Edition 30: Finding the Golden “Juul” for Gen-Z
Operators and the struggle to get Gen-Z into slots-like gaming
Welcome to the 30th edition! Thank you for reading and hopefully you guys are having as much fun as we are. This week’s edition takes a deep dive into the attempt to find a digital, slot-like experience that takes hold in the Gen-Z demographic.
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Let’s explore.
Explaining the Analogy to the Juul Device
Before anything, we’d like to take a minute to remind everyone that this is not a normative judgment on Juul, the attempt to increase uptake of slots, etc. This is simply an expository piece explaining how we see this phenomena occurring in the industry. We know nobody wants to be compared to big tobacco and we don’t mean any offense! It’s just a mechanism for understanding what product innovation could look like.
Usually, any analogy that requires further explanation is a bad one. But for completeness’ sake, especially non-Gen-Zers, we’ll do a quick explanation of this one. Long story short, decades of public health messaging on nicotine use worked. It looked like Gen-Z was going to follow the path of millennials and Gen-X and smoke less than any previous generation before it. And then Juul came along (and every company who followed Juul) and ruined it. Juul is the most prominent e-cigarette company and according to our sense with Gen-Zers, the real driver behind youth nicotine addiction. As of 2019, 27.5% of high school students had used tobacco products in the previous 30 days, with the overwhelming majority using e-cigarettes. There’s a lot of literature on the impact of Juul and e-cigarettes on young people (see here, here, and here), but the general consensus is that Juul and its successors introduced a bunch of Gen-Zers to a nicotine addiction that would have been avoided had the product not been invented.
Currently, casino operators are looking for an analogous product to Juul for slot machines, especially for young, male sports bettors. Operators want a product that takes off with the younger generation and preferably has the same high hold %’s that slot machines are notorious for. Slots, kind of like traditional cigarettes, just really aren’t appealing for the younger generations. Going back to our edition on the iCasino, our market research showed that Gen-Zers felt like any iCasino games were rigged. But what about regular slots? Well, when > 80% of total sports betting handle is online, Gen-Z isn’t going to go to casinos just for slots. This is borne out by industry data, currently the average slot player is 55!, with research indicating that younger generations do not often play slots, not exactly the future casino operators are hoping for. There needs to be a native digital offering for Gen-Z that plays the same role that traditional slot machines do.
So what are operators doing to find the Juul of the casino?
To do what Juul did for tobacco, a new initiative would have to meet a few necessary criteria (from the perspective of an operator). First, it should offer the same instant dopamine hit that slots do. This allows operators to rake in more money by allowing long periods of play where the house edge compounds. Second, like slot machines, it should have a high hold %. Higher holds mean more money for operators. Low margin products will never be able to replace a slot machine that is holding 20% of every dollar put in. Third, it shouldn’t cannibalize the existing wallet to the greatest extent possible (although this is more acceptable if it is cannibalizing low hold % bets for higher hold % ones). Most importantly, Gen-Z has to like the new offering and have it spread like wildfire. With that in mind, let’s review some of the things we’ve seen considered by operators thus far.
Option 1: Push the normal iGaming
It’s no secret that iCasino is a GGR (gross gaming revenue) machine and its high hold percentages are attractive for bookmakers. According to Chris Krafcik, CY21 GGR in the U.S. hit $3.93B, up +127% YoY.
The product allows operators to work with higher margins and lower costs due to the natively built product offering and significant hold percentages. Online casinos are making up for more and more of operators’ bottom lines due to these reasons and analysts are bullish on the potential impact of iGaming. Goldman Sachs analysts last March predicted that iGaming revenue may reach $14B in 2033.
Now, while all of this growth and predicted growth is all and well in theory, we don’t feel as bullish that people our age (Gen-Z) will embrace the iCasino the way operators believe we will. Our market research suggests the Gen-Z demographic is turned off by the high hold percentages and the “rigged” aura that surrounds iGaming and would rather spend their time and dollars on sports betting. While numbers have demonstrated strong growth in states where iGaming is legal, we’re skeptical of future adoption with more comfortable and seamless options for younger bettors to enjoy their “entertainment-focused” gaming experience.
Option 2: Microbetting
Microbetting is one area where operators believe they can tap into the short attention spans in Gen-Z. Microbetting does come with a few promising developments for operators. First, it lets players have that instant dopamine hit where they can repeatedly play over long periods of time and let the house edge compound. Additionally, microbetting is often dealt at -115, or -120 even, meaning that hold %s are much higher than normal sports betting markets.
Thus far, microbetting seems like a really promising option for operators. However, we do run into a few issues. First, it does cannibalize the traditional sports betting market. It’s unlikely that consumers will segment microbetting from their more traditional betting, meaning that they will allocate themselves the same amount of money for the overarching category of sports betting. Second and more importantly, Gen-Z just doesn’t like it yet. Check out our previous article on microbetting here. We went back to the well and had some casual conversations with Gen-Z bettors to see if the mood had changed.
Unfortunately, among the bettors we talked to, not a single one described himself as an active participant in microbetting markets nor did they say that they thought any of their friends particularly liked them. We’re honestly not sure what the end game here is for operators, but we do know that Juul was a product that took off nearly instantly. The adoption and growth of Juul and other e-cigarettes among Gen-Z was scary fast and that simply has not happened for microbetting in any meaningful way.
Option 3: SGPs
SGPs or Same Game Parlays are a relatively new phenomenon that look like they have the potential to take off the way Juul did. They are increasingly popular among Gen-Z and more and more sportsbooks are adopting SGPs as a mainstay. SGPs allow bettors to combine wagers within a single game in the hopes of increasing their payouts. The murmurs from books are that the hold %s on SGPs are astronomical, often north of 20% (murmurs because books don’t want to loudly advertise how profitable they are for the house) . The books are over pricing correlations in SGPs in order to protect themselves from large exposure in such a recently developed product. As a result, bettors think they are getting a much “deal” than they are. That hasn’t stopped the gravy train for operators, SGPs have taken off much like Juul did.
Operators have found an offering with high hold % and tremendous popularity among the Gen-Z demographic. But can this be the slot replacement alone? We lean no for two reasons. The first is that it does not simply provide the same instant dopamine hit that allows for continuous play like a slot machine does. For example, I may place one SGP parlay in each window of an NFL Sunday at an astronomical hold %. This is great for the book, but it isn’t allowing the house edge to compound with each spin of the slot over many rounds of playing. Second, this is a direct substitute for more traditional wagers like parlays. Bettors think of it like just any other bet, rather a revolutionary product that greatly expands the wallet. SGPs are great for operators and fun for players, but they do not fundamentally replace slot machines as a profit driver for casinos. Instead, SGPs augment the traditional sports betting experience.
Option 4: Future Innovation
Honestly, none of the above options themselves really fill the role that slot machines currently have for operators among older generations by themselves. There won’t even necessarily be a clean flip to a new product like there was with Juul. It could be some combination of the above options, even if we know their limitations. More likely, we see operators continue trying to use the “tik-tokification” of the world to try to find that replacement for slot machines with novel product offerings. We will see founders trying to innovate a new frontier, and those who are successful will be handsomely rewarded. Follow these areas to see where the biggest innovation will come from in the years ahead.
Conclusion
This has been a bit weird to write as a bettor. Objectively, we’re pretty happy that Gen-Z has stayed away from the slots and focused on sports betting. We don’t want to see young bettors losing their bankroll on slot machines. At the same time, we’re practical people. We know operators see the power of slot machines and will do whatever it takes to replicate it. Juul’s role in getting young people addicted to nicotine is incredibly unpopular, but then again so would getting a new generation into slot machines. This piece is merely meant to explain how a phenomena from one industry could be mimicked in another with the right product, it is NOT an endorsement of operator efforts to push products with higher hold percentages and high propensities for addiction.
Miscellaneous Content Consumption
Press
TN-based social sports betting app Wagr went live in Tennessee and announced their $12M Series A round involving the Kraft Group, Harris Blitzer Sports & Entertainment, & more. Forbes has more here.
BRIEF ASIDE: SOME IVORY TOWER STONE THROWING
David here to put the damper on what is going on with Wagr and why this capital is probably as good as burned. We’ll likely do a longer form piece on this in the coming weeks so I’ll keep this brief and specific to Wagr. With all due respect, Wagr seems like it was drawn up in a Harvard Business School classroom (as I write from a Yale dorm lol) without consulting any actual gamblers, whether they be recreational or professional. An exchange is the first idea all of my econ major friends have when they dip their toes into sports betting before I explain it’s more challenging than it seems. I guess no one had that conversation with the Wagr team! Now let’s dive in. A 5% transaction fee (what Wagr charges) is actually higher than sportsbooks hold on normal bets! This removes the best benefit for an exchange: lower hold percentages. Next, everyone knows that exchanges need liquidity to fill bets. So obviously Wagr starts at the very end of the NFL season in a state that is not a major player in total handle. Good luck getting deep liquidity on most markets. Finally Wagr claims that people will be able to bet against their friends as a way to create liquidity. The problem here is people love betting with their friends, not against their friends (more info here in future articles). And if people do want to gamble against their friends, they don’t need a social betting exchange that charges steep fees to do it. It’s a bit of a double bind. Either Wagr serves no real functionality and friends can cross each other without an exchange, or its pairing users who don’t know each other to bet (which comes with liquidity issues). Hope they succeed, but I don't think it's likely.
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