Chris Russo | Six questions facing the US sports betting industry

Chris Russo, chief executive of Fifth Generation Sports, explores the ramifications of the ongoing Covid-19 pandemic on the still-developing world of legal US sports betting.

Chris Russo

US sports betting has been dramatically impacted by the current medical and economic crises created by the Covid-19 outbreak. While professionals in the space are correctly focused on the health and safety of their families, employees and customers, some executives are beginning to consider the key questions facing the betting sector, once professional sports resume. Although the questions are fairly obvious, the answers are far less clear.

Will the current crisis ultimately accelerate the legalization of sports betting across the US?

Cash shortfalls facing many states could propel a faster path to legalization of sports betting, as states seek additional tax and licensing revenues. Also, given the potential need for social distancing, the move to mobile platforms could accelerate in certain states which have only legalized land-based sports betting to date.

While this hypothesis has merit, there are other factors to consider. Perhaps most importantly, many state legislatures will be consumed with more pressing matters in the near-term (or may be out-of-session, due to health concerns about assembling). Also, for some states, the potential sports betting revenues may be relatively insignificant compared to their massive cash shortfalls. Finally, if states are overly aggressive in their fees and taxation, these actions may actually dampen the growth of US sports betting.

Will economic challenges faced by sports leagues lead to a more aggressive deployment of sports betting?

Major US sports leagues have prudently managed the roll-out of US sports betting, developing a range of policies regarding local team activities, in-arena betting, in-game broadcast promotion, and other related initiatives. In order to boost revenues, some team owners could seek a speedier deployment of new betting products and marketing initiatives.

While this is certainly a possibility, the major US sports leagues are generally healthy, vibrant businesses that can effectively weather the current crises. Moreover, while betting is a key new engagement tool and revenue stream, there is significant risk in over-saturation, as was seen in the early days of daily fantasy advertising.

What types of betting companies will be best positioned, once sports resume play?

In difficult economic times, those companies that are well capitalized and generate diversified revenue streams tend to be best positioned. As such, large betting conglomerates and those companies with alternative products such as horse racing or online casino/poker may have an advantage.

However, this analysis is complicated by the challenges faced by companies that operate land-based casinos. It is not clear how quickly these casino properties can rebound or the degree to which they will receive government assistance. Also, since many betting operators are global enterprises, the environment in the US may be one of many factors in determining the health of these businesses.

Finally, individual company strategies, resources, and management talent may ultimately outweigh macro-trends, given the dynamic nature of the sports betting ecosystem.

Will betting operators change their approach to marketing?

Conventional wisdom suggests that betting operators will be more cautious about their marketing expenditures, given the economic downturn. Also, the types of marketing deals could be impacted. For example, instead of sponsorships and media deals, operators could increase their focus on performance-based customer acquisition (e.g. CPA deals).

While some operators will likely adopt this conservative approach, others may view the “pent-up demand” among sports bettors as an important opportunity to secure new customers, once sports resume. In addition, some operators may choose to spend heavily in order to gain market share from competitors weakened by the crisis. Finally, if state legalization accelerates, these betting operators may be “forced” to spend additional marketing dollars in order to establish themselves in important new markets.

Will investment and merger-and-acquisition activity in sports betting be negatively affected?

During an economic downturn, M&A activity and private equity/venture capital investment tends to decline. Also, to the extent that investments are made, they are often focused on shoring up existing portfolio companies versus investing in new companies or sectors. As such, the sports betting industry could experience lower deal volume in the coming year(s).

On the other hand, the potential need for scale and financial stability could result in a number of M&A consolidation transactions. Also, given that sports betting has significant growth potential, it may be the one area that continues to receive substantial investment dollars, even when investors exhibit extreme caution overall. While there will likely be a period of pause and reflection over the next few months, it is possible that robust deal-making in sports betting could return sometime during the second half of 2020.

Will US sports fans embrace betting, despite economic hardships?

Sports betting was not broadly legal in the US during past economic crises, so there is no direct, historical data regarding consumer behavior. However, it is reasonable to assume that a loss of jobs and disposable income among fans could reduce expenditures on sports betting. During the Great Recession, certain types of gambling activities were negatively impacted (e.g. trips to casinos).

Other gambling activities appear to be more recession resistant (e.g. state lotteries). More broadly, the major sports leagues that drive US sports betting appear to be recession resistant, based on the 2008 – 2012 experience. Given the loyalty and passion of sports fans, it is possible that game viewership and sports betting could become an important diversion for American consumers, even when vacations and other forms of entertainment are sacrificed.

While questions regarding the sports betting industry pale in comparison to the more important and imminent medical crisis, there will be a time when fans celebrate the return of professional sports and the opportunity to wager. Like all industries, sports betting is operating in uncharted waters, as it relates to the current macro-conditions. This uncertainty is compounded by the nascent nature of the US sports betting marketplace.

Nevertheless, there will surely be significant opportunities for those companies that best address the key questions and optimize their operations with thoughtful strategy and effective execution.

Fifth Generation Sports is a sports consulting firm focused on the intersection of sports, technology, and digital media.

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