future projections
for illustrative purposes only.
Some of the leading companies in
the industry are equally optimistic, with Draftkings and MGM both expecting
medium term industry revenues of around $28b.
It is important to appreciate the
differences between sports betting and iGaming given differences in market
size, growth rates and profitability.
Sports betting is defined as
betting on event connected to sports activities such as the winner of a match
of the game’s high scorer. The variations of wagers are endless. People have
been betting on sports since the dawn of time with horse racing being a favourite
time in many different cultures going back centuries.
In some countries, like the US,
sports betting had been illegal over fear that the sports could become
compromised.
However, social acceptance
shifted. Sports teams, leagues and the media are also supporting the change as
betting dramatically increases fan engagement and therefore the value of the
product.
iGaming customers are more
lucrative than sports bettors with average spend per adult expected to be
around $105 v $45 for sports, according to Morgan Stanley.
Profit margins are also lower for
sports betting, given the higher customer acquisition and other marketing
costs.
Bet MGM believe the payback
period for sports betting customers is 3 years vs 2 years for iGaming.
Source(s): Morgan
Stanley estimates, report dated 1/20/21.
New Jersey Division of Gaming Enforcement. BetMGM Investor Day, April
2021.
Demand
for sports betting and iGaming in the US. Some key statistics:
- The Gaming Industry in the US
is already $125b in revenues with commercial casinos including Native American
casinos at $75b. Lottery, card rooms and other gaming add an additional $50b.
- It is estimated by the American
Gaming Association that around $150b is wagered every year illegally.
- The gaming markets in countries
that share some cultural similarities, are meaningful with the sports betting
and horse racing market in the UK at $4.7b and Australia at $3.3b.
- Sports viewership in the US is
one of biggest globally with 100m tuning in to watch the Super Bowl every year.
Given this underlying demand,
regulatory change has been the key catalyst for growth.
How
has it happened?
- On May 14, 2018, the US Supreme
Court struck down the Professional & Amateur Sports Protection Act (PASPA),
the 1992 federal law than until then limited fully fledged sports betting to
Nevada (grandfathered in).
- States now have the right to legalise
sports betting through legalisation or constitutional amendments.
In what form?
- Most states have awarded
licenses to operate sports betting to the existing casinos, then allowed them
to partner with online operators, with each website/app referred to as a “skin”.
- Lotteries are the primary
authorised providers of sports betting in some states.
In a short period of time, sports
betting has rapidly legal in 24 states and on the way to 39 states by 2023. And
iGaming is legal in 6 states and on the way to 11 states by 2023, according to
Morgan Stanley.
Source: Morgan
Stanley. Future projections
for illustrative purposes only.
Technology is also spurring
growth. Globally, people are spending more time on electronic devices and 77%
of the US population have their own smartphone.
Other technological improvements
are also enhancing the gaming experience such as: improved user interface
including design, navigation, speed; and greater personalized marketing.
Morgan Stanley expects 82% of
sports betting to be online with 18% at retail.
Source: Morgan Stanley
Technological advances also support proposition bets
becoming more widely available. Prop bets are typically bets on any event
during the game that does not usually impact the outcome of the game. This can
include the first person or team to score. While many of these can be
considered “gimmicky”, they can also be a lot of fun for casual bettors.
Given the huge size of the illegal gaming market, we expect
meaningful conversion from illegal betting to legal betting.
The relatively low growth in the
“bricks and mortar” segment of the US gaming industry is also fuelling greater
investment into “online or digital” gaming for many of the larger companies
like MGM Resorts, Caesars and Penn. This accelerated investment will drive more
rapid revenue growth in the shorter term.
US sports are well suited for
betting. There are more discrete plays in sports like American Football,
Baseball and Basketball, which encourages various “prop” bets. Some examples
include:
Next player to score a touchdown
(NFL), a home run (baseball) or 3 points (basketball).
Long-term prospects
Sports Betting and iGaming is
still in its infancy and going through an investment phase, resulting in short
term losses for the B2C companies. However, the leading companies such as
Draftkings and Bet MGM are expecting high EBITDA margins in the range of 30-35%.
Morgan Stanley expect 25% margins.
EBITDA margin long-term prospects
Source: Draftkings
Investor Day, March 2021; Bet MGM Investor Day, April. Morgan Stanley.
Bet MGM believe they have
structural cost advantages to drive higher margins due to:
- Omni-channel
reduces marketing spend, increases retention and increases player value
- In-House
tech significantly cheaper
- Revenue
share lower due to MGM market access
- Scale
supports national advertising
Goldman Sachs also expected that
capex as a % of online gaming revenues, will be relatively low at 1.8% compared
to Bricks and Mortar Casino at 7% and also compared to online Retail at 2.2% of
revenues.
Source: Goldman Sachs
Bricks and mortar casinos are
very capital intensive with 3,000 room hotel resorts costing around $3-6b
depending on the location and investments in non-Gaming amenities.
Yet, by adding online gaming to
an existing brick and mortgage portfolio can expand the companywide ROI through
cross fertilization of customer both ways.
Relatively low capex requirements
may also drive the Return On Investment and create long term value for
shareholders.
To learn more about our Sports Betting ETF, please visit our fund page here.