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The global sports betting industry has been characterized over the past five years by equal parts growth and consolidation.

The revenue of the top five companies have tripled, driven by 70% growth in industry revenue and an 80% increase in concentration, or those five firms buying smaller rivals. Just last week, Barstool Sports backer Penn National Gaming Inc. agreed to buy Score Media & Gaming Inc. for about $1.74 billion. This week, DraftKings Inc. agreed to buy Golden Nugget Online Gaming Inc. for about $1.56 billion. How long will this trend continue and where will it lead?

We have an historical parallel for what is happening. In the early 20th century, sports bookmaking in the U.S. was a strictly local business. But with the end of Prohibition in 1933, the criminal enterprises that law created had to find new sources of revenue and turned to drugs, prostitution and gambling. Over the subsequent two decades, local bookmaking gave way to a single national organization quoting a unified “Vegas line” everywhere. Local bookies became franchisee order takers.

The business changed entirely. Local bookmakers had quoted odds, such as 3-to-1 on an underdog and took risk. The criminal interests switched to point spreads (invented by University of Chicago mathematician Charles McNeil in the 1940s). All bets were even money (minus a spread called “vigorish”) but if you bet on the underdog it got points added, and if you bet on a favorite the point spread was subtracted. Organized crime matched the bets on both sides, so that it made equal profit on all outcomes. This system lasted until federal prosecutors broke the organized crime monopoly in the late 1970s.

Sports betting is an industry with vast economies of scale. A bigger operation means more ability to balance risks and to diversify away from unbalanced risks. It allows companies to focus on the “lifetime value” of a customer rather than competing in a commoditized market for soliciting bets. Only the largest companies possess the financial, legal and lobbying resources necessary to satisfy regulators. Innovations developed for one market can be rapidly and efficiently scaled up for all customers.

All the top global competitors today are combinations of traditional bookmakers-like the U.K.’s Paddy Power or Golden Nugget-with technology innovators like Betfair or DraftKings. (Paddy Power and Betfair are owned by Flutter Entertainment PLC, which merged its U.S. business with FanDuel in 2018.) No pure company of either type has broken through to be a major player.

Given the limited number of large, successful traditional bookmakers, I expect that to mean the industry will continue to be dominated by today’s large players, augmented by acquisitions of smaller bookmakers without the scale to remain profitable and innovative new companies that quickly hit a ceiling due to regulation. (The only other plausible scenario is a new company staffed by experienced executives from existing big companies, backed by venture capital.)

This will change the sports betting business as fundamentally as the mob takeover in the 1940s and 1950s. The ultimate limit on sports betting revenue is the amount customers are willing to lose, which not even a monopoly company can influence.

In a disorganized, competitive market for sports gambling, the trick is to be nimble enough to grab a lot of favorable bets. But if the industry consolidates to a global oligopoly, as I expect, the game changes to attracting and retaining valuable lifetime customers, and keep them losing just enough to feed the top line without losing so much that they quit or cause trouble.

One particular tactic that might give regulators pause is subsidizing the bets of young people likely to be successful-college students for example, or children of wealthy parents-in the hopes of milking them in later decades (a strategy that proved to be a winner in the brokerage business).

Gambling is among the oldest and most universal human recreational activities, but commercial gambling for cash is only a few centuries old. The business, and government attitudes toward it, have undergone periodic seismic shifts. We’re in the midst of one today.

Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is the author of “The Poker Face of Wall Street.” He may have a stake in the areas he writes about.

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