Analysis: How to solve a problem like Illinois

Illinois represents a huge potential market for sports betting operators but the language of the state’s gambling expansion bill has left firms unsure how best to tap into the Prairie State

Illinois joined more than a dozen states in legalizing sports betting in early June, but rather than celebrating the opening of a new market of some 13 million people, operators were left wondering just what they were walking into.

The main bone of contention is the 18-month wait for online-only operators. Any firm wanting to offer online betting without a local casino partnership will have to wait 18 months after the local casinos receive their licenses to launch, and also pay a hefty $20m upfront license fee, compared to the $10m for casinos and sports venues.

The clause was proposed as a compromise for the local casinos and originally conceived as a way to punish FanDuel and DraftKings for allegedly operating their fantasy products illegally in the state after the Illinois AG declared DFS illegal back in 2015. DraftKings in particular was vocal in its opposition to the legislation, with CEO Jason Robins taking to Twitter to compare the clause to “passing a ride-sharing bill that excludes Uber and Lyft.”

“Very disappointing that Illinois customers will not have the best options available to them for 18 months,” Robins said, adding: “Imagine if your entire competitive strategy was to lobby to keep the best products out of the market. How bad must you think your own product is? (I would tweet this at Greg Carlin [the CEO of local operator Rush Street Gaming] but I don’t think he’s on Twitter).”

DraftKings’ lobbying lead Jeremy Kudon followed that up with his own Twitter barrage, tagging Rush Street for being unwilling to compete on a level playing field and declaring the bill to be unconstitutional.

When approached by EGR about its plans for the market, DraftKings’ director of global public affairs James Chisholm noted: “We’re considering all available options to bring a competitive mobile sports betting market to Illinois consumers as soon as possible.”

When asked whether that could include legal action against the bill, as hinted by Kudon’s unconstitutional claim, Chisholm replied: “We are considering all options.”

Routes to market

DraftKings, then, seems keen for a fight, but it’s not a response necessarily mirrored by other major operators, who are all looking for ways into what could ultimately be a $500m annual market. Another major operator confirmed it was also considering a legal challenge – specifically whether banning the use of a brand was a violation of the first amendment right to free speech – but questioned the optics of taking a state to court, and the cost of doing so.

“Ultimately we just want to be in the market and a legal challenge might not be the way to do that,” the source says. For those unwilling to wait 18 months, there appears to be a route to launching online betting, through traditional market access deals, with each Illinois casino given one skin.

Eldorado, for instance, has one property (Grand Victoria casino) and a market-access deal with William Hill in IL . That means in relatively short order we could see a ‘William Hill powered by Grand Victoria online site’.

This type of co-branding exercise has been permitted in states like Pennsylvania, but it is still unclear whether it will indeed be permitted in Illinois.

“It depends on interpretation,” says one gaming consultant who has discussed the matter with multiple firms. “[Operators] are getting legal advice that says you can simply co-brand, and that’s workable for them. But it does depend on whose advice you’re taking. Lawyers have different views. But if you’re reading it aggressively – and that’s how these firms are reading it, there’s no reason you can’t do a co-brand.”

Open for interpretation

That interpretation is by no means set in stone. As read, the bill says online betting shall only be offered “under either the same brand as the organization licensee is operating under or a brand owned by a direct or indirect holding company that owns at least an 80% interest in that organization licensee”.

In discussing the bill in the state legislature before its passage, bill sponsor Terry Link was questioned about the language and specifically asked: “If FanDuel partners with Paradise Casino, can (the branding) say ‘Paradise powered by FanDuel?’”

“No,” Link replied. It looks at present as if some operators have a different response to that question and could be headed for a collision of some sort down the road. Even assuming that co-branding has the green light, it’s by no means assured that it’s the preferred option compared to waiting for one of the three online-only licenses.

“Online-only operators have a choice: Partner early and gain first-mover advantage and lower initial costs or stump up $20m in 18 months’ time”

“Online-only operators have an interesting choice to make,” said Regulus Partners in a note following the bill’s passage. “Partner early and gain first-mover advantage and lower initial costs or stump up $20m in 18 months’ time and gain full control of the P&L once the market has bedded down somewhat.

“The recent history of US state expansion will suggest a mad scramble for the former. But given relatively poor operational execution so far, this might leave the way open for a very brave operator to bide its time for the latter. Much may depend upon what the DFS-led operators and bet365 choose to do…”

The waiting game

Bet365 declined to comment on its plans, but given its proud history of online-only operations and the fact it has never entered the M&A fray, it could be expected to wait it out. After all it has no shareholders pushing it for short-term results. And what’s $20m to the largest operator in the world?

“The three online-only licenses look a pretty rich proposition at $20m but in the context of other market access deals it’s not that bad,” adds the consultant. “Bet365 paid $50m to acquire stock in Empire to get into New York and Hills gave away 20% of its US business in addition to market access fees and equity in the parent company for the deal with Eldorado,” the consultant noted.

“So Illinois as an opportunity, the size of that market, its propensity to bet, the number of sports teams that are there, I think economically it’s not the worst outcome in the world for the likes of 365 to go down the $20m path.”
Even the co-branded skins will cost $10m upfront and come with restrictions that mean customers will need to register in-person for the first 18 months, suggesting again that waiting might not be the worst idea – providing of course you can get one of the three online licenses.

The language of the bill suggests they will be awarded in a “competitive process,” likely based on how much money and how many jobs an operator can bring to the state.

“I think the $20m licenses will be highly coveted by the firms without inclination for retail, like 365, and they have the ability to outgun just about anyone for that in terms of tax dollars and the like,” the consultant says.

Does that leave others fighting for just two online-only licenses? It might not matter too much. Of the remaining sportsbook operators, William Hill is expected to go for one of the $10m licenses (the operator declined to comment when approached by EGR), in part because it has the strongest experience with retail.

FanDuel and DraftKings are seen as more likely to wait it out, although FanDuel has the technological capability to act as a B2B partner for the local casinos, or even the sports venues with capacity of more than 17,000 which will also be able to offer sports betting. FanDuel told EGR it was still considering all options.

Finally, Stars and GVC/MGM are seen as more likely to be going down the co-branded route.

The latter, operating as Roar, might find things a little tricky as MGM doesn’t have a presence in Illinois, having sold off its lone casino in the state to Eldorado last year. “It is difficult for people like us who want access and want to use our brands,” said Scott Butera, who heads sports betting for MGM, in a recent interview with Bloomberg.

In short, Illinois is a massive opportunity but there is still huge uncertainty as to how the market will play out. As one European analyst put it: “It’s a bit of a clusterfuck at present.”

DraftKings | FanDuel | Illinois | Sports betting | Strategy