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Who will be the last operator standing?
This week’s edition will examine how ad spend from one large operators could influence the actions of other large operators. To clarify, we’ll be looking at larger operators who can afford to spend at the same level as the market leaders in the United States. What smaller operators spend on customer acquisition is a drop in the bucket compared to the behemoths of the industry.
The Status Quo
If you’ve been following our work at The Handle, you probably saw our piece on sustainable customer acquisition ideas. It’s available here for anyone curious. But anyway, the gist of that piece was that operators are burning money at incredible rates and not necessarily in sustainable ways. This is evidenced by the beating that some of the operators have taken in the equity markets, and the positive response that BetMGM got when they announced that they were going to cut back on advertising spend. In short, operators are shelling out cash and investors are starting to get upset. They want to start seeing some real profitability and proof that the cash isn’t just going to entrepreneurial folks who are taking advantage of generous deposit bonuses.
To the Game Theory
Right now, there is an absolute barrage of advertisements and offers for many operators, especially when a new state comes online. Operators blitz the airwaves and try to become the most recognizable brand in a given area. They work to offer the most generous incentives to consumers (whether a $1000 free bet is more appealing for the average consumer than a $250 deposit match is another fun question) in an effort to become the first place that bettors make a new account. Every operator wants to be the first one that a customer thinks of when they go to open their first legal account.
Generally, that means operators are in a competition to spend the most money to be in front of the most eyes. It’s why we’ve seen operators not afraid to have costs of customer acquisition in the high triple digits. Operators were in a war of capital attrition. Whoever ran out of money first would be unable to compete in new markets and no longer be able to operate on the same plane as the market leaders. Luckily for the industry, none of the major players seem to be running out of money and even with the recent market downturn, there is still a lot of excitement in the space.
This brings us to the game theory element of the decision making. Let’s pretend that there are two leading operators around the country, SelectionMonarch and SpectatorJoust. Each has a market share in every state they operate in hovering between 30-40%, meaning combined they make up about ⅔ – ¾ of the overall market. They spend the most by far on customer acquisition and are the first name that the casual sports fan thinks of when they think of legalized betting.
In the first scenario, if these two firms don’t cooperate, they will both spend significant money to try to pull ahead of their respective competitor. There will be over spending that may not be sustainable in the long run, potentially opening up the door for a new market entrant. In this high spending competition, it’s unlikely that either operator would be able to reach profitability because there is no incentive to as long as investors care about customer acquisition more than the bottom line. Additionally, each operator can go to its investors and say “we need to spend more than our competition to make sure we don’t fall behind”, and the investors can assess the situation and decide that backing that strategy is in their best interest.
In the second scenario, one operator spends a lot of money while the other pulls back from the unsustainable spending in both new markets and existing markets. In this case, the operator spending a lot of money will likely be able to increase their market share above their existing baseline in any new market. After all, they will be the one that everyone sees first and the one offering the most generous sign-up bonuses. The operator spending money will eventually be rewarded with significant market share while the other lags behind. This seems to be DraftKings’ strategy, where they are happy to let everyone else start to get sick of the advertising while they double down and reach customers in new markets.
In the third scenario, the two market leaders can collude (which is illegal, this is just for illustrative purposes), and agree to limit spending between themselves. Generally, the competitors at the lower end of the market won’t have the resources to jump in front of the market leaders even at this lower spending level. Sports gambling advertisements would likely be seen by a similar number of people, and sign ups would probably be in the same range, but a bit lower. The reason is that advertising spending likely exhibits incredible diminishing marginal returns on actually converting someone into becoming a new sports bettor. People who want to bet on sports will see the ads and decide it’s something they want to do, regardless of if they see 2 ads or 12. They’ll take advantage of the deposit bonuses, but fundamentally they want to bet and are okay with smaller deposit bonuses. The reason the spending stays high is that the competitors must stay in near lock step when attempting to become the primary account for that customer.
Obviously, even if the operators did agree to collude and limit spending between themselves, both sides have a massive incentive to cheat! If they manage to spend more than their rival, they access far more customers and can reap the benefits of the second scenario above. The ideal case for our pretend companies would be a regulatory limit on gambling advertising (something that is currently being kicked around) below where they are currently spending, but above where the competitors at the lower end of the market are comfortable spending. In this case, the two large operators are better off because they are still spending less than they were in the original environment, but are still comfortably situated ahead of their lower end peers.
One assumption that this relies on is that the operators are basically providing goods of equal value to consumers. We think this is probably close enough to the truth. No one really has the strongest preference about whether they use one operator or another, providing a few basic conditions are met. The quality of the experience being relatively similar is a prerequisite for this type of competition to occur. Otherwise, users would just flock to the best app slowly but surely over time. Again, the current market leaders in the US have relatively similar user experiences.
It’ll be interesting to watch the coming months of advertising spend and customer acquisition come in. After BetMGM turned down its spend, will larger competitors like Draftkings and Fanduel mop up its market share? Will BetMGM’s customers be sticky, or abandon ship to find the deposit bonuses from higher spending operators? We can’t really know the answer to these questions, but we do know that if BetMGM can maintain its same level of market share with lower spend, a lot of these companies wasted a lot of money on advertising.
