Thursday, September 16 2021

IF YOU ARE going to handle a gambling operation, it helps to have the luck on your side. A few months after Peter Jackson was appointed head of Flutter Entertainment in 2018, the US Supreme Court struck down a federal law banning most sports betting. For a company running established bookmakers like Betfair and Paddy Power, this opened the door to a betting El Dorado. Two years later, Flutter’s $ 12 billion madness at PokerStars, an online tournament franchise, seemed expensive – until a pandemic left millions at home in possession of stimulus checks and lots of free time. If the house still wins, Mr. Jackson comes in second.

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Bets were once the prerogative of mafia bosses and the sharp cards of the alleys. Today it is a more and more regulated $ 500 billion company where more and more bets are placed on mobile phones. Executives at companies like Flutter use daily metrics (conversion rate, customer acquisition cost, employee engagement) familiar to managers at Amazon or McDonald’s. To be sure, a certain brand of investors still treats gambling as hopelessly “sin”, to be put in the same bucket as the suppliers of alcohol, cigarettes and missiles. That didn’t stop Flutter, the world’s largest games company, from securing a spot in the blue-chip. FTSE Index 100 in London, backed by a market cap of £ 25 billion ($ 35 billion). This high number depends on the continuation of Mr. Jackson’s winning streak.

It can do well. Online gambling is a rare global industry that has been dominated by European companies. European governments generally preferred to regulate and tax what they assumed would happen anyway. The operators of brick-and-mortar betting shops merged into groups that could better afford the investments needed to develop websites and applications. Besides Flutter, which merged Paddy Power, Betfair and others into an Irish holding company, there is Entain, a FTSE rival, who rode Ladbrokes, Coral and Bwin, originally from Austria. As online casinos and poker took off, other acquisitions were made to sell roulette spins to soccer bettors.

In America, legal betting that existed before 2018 was limited and local. Most were for casinos and resorts; sports betting was virtually banned outside of Nevada. This meant that as states liberalized their sports betting offers – as nearly half of them have now done – most of these potential American rivals lacked the expertise to calculate. and stream online the changing odds on which the New York Yankee will hit the next home run. This is precisely the sort of thing that European bookmakers have been doing for years.

To take advantage of this “massive land grab” for sports betting, Mr. Jackson did what any good player does: he took a calculated risk. It prepared to enter the US market ahead of the Supreme Court ruling. Weeks after the rule change, Flutter took to FanDuel, a “fantasy league” website where wheelchair quarterbacks were speculating (mostly for fame, not money) on the results of sports competitions. Getting a hold of it before rivals realized its value gave Flutter a database of loudmouths who were eager to put money behind their swagger as soon as the states started allowing it.

The forecast for US gambling revenue is now growing as fast as Schumpeter’s losses on poker night. By 2025, analysts predict that bookies serving American sports fans could pocket $ 10 billion to $ 15 billion a year in gross gaming revenue, the money they make after paying successful bets. Although covid-19 briefly interrupted most sports, it pushed more potential gamers into online hobbies, which included bingo as well as Netflix. Cash-strapped US states are in desperate need of taxpayer dollars to fund pandemic relief, and other goals have started legalizing sports betting faster than expected. A few allowed online poker and casino games, which were also illegal in most places. This could bring in an additional $ 5 billion a year for top brands.

Hence the land grabbing. Flutter argues that gaming benefits from the same network effects as other digital markets such as social media or ridesharing. Bettors want to play where others bet. Early entrants can spread the cost of brands and technology over a larger number of users, further increasing barriers to entry. American sports betting can indeed be a market where the winner takes the most. The share of the three big operators (FanDuel; BetMGM, partially owned by Entain; and DraftKings, another “fantastic” site turned bookmaker) has grown from less than a third in 2018 to three quarters now. FanDuel itself controls almost half of the market. Unresponsive to heavy losses as it splashes out to attract new clients, analysts put the deal at $ 18 billion.

Before the climax

In order for the bet to continue to pay off, Mr. Jackson will have to dodge a few missed numbers. Exuberance in America contrasts with harsher prospects elsewhere. UK regulators are expected to introduce new restrictions to tackle problem gambling. Germany has imposed new rules that will penalize operators’ profits. This should give pause to those who think that American law is predestined for further easing: what the regulator gives, the regulator can withdraw. Few people doubt that the money will be made in American sports betting, so new competitors are set to emerge in search of a share of the pot. The American sports leagues are all powerful and have already called for a levy on betting. Broadcasters have a lot of influence; Flutter is engaged in a legal battle with Fox, Rupert Murdoch’s empire, which owned a stake in the parent company of PokerStars and has an option to buy nearly a fifth of FanDuel.

The risk for Flutter is that too many good things end up generating a backlash. The company spent $ 291 to acquire each US customer, mostly on ads and subsidized first bets. If Flutter is to generate a profit, bettors must lose at least that much on average. For that to happen, they might have to bet a few thousand dollars. Flutter, like all other publicly traded game companies, emphasizes that it is about the market providing a little light entertainment, not attracting gambling addicts. If bookies are too successful, this argument may start to seem even more hollow.

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This article appeared in the Business section of the print edition under the headline “Jackpot!”


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