The agreement announced in July 2019 that Penn National was to provide DraftKings, PointsBet, theScore and The Stars Group access to a range of states seemed in keeping with its approach to date. While it operates 41 properties across 19 states, it has largely provided partners with a route to market, rather than carving out a presence as an operator itself.
Yet this is arguably true across the board. It’s the online brands, either in the digital space or moving into retail, that are the most talked-about businesses in US sports betting. Just look at New Jersey—it’s Meadowlands and Resorts Digital that are listed as being the largest sources of wagering revenue each month. But it’s DraftKings and FanDuel that the industry and the media think of when looking at these figures.
For Penn, the technology partnership with Kambi—announced alongside the market access deals—has largely been talked up as a win for the supplier, but what it potentially brings to Penn less so.
Penn, meanwhile, is positioning itself to break this digital dominance and build a strong online business to match the brick-and-mortar operation. Jeff Kaplan, as vice president of strategy for the operator’s interactive arm, is the man with the plan, working out how the market access deals, proprietary offerings and elements such as the social casino business all slot together.
He sees Penn Interactive Ventures as having four strands to the business: its online sports betting offering, online casino and retail wagering, then the skins, which he describes as a business segment in itself.
For online sports betting, Penn is building its own sportsbook front-end, underpinned by Kambi’s technology.
“We want to build something that is going to be differentiated in the market, it’s not going to be a me-too product,” he explains. “It’s going to look and feel different for bettors than some of our competitors’ offerings.
“So there’s a lot that’s happening in the background with our engineers, what they’re building, what they’re working on right now. Most likely, we’re not going to be live until summer.”
The online casino offering, currently only live in Pennsylvania, is powered by International Game Technology. Retail, on the other hand, will come under its control, via the Interactive Ventures division, with five books currently live: Ameristar Council Bluffs in Iowa, two properties in Indiana, as well as Hollywood Lawrenceburg, and then Meadows in Pennsylvania.
“We’ll have at least five books by the end of this year, and then our goal is to be in Penn National’s 41 properties in 19 states, continue to grow from there,” he says. “We think that we should have no less than 15 sportsbooks live by the end of 2020 on the retail side.”
For the skins, DraftKings has already gone live in West Virginia and Indiana, with further partners launching imminently in Indiana. Early results have been “phenomenal” Kaplan says. “We are over-indexing in our retail sports betting share compared to our land-based GGR share at all of those properties in the states. Our hold rates have been fantastic.
“So, other than that, nothing really going on,” he says with a laugh.
It would be easy to see market access deals as easy money for the land-based industry. After all, there is high demand, and often a decent return in fees and equity takes to be had.
But to Kaplan, these partnerships were not a case of seeking out the businesses willing to pay top dollar for a route into the states. The partners had to be the right fit.
“Most of these deals are between 10 and 20 years,” he explains. “So we have partners who are going to be operating on our skins for a long time, and we’re looking for who’s going to get the biggest market share.”
Differentiation is key. For theScore, it’s the huge readership for its sports news portal. For DraftKings, it’s the daily fantasy audience converting to real money. For The Stars Group, it’s the brand recognition provided by Fox Sports. And for PointsBet, it’s the unique PointsBetting product and Karma Kommittee, which refunds near misses.
Kaplan points out that the Karma Kommittee’s decision to refund bets on the National Football Conference Championship Game—where the New Orleans Saints lost to a dubious refereeing decision—even caught the attention of his mother-in-law.
“If they’re reaching my her, they’re doing something right, because she is not the target demo,” he says. “For those reasons, we view those partners as strategic and we think, in the long run, they don’t necessarily have to have the deepest pockets, but they have to have a strategic advantage to help them win in the market.”
This will create more competition for Penn’s proprietary offering—it has saved a primary skin for itself in each state—but Kaplan is sanguine about any potential impact on growth.
“We’d be competing against these folks anyway, but this way we have a strategic partnership rather than just competing,” he says. “For us, it was not a case of choosing to either partner or compete. You can do both.”
PRESSURE TO DELIVER
Of course, if these partners are launching ahead of Penn as it develops its offering, it is losing firstmover advantage. The operators that were first to go live certainly appear to have been the big beneficiaries in the early days—think DraftKings and FanDuel in New Jersey, or Rush Street in Pennsylvania.
Kaplan acknowledges there is a clear advantage to being first and he is also aware that while the casino database may convert cleanly into online gaming, this is less likely to be true for sports betting. While DraftKings and FanDuel may have gained an early advantage from leveraging their DFS player base, Kaplan believes retail sportsbooks can play a similar role.
With 41 properties in 19 states, it has a direct link to customers, and in many states, a way of bringing them online.
By leveraging the retail assets, there is less need to invest heavily in marketing, and with less pressure on margins—again, provided there is a reasonable tax regime—it can actually prove to be reasonably profitable, he adds.
“You’re not going see the same revenue numbers as you do in online sports betting. We know that. I mean, New Jersey is consistently generating up to 75%-85% of revenue online.”
But, he adds, retail in the US is a vastly different experience to European betting. “[When you go to] the casino or the racetrack or the OTB facility and watch a series of games with hundreds of people who are all betting on different things, there’s a buzz,” Kaplan says. “We think that’s really powerful, and that’s what we’re looking to build in our sportsbook. We’re looking to make it somewhere where people really want to go. “Whether that is through lounges, or putting up big TVs where people can gather, it’s exciting and that’s fun.
“I think from a European perspective, you might look at retail as in the past and dying, but in particular, the casino sportsbook experience can be a lot of fun and really engaging to people in the US.”
Replicating that communal experience online will be a key component of Penn’s mobile betting strategy, he adds.
“We believe that it’s important, but it doesn’t necessarily have to be with 10, 100 or 500 people sitting in the same room. You can do that digitally as well, create a bit of a community, and we’re really looking forward to see if our hypothesis plays out the same way you think of betting.”
Leveraging retail could prove a particularly effective tactic as the industry matures and the early-stage investment in marketing begins to taper off. This can’t continue forever, Kaplan points out.
“If we just decide we’re going to launch our sportsbook, spend $40m-$70m on marketing a year, most likely we won’t be profitable anytime soon,” he says. “I think those levels have to come down eventually.
“If that’s going to be our strategy and we’re just going to go for a pound-for-pound heavyweight boxing match with Fox Bet, and FanDuel, and DraftKings, and eventually Roar and Caesars and anybody else, it’s probably not going to be hugely profitable.”
He says, the path to profitability will be determined by operators working out how to acquire customers as inexpensively as possible. This could be aided by the right media partnerships, or deals with leagues and teams, or free-to-play gaming.
Social is an area Penn has been in for some time, launching Hollywood Slots in partnership with OpenWager in 2016, and following that with the $60m acquisition of Rocket Games. However, Kaplan views free-to-play sports as “challenging.” He says Fox Bet has done “a phenomenal job” of migrating the Super 6 product to the US, but that’s largely down to the differentiating factor of Fox Sports’ involvement.
“They can have Terry Bradshaw right on the pre- or post-game show, or halftime show when 20 million people are watching. That’s powerful,” he says. “So that’s differentiated.” Penn wants to do something similar, but is yet to identify the right partner, whether that’s a media company, and as with the real-money sportsbook, “it can’t just be another me-too product”.
“We think the winners in the space will have that differentiator, and then there’s going be a lot of folks for whom free-to-play games is what seems like a panacea, and it won’t really try to provide the conversion that they’re going to expect to see.”
Yet as he says, free-to-play, along with partnerships and efficient acquisition, is the way to a sustainable market.
“It can’t be one or a couple, you have to nail all of it to ultimately be profitable. But we firmly believe if we do those things, then online sports betting will be a profitable venture.”
With the US market only just starting to open up, Kaplan believes there is huge scope for growth and evolution in the market.
“We read every industry report that’s out there, and the common wisdom was, in 2021, maybe 2022, New Jersey would pass Nevada as the largest sports betting market,” Kaplan says. “Well, it’s already done that.
“I don’t think that trend is going to reverse. The gap will only widen. I think New Jersey will continue to significantly outstrip Nevada. And that happened quickly. Online launched last August, so basically it took a year. That’s really powerful.
“On the flip side, I think it’s still too early to say what Pennsylvania looks like. I mean, we’re in month four of truly online sports betting but I think in the early days, we’ve been extremely pleased with the performance of retail in Iowa and in Indiana.”
He admits that in the latter states, the early performance, which has seen Penn hold up to 15% of stakes, is unsustainable.
“But the handle numbers that we see are strong, and our books are packed, particularly at the weekend, but really most days. People are excited to place bets. So we’re really excited about the potential of those markets.
“We see a previously untapped demand there for sports betting, and we’re quickly seeing that pent-up demand is coming to our books, and we’re excited to see what happens online in those states in particular.”
So while Penn may have appeared to bide its time to some extent in the wake of PASPA’s repeal, this time does seem to have been well spent.
The business has ensured that it will not only expand the market, but also benefit from new entrants moving in. Should the launch of its proprietary Kambi-powered offering succeed as hoped, it may be the first traditional US operator to win in the sports betting space.