A long time ago in a country far, far away — well, it was 2019 and Canada — there was a provincial government that announced “a series of transparency measures” intended to highlight the cost to consumers of the federal government’s tax on carbon emissions.
One of those measures, the Ontario government said, would require stickers on gas pumps saying the feds’ carbon tax had cost the customer an extra 4.4 cents per liter (sorry for getting all Canadian here), and that the charge would rise to 11 cents per liter (sorry, sorry, sorry) by 2022.
Ontario’s sticker-shock plan ultimately met its end in the courts. But the logic behind its introduction was clear: tell people how much more they’re paying, try to get them riled up, and put political pressure on the feds.
$DKNG CEO indicates that the pending winning bet surcharge could be a tool to get state governments to lower their taxes:
— Ryan Butler (@ButlerBets) August 2, 2024
"I do think that this is something that may make some states reconsider because now they may be hearing more from their citizens that they don't like it."
This brings us to DraftKings and its plan to hit winning players with a “gaming tax surcharge,” a move that got the social media masses chattering on Thursday when it was revealed by the company as part of its second-quarter financial reporting.
Call me a cynic, but this strikes me as being something that could be as much about riling up bettors and applying pressure on lawmakers who dare to dream of higher tax rates, as it is about adjusted EBITDA and remaining competitive with illegal operators.
In Illinois, for example, dreams have already become a reality, as the state legislature recently approved a tax hike that can reach as high as 40%. But if other lawmakers know any added taxes will be passed on to the bettors — also known as voters — and that those customers will be informed about it, that could be a powerful counter.
And, because of this, I think DraftKings’ move could be less about the money it receives from a surcharge and more about sending a message.
“How much of this is a shot across the bow of other states contemplating tax increases, versus an actual cure to the issue of higher tax rate competitive markets?” asked a Deutsche Bank note on DraftKings’ latest results.
As my colleague Ryan Butler reported this morning, DraftKings CEO Jason Robins' remarks during the company’s earnings call seemed to confirm that at least part of the rationale for the surcharge had to do with winning over hearts and minds.
"I do think that this is something that may make some states reconsider because now they may be hearing more from their citizens that they don't like it,” Robins said.
Charge it
The additional fee would be applied next year in "high tax states" with multiple competitors, which at this point are Illinois, New York, Pennsylvania, and Vermont.
The Boston-based bookmaker said the cost would be “fairly nominal” to bettors — one slide in the company's latest investor presentation suggested a 3.2% levy on winnings in Illinois — and that it sees “upside potential” for its adjusted earnings from the financial maneuver.
However, DraftKings’ investor presentation also suggested that this “fairly nominal” surcharge would be broken out and displayed to bettors right after they placed a wager. So, while the fee applies to winning bets only, customers will be alerted to its presence even if they lose.
The example given in the investor presentation was someone wagering $10 at +100 odds would see on their slip the wager amount, their initial payout ($20), and then just below that an "Illinois Gaming Tax Surcharge" of 32 cents and a "total" possible payout of $19.68 for the player. And just like that, an even-money bet would become a wager placed at odds closer to -103.
Now, DraftKings could have gone another route here. DK and its chief rival, FanDuel, had warned odds could worsen in the face of higher tax rates. Instead of telling bettors they’re going to cough up a bit of their winnings, DraftKings could just submerge the added cost of doing business in the prices offered to players up front.
But then… would bettors notice? Would a casual bristle at odds of -103? Would they even know it used to be +100, or that it should be that?
Maybe a bettor who uses multiple books and shops for the best prices would know. However, a sizable chunk of the recreational bettor population probably doesn’t do this. A report from Citizens JMP Securities in June, citing data from Juice Reel, found the average bettor used 1.5 apps during May, down from a peak of 1.8 in December.
Who's coming with me?
DraftKings also has a significant market share. The company says it accounted for 29.8% of gross gaming revenue in online sports betting and iGaming as of the end of June. So, given this and the ongoing consolidation in the industry, there’s a good chance your average bettor is a DK user as well.
Still, let’s say the surcharge is annoying enough to prompt DraftKings users to consider taking their business elsewhere. Who’s to say other online sportsbooks don’t implement something similar? The message DraftKings is sending may not just be for lawmakers and bettors, but for their rivals, too.
“From a competitive standpoint, if competitors aren't following suit, this feels like a potentially expensive gamble, especially considering the [gross gaming revenue] at stake across these 4 states, given their size,” Deutsche Bank said.
But competitors may very well follow suit. Robins even suggested during their earnings call that others could reach the same conclusion, albeit they may choose a different solution.
Now... if you tell bettors they're going to pay an "Illinois Gaming Tax Surcharge," which DraftKings is proposing to do, are most people going to think this is something imposed on them by the state or the operator? pic.twitter.com/PBL9B9c4TT
— Geoff Zochodne (@GeoffZochodne) August 2, 2024
Maybe this is indeed more about the bottom line, though. Maybe DraftKings is trying to do right by its shareholders by protecting profitability, which it indeed achieved in the second quarter.
The company reported a $63.8 million profit for the three months ending June 30 and an adjusted EBITDA of approximately $128 million. DraftKings also said it was revising its 2024 guidance for adjusted EBITDA, lowering it to a range of $340 million to $420 million from $460 million to $540 million, citing the impact of the Illinois tax hike, among other things.
Yet DraftKings is still guiding for $900 million to $1 billion of adjusted EBITDA for 2025, thanks to its "underlying business momentum, including the expected benefit of higher customer acquisition in the second half of 2024."
That guidance does not account for any financial benefit provided by its proposed surcharge. In other words, DraftKings is predicting higher profitability despite its greater tax burden. The company's board of directors even authorized stock buybacks of up to $1 billion.
So, DraftKings anticipates it will make plenty of money in the future. It could do so even without telling its customers they are being charged an additional fee because of higher tax rates in the states in which they live.
But DraftKings wants to tell customers they are paying a new surcharge. It’s sending a message, and it wouldn't do that if it thought it would cost them market share or profitability in the long run.
Perhaps what’s more important is who this message is intended for, how it will be received, and ultimately how those recipients respond. It's a hell of a move.
