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July 12, 2023

Editor Note: JohnWallStreet and Guggenheim Securities' Michael Morris are hosting a sports investing 'mini-camp' this afternoon for a collective of institutional investors and JWS A-Listers.

Eilers and Krejcik Gaming Partner Emeritus Chris Grove will lead the interactive discussion on topics including, but not limited to, market share/addressable market, the current environment (think: legalization, consolidation, promotional/marketing and technology) and OSB media strategy. The story below is certain to come up.

There are plans to continue and expand on the series in the months ahead. We'll pause in August before returning with another NYC-based event in September. Two more cities will get mini-camps over the next 12 months, and we're starting to plan a pair of larger scale sports investing 'training camps'. Much more info to come...

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Fanatics Sportsbook’s Impact on Market Share May Depend on Product

PointsBet shareholders recently approved Fanatics’ $225 million bid for the company’s U.S. business. Fanatics upped its offer by 50% after DraftKings bid $195 million for the assets.

The outcome is widely viewed as a win for the online retailer turned sportsbook operator. Fanatics Sportsbook is now in position to achieve scale before football season kicks off (think: PointsBet operates in 14 states).

There is less of a consensus on what the acquisition means for FanDuel, DraftKings, BetMGM and Caesars, the current market leaders.

While some industry insiders believe Fanatics’ presence is certain to have an impact and that the debate is simply about how large, others view taking meaningful market share as a costly, uphill battle for the challenger brand.

We may have a better sense of who was right before the end of the ’23 NFL season.

The argument against Fanatics having an impact is the fact that despite best efforts from the competition, FanDuel and DraftKings continue to accrue market share. The two companies now control upwards of 80 percent in most states.

If you believe it is ‘game over’ and that the two DFS operators have won, then Fanatics is not change the competitive dynamics of the marketplace; regardless of how much capital it burns trying.

“That’s pretty much our view,” Curry Baker (director, media & entertainment equity research, Guggenheim Partners) said. “MGM made a run. Caesars made a run. Others have. I’m skeptical that Fanatics’ push is going to be all that different, or successful, relevant to catching up to where FanDuel and DraftKings are from a product, tech, customer relationship, marketing [and], brand recognition perspective.”

But if you start with the premise that legalized gaming is in the early days of a 20–30-year long rollout in the U.S., then it may be premature to declare anyone a winner (or loser).

“We’re very early both in terms of time and the whole rest of the market actually opening. Online sports betting still has almost half of the country to go, and online casino is only available to about 15% of the population,” Chris Grove (co-founding partner, Acies Investments) said.

Fanatics is getting the platform and market access it believes it needs to challenge the incumbents in the PointsBet acquisition. It will also inherit the brand’s existing market share (~3% nationwide).

It could have taken an organic path and methodically built a gaming business from the ground up. Fanatics Betting & Gaming CEO Matt King has spoken of his belief in the company's ‘second mover advantage’.

But rolling out sports betting on a state-by-state basis and getting to national scale is hard and expensive, and that’s with the technology. Fanatics plans to integrate the best parts of PointsBet’s tech into its own stack.

“[Fanatics is] already starting at a major disadvantage. As more states roll out, and DraftKings and FanDuel continue to consolidate their positions, it’s only going to get tougher and tougher,” Baker said. “So, it’s a race against time.”

The acquisition should accelerate Fanatics Sportsbook’s efforts, perhaps by

more than 18 months

.

The brand will enter the U.S. sports betting market this fall from a position of strength.

As a private company, it won’t be subjected to the same scrutiny its public counterparts are. So, it can take a 

strategic ten-year approach

, as opposed to focusing on short-term profitability.

Fanatics is also well capitalized, which should be valuable as consolidation continues in the space.

And the brand has a large database of potential sports bettors. The presumption is it will be able to migrate a meaningful number of existing e-commerce customers to the new sports betting platform. Early indications, based on a small number of markets, are said to be promising.

Of course, Caesars and BetMGM have large databases too. It hasn’t mattered.

“What we’ve seen is it’s very hard to drive meaningful market share and attract customers away from FanDuel and DraftKings,” Baker said.

While that has been true to date, it’s not how comparable markets have historically behaved over an extended period.

“You tend to think of the top two controlling something a lot closer to 40% than 80%, and then you see a couple tiers of competitors below,” Grove said.

The bulk of any market share Fanatics is able to command will likely come from DraftKings and FanDuel, at least initially. That is because the brand plans to go to market with a casino/sportsbook product similar to the market leaders.  

DraftKings made a late play for the PointsBet business that would have slowed down Fanatics’ sports betting ambitions. But Baker insists that was not the company’s motive.

“My sense is they’re not worried about Fanatics buying PointsBet,” Baker said.

Grove thinks that may be a mistake.

“It may not be a massive negative for the market leaders, but the transaction certainly can't be construed as a positive for any incumbent,” he said.

In fact, it’s fair to wonder why Flutter, FanDuel’s parent co., never showed up at the negotiating table. The company has the financial wherewithal, and seemingly would have valued PointsBet’s profitable Australian business. Flutter is the market leader in Australia.

And remember, the gaming conglomerate has ambitions of spinning FanDuel off. The emergence of a new, well-capitalized, competitor with national scale would seemingly place a dent in the company’s equity story.

To date, the public markets have not reacted strongly to Fanatics’ acquisition of PointsBet.

That will change if the company starts to take market share this fall.

But at this point, it’s hard to view the market as a barometer of likely outcomes anyway considering its track record on the sports betting opportunity.

It’s hard to say if Fanatics will ultimately have a seat on the podium. Too many variables remain.

“But is the potential there? Sure,” Grove said. “They have the size, resources, and

potential

to offer a differentiated product. But if all they do is offer a slight tweak on the standard casino sportsbook product and hope to close the gap by embedding the product within Fanatics ecosystem, that's a very tough lane to swim.”