US sports-betting duo’s growth wager is paying off

PENN Entertainment

24/01/2025 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Jennifer Saba
       NEW YORK, Jan 23 (Reuters Breakingviews) - The wide
world of sports betting is narrowing. DraftKings  DKNG.O  and
FanDuel have about 80% of the U.S. market, which could reach $39
billion in size by 2030, the latter company’s owner Flutter
Entertainment  FLTRF.L  reckons. High entry costs and slick
products stack the house in the duopoly’s favor. Absent a
regulatory crackdown, it looks like years of red ink will
finally pay off.
    Both companies’ roots lie in speculative chance. FanDuel and
DraftKings were founded in 2009 and 2011 respectively as daily
fantasy sports websites. They operated on the fringes of
sports-betting proper, because a U.S. federal statute prohibited
running sportsbooks outside of Nevada. The pair’s implicit
gamble was that rival gaming hub New Jersey would challenge the
law of the land. Lady luck was on their side: in 2018, the
Supreme Court ruled that each state could regulate wagering on
its own terms.
    The decision opened the flood gates. So far, 38 states and
Washington DC have legalized sports punting in some form. Nearly
one-fifth of American adults have put money down on football,
basketball and other games, according to a 2022 Pew Research
Center survey, and the total amount wagered ballooned from $13
billion in 2019 to $135 billion last year, per Sportsbook
Review, landing operators almost $13 billion of gross
revenue. Two of the most populous states, Texas and California,
are still mulling whether to allow betting.
    Punters’ unbridled enthusiasm has left analysts and
executives continuously dialling up their estimates of the
possible market size. Take Flutter Entertainment, the $48
billion company that owns FanDuel as well as European brands
Paddy Power and Betfair. Back in 2022, it reckoned the total
addressable market for U.S. sports-betting would be $23 billion
at maturity in 2030. Last September, it raised that estimate to
$39 billion because legalized states were on track to surpass
its original expectations.
    The string of fortune has nicely positioned FanDuel and $20
billion DraftKings, run by co-founder Jason Robins and which
went public via a special purpose acquisition company in 2020.
Both were ahead of the game roping in customers and building a
slick mobile app and complex IT systems to address multiple
rules, outcomes, and payment types. The historic sales and
marketing investment stands out. In 2021, DraftKings put roughly
75% of its $1.3 billion in revenue towards that line item, while
FanDuel shoveled nearly 50%. That beats other infamously
high-cost customer acquisition businesses like Uber Technologies
 UBER.N , which spent one-third of its top line on sales and
marketing in 2019, the year of its initial public offering.
    Rivals are circling the table. BetMGM is a partnership
between MGM Resorts International  MGM.N  and UK-listed Entain
 ENT.L . Penn Entertainment  PENN.O  struck a 10-year deal with
Walt Disney’s  DIS.N  sports network ESPN to use its brand for
$1.5 billion and rename its product ESPN Bet. Even collectable
and sports apparel brand Fanatics launched its own betting and
gaming network.
    Still, FanDuel and DraftKings command 44% and 34% of the
market respectively, according to H2 Gambling Capital figures
for operator gross wins, which is gambling-industry parlance for
the amount staked minus payouts for winning bets. That advantage
should perpetuate itself, since scale gives the duo more money
for marketing and product development. Bigger gambling companies
can also typically afford to offer tighter odds without
sacrificing their revenue, mostly through smarter pricing, which
keeps customers coming to their apps.
    In many ways, betting helps sports teams too. The National
Football League and National Basketball Association are just
some of the franchises, along with collegiate sports, that have
attracted punters. Betting sites give wagerers a reason to keep
their eyes on the screen with in-game parlays, which depend on
multiple outcomes to hit the jackpot. In turn, leagues’ viewing
figures improve, allowing them to charge ever-more for the right
to air their matches.
    It all adds up to a financial jackpot for FanDuel and
DraftKings, which probably both generated meaningfully positive
EBITDA in 2024, according to analyst estimates gathered by
Visible Alpha, after years of massive losses. Those figures
should quickly grow, however. Analysts reckon DraftKings will
bring in $2 billion of EBITDA in 2027, while Flutter is aiming
for $2.4 billion from FanDuel that year, at a healthy 25%
margin. The companies’ relatively modest forward valuation
multiples of 10 times 2027 EBITDA, using Visible Alpha data,
imply further upside for their stock if they hit those numbers.
    Success has its drawbacks. Regulators have lurked for years.
In 2017, FanDuel and DraftKings scrapped their plans to merge
after the Federal Trade Commission sued to block the deal
because the two would control 90% of the daily fantasy sports
market. In December 2024, U.S. Senators Mike Lee and Peter Welch
called on the Department of Justice to investigate the duo,
citing concerns that they were working together to stymie
competition. The same month, the chamber's Judiciary Committee
held a hearing on the dangers of addiction brought on in part by
the ease of online sports gambling, citing that 2.5 million
adults have a severe problem.
    The industry is trying to get ahead of such challenges,
including by founding the group Responsible Online Gaming
Association. Even if that move proves ineffective, it’s
nonetheless hard to see the administration of President Donald
Trump, with its de-regulatory zeal, from cracking down any time
soon. FanDuel and DraftKings took a major punt on growth, and it
looks set to pay off.

    Follow @jennifersaba on X

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Sales & Marketing costs eat up a chunk of total revenue    https://reut.rs/4hiMUsT
FanDuel and DraftKings are US market leaders    https://reut.rs/4amtTDG
Basketball and football are US punters' top sports    https://reut.rs/4jj2RAR
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 (Editing by Liam Proud and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  SABA/ 
jennifer.saba@thomsonreuters.com))