Edition 11: The Online Casino Dilemma -- Sorry Operators, You Can’t Fool Us
Why iGaming faces steep adoption challenges amongst Gen-Z
Good morning and happy Monday to you all, excited to share our thoughts on the burgeoning online casino vertical and why Gen-Z won’t participate. If you’re enjoying The Handle, subscribe and check us out (11 Editions down!).
As of June 2021, online casino games are available in just 5 states (excluding Nevada) but still have generated $1.1 billion in GGR (h/t Eilers & Krejcik Gaming June 2021 Monitor). Chris Krafcik of EKG put out a few quick takes on the online casino market:
Just last week, DraftKings made a lot of noise with their $1.56 billion all-stock purchase of Golden Nugget Online Casino. We can expect the M&A trend of consolidation of relevant players in the market to continue to heat up in coming years on both the iGaming and sports betting fronts. What makes the Golden Nugget acquisition intriguing is it solidifies DraftKings’ investment in the iGaming space and attempts to expand their reach and entrench themselves as a market leader (2nd largest by GGR share). The New Jersey DGE reported that NJ had its best-ever month in online casino revenue in July reaching $118.7 million (prev. $113.7 million in March 2021). Revenue also increases 35.7% YoY as internet gaming offers consumers a gambling option from the comfort of their own home in a more controlled environment.
To give some perspective, sports betting revenue in New Jersey in July 2021 was only $55 million. In short, iGaming seems to be the path to operating profitability and higher gross margins in a world where the expected hold on any given single sports bet comes in at well under 5%. For operators, online casino games are less labor intensive to offer than a full sports betting menu, but sports betting brings customers in the door so operators are looking to pair sports betting brands with casino arms to drive customers into the virtual slots and provide a strong revenue boost.
With COVID-19 leading to a massive uptick in online casino spend and revenue, we don’t necessarily feel the same optimism for the future of iGaming among our generation (Gen-Z & Millennials). We doubt our peers will feel inclined to take a virtual seat at the casino table. Now, fair warning we are about to use some anecdata, but we are generally confident we understand the general sentiment of the broader population. We’ve colloquially talked to over 20 PPH bettors under the age of 22, and two backers of PPH books, all on the condition of anonymity as the basis of our perspective. For those who aren’t familiar, most PPH sites offer some sort of iGaming, whether it be roulette and blackjack, or more complex offerings such as Baccarat, slots, etc. Bettors using the online casino on PPH sites is a backer’s dream. The odds are not in the bettor’s favor, it is incredibly easy to go through credit, and there are no problem gaming checks.
It’s not just backers who know it’s rigged, we heard bettors acknowledging the same. The more tech-savvy Gen-Z bettors generally communicated that they thought iGaming, in general, felt too rigged to be enjoyable. They think because the house is the one that programs the games, they would never get a fair shake. As a result, the people we talked to almost all always avoided playing any type of online casino game or recounted horror stories of second-hand accounts of unhealthy iGaming and massive losses.
The idea that PPH bettors avoid online casinos was confirmed in our conversations with backers. They casually estimated that at any point in time, maayyybeee 1% of all bettors on their book are actively using the online casino offering. The backers expect almost no action and the players stay away because it feels rigged. These are the players who grew up with “random” video game packs, the full breadth of the interns, and a strong understanding of technology, so it’s no surprise they are more risk-averse to technology-based casino games than older players.
This is an ominous sign for operators who are hoping to turn young, casual NFL bettors into iGaming customers. The mental friction in switching from betting on a sporting event where the outcome is completely out of both the book’s and the bettor’s control to a virtual game where the book is controlling the payouts through a randomized computer program is simply something young bettors do not easily overcome. As Gen Z becomes a bigger portion of expected revenue, operators should be wary of optimistic projections about iGaming conversion if not segmented by age.
So is Gen Z right? Are the odds rigged against the player?
On most PPH sites, some casino games have hold percentages around 20% meaning the bettor is indeed facing far worse odds than traditional -110 they would get betting into sports. Outside of just the expected probability of loss, there are psychological factors with the ease of pressing a button and betting on credit which lead to explosive losses and gamblers on full tilt. Heavy juice and credit is a recipe for bankroll management disaster.
Unfortunately, it’s not much better in the regulated world. A cursory glance at DraftKings’ 10-K tells us that the odds are not quite as random as they are in a casino. Specifically, they say “In iGaming, we believe there is typically lower volatility versus land-based casinos since the average return to a player for specific games is easier to predict in advance based on game rules and statistics”. There should be no difference in volatility for games on land casinos vs online casinos, since the odds ostensibly ought to be the same, and there is no reason players should be expected to play anymore, or play any less. The mathematical framework that governs the average return for a player on land ought to be the EXACT SAME as the ones that govern the average return in iGaming, but I guess Draftkings knows something we don’t!
Of course, at The Handle, we recommend staying away from online casinos. The hold percentages are high, the games are easy to lose money in, and the odds are never in your favor. It’s a bankroll minimizer to spend some time playing blackjack on the computer, and an easy way to not have any money left to bet on sports, which we think is the most fun part of the gambling ecosystem. If that is your thing, we recommend doing it responsibly, with loss limits, dedicated time boxes, and an acknowledgment that the EV of any online casino will almost certainly be lower than any sports bet.
Long story short, iGaming does not seem like it will be the holy grail for operator profitability, at least if Gen-Z gamblers have anything to say about it. Removing the perception that the games are rigged will be impossible, and the mental leap between someone who bets on sports vs someone who gambles in a casino online is too large for our generation. It will be interesting to see how it plays out for operators in the future, but we aren’t too optimistic.
Miscellaneous Recent Consumption
Press
Caesars Sportsbook has partnered with the Fiesta Bowl, a first-of-its-kind partnership and recognition of the value of sports betting by the NCAA.
“Sports wagering is going to have a dramatic impact on everything we do in college sports. It’s going to threaten the integrity of college sports in many ways unless we are willing to act boldly and strongly.” - NCAA President Mark Emmert, 2019 (h/t Dustin Gouker). Funny how the integrity of college sports isn’t in question anymore.
Jake Paul’s new VC fund “Anti Fund” led a $30 million investment in Simplebet, a micro-betting company featured on last week’s Handle opportunity job board. Simplebet boasts a cap table that includes Andre Agassi, David Blitzer, and the SF Giants MLB team. Simplebet also partnered with DraftKings earlier this week, so keep your eyes peeled for an upcoming piece from us on the micro-betting ecosystem in the U.S. With the big news this week, we have an opportunity from Simplebet down below.
Starting in the 2022-23 season, NHL teams can sell jersey and helmet ads to sports betting companies if legal in their state.
Twitter
Pods
It’s about time we show some love to the Props & Hops podcast. While I don’t have 1 specific episode I recommend, host Matt Landes has had awesome guests on the pod within the industry including Data Scientist Ed Feng, Captain Jack Andrews, FanDuel Director of Trading John Sheeran, Spanky, and many more. Check out the Props and Hops pod.