DraftKings enflamed the US sports betting world on Thursday by announcing a projected 3-5% "surcharge" on all winning bets placed in four “high tax” states. The decision met near universal condemnation online, but it remains to be seen if it will help DraftKings’ bottom line — and potentially alter the entire regulated industry.
With DraftKings’ charge set to begin Jan. 1, 2025, in New York, Illinois, Pennsylvania, and Vermont, the answer to the biggest question — why would the company do this — is clear.
“So obviously, some people might just react negatively to the idea of being charged at all,” CEO Jason Robins said during Friday’s corporate earnings call, “but it's really fairly nominal and it makes a huge difference in our ability to make a reasonable margin.”
Here are the key questions that remain:
Will other sportsbooks follow?
This “gaming surcharge” could survive or fail largely due to the adoption by smaller competitors or, most critically, FanDuel.
DraftKings, which has roughly 33% national market share, is hoping FanDuel (also roughly 33%) will follow with a tax of its own. Though the half-dozen or so books that make up the remaining 33% of the national market share also play a role, no companies come close to DraftKings and its long-time daily fantasy sports rival.
MGM (No. 3 in US market share) and Caesars (No. 4) did not indicate such a tax during their respective earnings calls earlier in the week. All eyes will now be on FanDuel parent Flutter’s earnings call later this month.
“I think every company has to do what's best for their own business. I think we believe this is what's best for us,” Robins said during Friday’s call. “But I would imagine that if that's our calculus, then others would come to the same conclusion.”
If FanDuel announces a similar move either this month — or ever — it will give cover for other books to follow. Smaller companies may contrast themselves by not offering such a tax. Basic economics suggests this would undoubtedly attract new customers in the impacted quartet of states, all of which have multiple other competitors.
DraftKings, and possibly its rivals, are hoping another economic factor — customer inelasticity — will keep enough customers at their book to make the tax a net gain to the financial bottom line.
“I do think that if you run the math, it would take quite a bit of top-line deterioration to make it not worthwhile from a bottom-line perspective,” Robins said about the tax.
Will this lower state taxes?
Almost assuredly not.
Though Robins repeatedly called the fee “nominal,” he nevertheless voiced optimism it would lead bettors to assign the blame on state governments, not the sportsbook passing that cost on to its customers.
“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.
In New York, which has the nation’s highest sports betting tax and where DraftKings’ variable winning bet fee will almost assuredly be highest, lawmakers have essentially shut down the thought of a decrease. Illinois, which recently raised its rate from 15% to a graduated rate topping out at 40%, likewise seems disinclined to make sure of a move. There has been similarly little buzz in Pennsylvania or Vermont.
A more pertinent question is how this impacts the next tranche of higher-taxes states.
Massachusetts as well as Ohio, which recently doubled their tax rate from 10%, are larger markets that sit at 20% each. If DraftKings sees success in its first four test states, and with governments loathe to lower rates, it could mean this sportsbook-imposed fee spreads to these and possibly more states.
Will bettors leave DraftKings?
Per social media outcry, there are no bettors left. The reality paints a more complex picture.
Despite thousands of angry X posts, it's not clear if the casual bettors that make up the vast majority of DraftKings’ revenue will leave when they see roughly 4% of every winning bet automatically deducted from their bankroll. In a gambling offering where industry-standard margins make it exceedingly difficult to remain profitable long-term, an extra few percentage points on each winning bet makes this all but impossible.
Good riddance to DraftKings. Hopefully other books won’t follow suit but I’m afraid they eventually will. https://t.co/Btl9K0DBeg
— Tom Ignudo (@TomIgnudo) August 2, 2024
Most bettors don’t realize this.
Brick-and-mortar casinos are lined up with players looking to play double (and now triple or quadruple) zero roulette and 6:5 blackjack with eight-deck shoes. The 3-5% tax is both a small percentage of an overall win and a handicap that makes breaking even an effectively insurmountable challenge.
To that point, DraftKings’ tax may kill two birds with one stone.
“Sharp” and/or price-conscious bettors — the ones that can potentially win money long-term — will turn away from DraftKings, leaving only “round” and/or ill-informed bettors. The latter demographic is DraftKings’ target audience.
The central question is, will these types of bettors already committed to DraftKings and unwilling or unable to switch to a competitor remain when they see 3-5% taken away on each winning bet slip? DraftKings is banking that billions spent on building and marketing a sportsbook will retain these high-profit, losing bettors despite the higher price.
“We feel it is an important step that consumers will ultimately understand,” Robins said Friday. “And if they feel the product and experience is better, then they'd rather pay for that than somewhere else that maybe doesn't have a strong product.”
