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The Uber-fication of Sports Betting

If you are an avid sports fan, which I can assume (although you should never assume) all of my readers are, than you have undoubtedly noticed the incredible rise of Sport Book advertisements that take place during the commercial breaks of our favorite games. This reality was inevitable after sports gambling was made legal by the majority of state's (30+ will offer legal online sports gambling by the end of 2021) in our great nation. But my God, it seems that the likes DraftKings and Ceasars have made their way into every piece of content that a sports fan could come across. The sports radio shows sound more like infomercials and I'm getting confused when I see Drew Bree's analyzing a game one minute and then promoting PointsBet the next. This made me question the economics of the industry and wonder what the impact of this madness is going to be over the next few years.

Lets dive in...

We will begin with the macro-economic details. According to the American Gaming Association (AGA), sport betting is a $41.2bn industry, and its legalization is expected to contribute $22.4bn to the U.S. GDP in 2021. On top of that, it is projected to support for 216,671 jobs and $11bn of total labor income.

Revenue of the largest sports books in the nation (i.e., Draftkings, FanDuel, BetMGM, etc.) are estimated to finish the year at $3.8bn, with a Compound Annual Growth Rate (CAGR) of ~31%, which means revenue would be closer to $11.8bn by 2025.

Now here is where things start to get interesting. None of these sports books, that are generating billions of dollars of revenue, are going to be profitable... How could that be? Well, I got two words for you, Customer Acquisition (CAC). For those of you that slept through micro-economics, CAC is simply the cost of acquiring a new customer. The formula often used to calculate CAC is Sales & Marketing Expenses / # of New Customers. These firms, as we have seen, will stop at nothing to out-advertise and out-market their competitors, a strategic methodology that big tech firms (e.g., Netflix, Uber, Amazon) pioneered and normalized over the last decade.

For example, it is reported that DraftKings, who spent a total of $500m in 2020 to acquire customers, had already spent an additional $400m in sales and marketing through the first two quarters of 2021, a 60% increase YoY! Their projected $800m in CAC is going to devour almost 73% of their ~$1.1bn of annual revenue.

Even more interesting are the unique deal structures that sport books are offering former star athletes to become brand ambassadors. Bree's, who I previously mentioned is now working with PointsBet, was given a 4.99% equity stake in the company to formally endorse their products. Meanwhile, the entire Manning family, including Cooper, who has no professional sports resume, have just agreed to an undisclosed amount to partner with Caesar's Sports Book.

At some point these firms will have to answer to their shareholders and turn a profit. What does this mean for all of us? Well in the coming years expect to see less promotion's offering to "match your first $100" or "cover up to $50 worth of losses". These tactics will become less important as profitability is prioritized and market share is swallowed up by the major books.

This week I am going to make a few random college basketball bets. Please see below for upcoming wagers.

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