The American nightmare: the relentless exodus of tier-two and tier-three operators

After the repeal of PASPA in 2018, many European operators flocked to the US as the industry’s largest greenfield opportunity to date began to emerge.

Yet, six years on, JMP Securities published a note on 11 July that laid bare the struggles some smaller brands have endured in the US during that time. 

The investment firm said that of the 74 companies it estimates to have entered the regulated US online sports betting market since 2018, just 43 (58%) are still operational.

Meanwhile, 18 (24%) have ceased operations altogether, and 10 (14%) have significantly reduced their presence or are in the process of shutting down. Three more (4%) have been acquired.

“Exits are far outpacing new entrants,” JMP Securities wrote. 

The US exodus has gathered pace once again in recent months as companies have reassessed whether a Stateside business remains a worthwhile venture, especially with the path to reach profitability seemingly never-ending.

For instance, Kindred Group wrapped up operations in Q2, while Betfred USA backed out of Maryland in July before leaving the sports betting markets of Ohio and Colorado in August. 

Meanwhile, evoke, which powers the SI Sportsbook and SI Casino, is throwing in the towel across the pond, with a controlled exit of its B2C operations expected to be completed by the end of 2024, and BlueBet confirmed in August it will pull out of the US to focus on its home market of Australia.

Elsewhere, Super Group announced in July that Betway will exit all nine US states where its sportsbook is active, a move closely followed by SuperBook revealing its intention to withdraw from eight states. 

Tipico is another casualty of the US market, with LeoVegas Group confirming in June that it was buying the Malta-based operator’s US sportsbook and casino platforms.

And if that wasn’t enough, Prophet Exchange surrendered its licence in New Jersey at the end of May, SaharaBets shuttered operations in Arizona (its only state), WynnBet has all but abandoned its digital sports betting operations and, just as this issue went to press, Betsson revealed its Betsafe brand will leave the US by the end of September. 

The US sports betting graveyard has racked up quite the body count thus far, and we haven’t even mentioned the demise or disappearance in recent years of the likes of Fox Bet, PlayUp Sportsbook, MaximBet, Fubo Sportsbook, William Hill and Barstool Sportsbook. 

Many casino-first operators saw the chance to get their foot in the door with sports betting, with a view to bursting all the way through it when online casino legislation followed suit. Unfortunately for them, that hasn’t been the case. 

As of now, 38 out of America’s 50 states (in addition to Washington DC) permit legalised sports betting in some capacity, while 31 jurisdictions allow online sports betting. With online casino, though, it is a different story entirely (see graphic, below).

In a complete mirror image to the sports betting scene, only seven states have legalised online casino – and not all of them are multi-licence markets.

Benjie Cherniak, former managing director of odds comparison service Don Best Sports, thinks an online casino safety blanket might have kept more operators in the market. 

“The path to profitability for a lot of these tier-two and tier-three sportsbooks would be casino,” he says.

“If more states offered casino, I think it would be a lot easier for some of these tier-twos that have left the market to have survived in the market, and some are still sticking around waiting for that day to come.”

Josh Pearl, a gambling consultant and former director of sportsbook operations at PENN Interactive, believes Ontario, Canada, represents the kind of multi-product market many operators had previously envisaged for the US. 

He explains: “A great case study to look at is Ontario and the number of operators that are still there. The market opened in 2022 and now you have 50 operators offering over 80 brands – that’s because there is legalised online casino and poker in addition to sports.” 

Cherniak suggests some companies might be experiencing buyer’s remorse, adding: “Many operators are realising that in retrospect they shouldn’t have entered the market. They didn’t know then what they know now, and if they had, a number of them wouldn’t have come in to begin with.” 

99 problems 

With a slower-than-expected introduction of icasino legislation, operators have had no choice but to focus primarily on sports betting, inherently a low-margin product.

However, one of the major issues facing smaller operators is the innate difficulty of launching a sportsbook product in the US. 

“It’s really hard to make money on sportsbook in the US as a general statement,” Cherniak points out.

“Sportsbook in the US really isn’t a great business on the B2C side, and a number of the operators have discovered that.”

Sports betting being regulated state-by-state with differing tax rates, individual licence fees and market-access costs also present an expensive challenge. 

What’s more, America’s sporting calendar is unique. The NFL season runs from September to January, with playoff season wrapped up by February after the Super Bowl.

The NBA season is only slightly longer, October to April, with college basketball tournament March Madness providing a boost in between.

US sports betting is concentrated around certain periods in the calendar, a contrast to European bookmakers that see action pretty much throughout the year.

US operators also fight over a finite number of licences available in some states. Pearl explains: “The way laws are structured here on a state-by-state basis have played a major factor. International operators have been required to enter into an agreement with an in-state gaming licensee to obtain access to offer online wagering.

“Take Michigan as a great example; essentially one licence equals the ability to offer [only] one brand. Caesars, that are now rolling out a multi-brand model strategy across the country, had to go buy a second licence to offer a future second brand.

“Since there are only 14 licences available for each online sports wagering and online casino, a prominent brand like bet365 can’t get in. 

“Although they are seeing 4% or 5% market share in most states they operate, they can’t get into a big state like Michigan because there are no licences available unless a current operator pulls out.” 

Then there is the expense associated with establishing any new sports betting business, such as marketing, player generosity, data feeds, oddsmaking, payments and geolocation requirements.

To make any kind of significant profit is an uphill task, particularly when you can’t cross-sell bettors into igaming or acquire casino players directly.

In fact, Entain said last December that about 65% of BetMGM sports bettors in its multi-product US states, plus Ontario, engaged with either casino or poker, or both.

Prior to pulling Unibet from the US, Kindred Group noted the lifetime value to cost-per-acquisition ratio in multi-product states was 2.8x. 

Early birds caught the worms

JMP Securities’ aforementioned note said the top seven operators control roughly 98% of sports betting revenue and about 90% of igaming revenue in the US. Estimated to account for three-quarters of the sports betting market based on revenue are FanDuel and DraftKings. 

These DFS foes were, in the early days of the post-PASPA era, able to capitalise on their powerful brands and deep customer databases to race into the lead – positions they are yet to relinquish. Nowadays, they also have the products, loyal customers and financial firepower to stay in front. 

Pearl says: “They [DraftKings and FanDuel] were here with daily fantasy and they built those brands up for years ahead of the repeal of PASPA in 2018. They’ve invested heavily in building their tech stacks, so they controlled a lot of their product destiny.

“They started obtaining players when there was no online sports betting; the closest thing to it was DFS, which is typically allowed in most states at 18 years of age. 

“Therefore, they were able to build up and tap into these databases when sports betting came along. Their same customer base – who enjoyed DFS when they were around 18, but were now 21 or older – had some experience with sports betting products, and now were old enough to bet and had more money to do so.

“They got the head start, and everyone else has just been playing catch-up.” 

Looking at New Jersey, FanDuel generated $272.5m in mobile sports betting revenue for January to July, with DraftKings the next highest with $163.4m. BetMGM’s $35.7m, Caesars Sportsbook’s $18.8m and bet365’s $23m combined was less than 20% of the revenue the top two giants achieved during that period. 

Among those on the lower rungs of the ladder, SuperBook made just $522,075 and Betway generated a relatively paltry $481,902.

With US sports betting dominated by FanDuel and DraftKings, the battle in the US seems to be among the tier-two operators for that one remaining podium position, with the rest of the chasing pack feeding off scraps as they struggle to stay alive.

Furthermore, the high barriers to entry in the US mean we are unlikely to see any new entrants, not unless California and/or Texas regulate sports betting. 

According to boutique analyst firm Eilers & Krejcik Gaming (EKG), legal sports betting (online and retail) is available to 67% of the US adult population, yet it remains bearish on the outlook for further regulation.

In fact, the firm expects the earliest we could see a new sports betting state launch is 2026 with Missouri, as sports betting managed to get onto its November ballot. 

EKG projects the next most likely markets to go live are Georgia and Minnesota (both 2027), followed by potentially Texas in 2028. But this is all hypothetical, of course.

Adam Krejcik, EKG co-founder and partner, wrote in a LinkedIn post at the end of August that further M&A and “more operators exiting the US market” is the likely scenario. 

Finding value

With such seemingly small margin for success, what exactly is left for smaller operators to fight for? Lloyd Danzig, managing partner at Sharp Alpha Advisors, believes there is value for some in catering to a smaller, more loyal customer base rather than spreading themselves too thin trying to appeal to the masses. 

He says: “Small companies tend to be more nimble and precise when establishing a brand. Even some of the most successful operators are still honing their voice and positioning, having struggled at executing effective brand strategies to date.

“Authentically engaging with 1,000 true fans of a new feature and interacting toward product-market fit is much harder in a large organisation.” 

Although many operators that were quick to rock up to the party are starting to bow out, Cherniak suggests any latecomers could reap the benefits of a more mature market. 

“I still think we could arguably have another phase of folks who come into the US, where the unit economics make more sense,” he posits. 

“Customer acquisition costs were highest at the beginning. They’re still high now, but they’re arguably not as high as they were then. Then there’s the licensing, and market entry and skins in various states – it’s not free now, but it’s a heck of a lot less expensive.” 

Cherniak adds that some firms that have been in the US for a long time could make way for new entrants, now the economics are more favourable. 

Gambling consultant Pearl insists consumers will increasingly see the value of a more competitive market, noting: “You’re trying to take away that customer from DraftKings or FanDuel, so just having something that’s on par with their products likely isn’t enough to convert them over.

“However, most users have multiple accounts. As more bettors become educated, they’ll understand the benefits of having accounts with multiple operators.” 

Nobody can say with certainty what the future holds for the online sports betting market in the US, but most gamblers and industry observers would probably bet their shirt on FanDuel and DraftKings maintaining a stranglehold, to the detriment of their rivals, especially the also-rans with sub-1% market share. 

The uncomfortable truth is the US might be the largest regulated gambling market in the world, but it’s fast becoming the most uncompetitive.