Jason Ader: New York operators likely to face ongoing profitability concerns

New York’s licensed sports betting operators face a “negative spiral” of trying to generate profitability in the Empire State amid its 51% tax rate on gross revenue, says SpringOwl Asset Management founder and CEO Jason Ader.

Geolocation specialist Geocomply reported a record high for transactions for the first 12 hours of New York going live, while the four of the nine approved operators allowed by New York State Gaming Commission to launch on January 8 saw significant traffic on their sites and apps.

In order to attract New York bettors, the quartet of operators – FanDuel, DraftKings, Caesars, and BetRivers – offered substantial promotional incentives, despite the high taxation rates, the highest in the US for a non-monopoly market.

“The challenge is profitability, given the cost of customer acquisition is likely to go up as more participants enter the marketplace,” Ader told EGR NA.

“Its also going to prove very tough when you’re paying 51% to the state first. Sports betting is a hard business to make money in comparison to online casino and sports betting is not a high-margin business, so it’s  going to be a challenge,” Ader added.

Ader likened the potential impact as being similar to that of negative football results on operator betting revenue, in that initial losses can be absorbed, but that is not the case with longer-term losses.

Offering his assessment, Ader suggested any lowering of the 51% tax rate would not occur over the near term due to New York State needing to balance its budget.

However, he suggested a bit of comfort to the industry by suggesting the positive benefits to the state would accelerate the potential for wider igaming legalization in New York.

Addressing the impact of the Empire State’s remaining five operators entering the market, Ader suggested the first-mover advantage would force a promotional race between first-to-market operators and their later-launching counterparts.

“They will try to catch up by offering promotional benefits like cashback and freeplay, so therein lies the risk, in that those who are in now will have to up their own promotional activity in the face of the competition.

“This will just become a negative spiral in the context of trying to achieve profitability in New York,” he added.

One consequence, Ader insists, is it could further diminish US investor confidence in online gambling firms, with many stocks experiencing significant declines in their stock over the last six months.

“I’m excited for New York, I’m excited for the licensees there,” he explained.

“However, I think the reason these prices have come down so much is that investors are starting to ask, ‘when will your company become profitable’? “For some like Flutter that’s not an issue, but for the likes of DraftKings and some of the others, patience is running very thin.

“Investors are fed up of hearing of how great online gaming can be, they want to know when it will actually realize this,” he added.