Conversion Corner: Running out of steam

With the launch of the football season behind us, data is starting to trickle in from individual states showing how operators have performed so far this year, alongside the quarterly earnings reports from the operators themselves. Using the data and the latest financial reports, we can now take a deep dive into the numbers and assess the success (or perhaps failure) of customer acquisition campaigns across the market and for the main players in particular. The state-level data will provide us with good comparisons and growth from 2020, while also highlighting the challenges operators are facing when it comes to acquiring new customers in specific markets. The quarterly reports will provide a more in-depth view of the growth per operator and the expectations the market has on each. While it is still very early days for legal sports betting in the US, these numbers and reports are allowing us to see how the live states and operators are shaping up. It makes for interesting – and in some ways frightening – reading.

Spend has been excessive

Looking at the quarterly reports and listening to the latest earnings calls from operators indicates that marketing and ad spend is excessive – and that is putting it politely. We have focused on the importance of growth over the past few years – with little regard to the cost of the growth being targeted. Recent reports seem to indicate an inflection point where operators are now looking for sustainable growth over rapid growth. The comments on overspending on marketing also indicate that operators are not achieving a good ROI on the millions of dollars being outlaid on customer acquisition. If the ROI was good, we would not be hearing about it on earnings calls. We have arrived at this situation because of the all-too-common “me too” strategy to national marketing spend. Under this mindset, there is less tactical and localized marketing spend being deployed in the states where operators have licenses or will get them. Of course, the approach to acquisition differs from state to state and from operator to operator.  Some companies are still in the launch phase while others have plenty of data to inform marketing activity. This is providing investors with a wide range of information and insight. In this edition of Conversion Corner, we will take a closer look at Bally’s, Rush Street Interactive, Penn National, DraftKings, Fan Duel, and PointsBet, drilling down into their earnings reports and calls to get a clearer picture about how each is approaching acquisition and ad spend. Before we do – and for a little perspective – consider this: Nielsen Ad Intel reports that sportsbook firms spent nearly $154m in the first quarter of 2021 on local TV commercials. In the same period in 2019, sportsbooks spent only $10.7m on such spots. In addition, Mario Stefanidis, vice-president of research at Roundhill Investments, recently said: “Customer acquisition costs are still in the $300 to $400 range when competing on breadth of offering. Most sportsbooks offer lucrative intro bonuses which increases acquisition costs, but in the long term, retained customers should deliver strong recurring value.” I’m not sure I agree with those numbers based on the figures below….

Bally’s (highlights from its Q3 results presentation)

The operator has 500,000 monthly active users (MAUs) across its 14 land-based casinos in 10 states. While its retail footprint may not marry with the current online gaming opportunity, there is plenty of opportunity to focus on its casino MAUs to drive online engagement. That will not only benefit the online gaming component of the business, but it will also help to significantly increase the average revenue per monthly active user (ARPMAU). Put it this way: if I had $1 to invest, I would focus on the long-term opportunity versus $1 trying to convert other opportunities Bally’s has at its disposal. While it has access to sports betting in 15 states, it should instead focus on converting its casino players to sports betting customers. Cross-sell potential is high and can be achieved at a much lower CPA than other channels. It’s also worth highlighting a couple of points from Bally’s overall marketing strategy:

1. Drive awareness of the Bally’s brand at a local level using proprietary assets and partnership.
2. Work hand in glove with our retail teams to leverage our footprint.

Both of those make perfect sense.

Rush Street (highlights from its Q3 results presentation)

The operator reported revenue of $123m and, interestingly, is seeing ARPMAU of $380 during the quarter. That equates to over 105,000 MAUs with an increase of 26% from the previous quarter. In short, the operator increased its total players by 20,000, having spent $45m on advertising and marketing during the three-month period. That works out to $2,250 per customer. Clearly its customers are far more valuable than other operators’ customers. Advertising and promotional spend came in at 37% of revenue and included ads AND promotional bonus spend. This is very different from PointsBet, which I will analyze next.

PointsBet (highlights from its Q3 results presentation)

PointsBet has increased its “cash active clients” (CAC) in the US significantly. It now has more than 185,000 CACs. The operator doesn’t break this down into a unit such as MAUs, so it’s hard to compare apples with apples. It defines CACs as anyone who placed a cash bet in the past 12 months, and it increased CACs in the US by 26,000 during the quarter. The operator spent $26m on marketing costs, which equates to $1,000 per new customer. However, that doesn’t include the bonus costs of $16.7m. While I would have thought that the increase would be noteworthy, its US CEO offered interesting comments regarding its media and freeplay relationship with NBC. While PointsBet acquired 516,000 users via its freeplay products, he seemed to indicate that the company would rather spend resources on building a differentiated product versus building databases of bettors in various states through F2P. I would certainly love to know the conversion they are having.

Penn National and Barstool (highlights from its Q3 results presentation)

The operator revealed that it now has 25 million MyChoice customers. That feels like a massive opportunity considering its favorable footprint of casinos in states where sports betting is legal. The operator led its earnings report’s betting section with the success of its retail sportsbooks and not its online assets, which indicates the former is where the biggest sports betting wins currently lie. But while retail is important, it is a fraction of the total market. Penn National is on record recently as saying that “we have been able to achieve this growth while maintaining our disciplined approach to marketing, which has resulted in blended customer acquisition costs of under $100 for the year.” Acquiring customers below $100 would certainly make Penn National a leading contender.

FanDuel (highlights from its Q3 results presentation)

The operator recently announced that it had 1.9 million Active Monthly Players in September 2021. These are impressive numbers considering that it said: “typically we think that US consumers have many fewer accounts, they’re much more likely to have one account, that we would see in the equivalent situation in the UK.” It appears that FanDuel is not only acquiring a solid number of players, it is retaining them as well. The operator said it had also been “aggressive throughout this period and will continue to do so, but in a relatively disciplined manner. Some of the people who tried to grab some of the market early in the football season are starting to run out of steam.”

DraftKings (highlights from its Q3 results presentation)

DraftKings spent more than $700m to increase its Average Monthly Unique players to 1.3 million for the first nine months of 2021. That is an increase from 679,000 over the same time period, costing the operator $1,000 per new MAU. With an Average Revenue per MAU of $61, they become profitable at month 16. The best example may be WynnBet, as they seem to have conducted a bit of a 180 since the start of the football season, when the operator launched a star-studded commercial that must have cost a good few dollars. In its Q3 results, outgoing CEO Matthew Maddox said, “Competitors are spending too much to get customers, and the economics are just not something that we’re going to participate in, in the short term. “So, while we built the brand, we launched the product in the third quarter, we’re going to be focused on building a long-term business that’s sustainable, that is not losing lots and lots of money.” Craig Billings, CEO of Wynn Interactive, also added: “… we expect the capital intensity of the business to decline meaningfully beginning in the first quarter of 2022.” That seems a prudent approach by the team at Wynn and probably for the rest of the industry.