Having reviewed the monthly revenue stats of US wagering’s current ‘big-3’ states New Jersey, Pennsylvania and Michigan. Regulus Partners warns that bonus-inflated metrics are not an effective measure to gauge the total addressable market (TAM) of a disrupted US gambling marketplace…

September marks a seasonal return of US sports as well as a Northern hemisphere seasonal uplift in igaming activity. The autumn and winter months also now promise continued positive activity (unlike for invaders of Russia). It is dangerously easy therefore to get excited about topline progress, especially since NJ has topped the psychologically significant US $1bn mark in sports betting handle for the first time (+55% MoM + 35% YoY).

However, a deeper analysis of the ‘big three’ US online betting and gaming markets (NJ, PA, MI) demonstrates that they remain range-bound and under significant structural pressure. Topline growth is not the same as strategic progress: indeed, in many respects and for a critical mass of market participants it might be signalling the opposite.

On the face of it, online betting handle reported strong activity on a healthy margin (6.7% in NJ and MI, 7.8% in PA) across all states. However, PA online betting GGR comprised 48% bonuses and MI fully 99.6%. GGR therefore clearly remains a duff measure of underlying activity and evidence is mounting that competitive bonusing is almost certainly putting downward pressure on underlying yields (see blog and WPs passim).

A self-defeating race to the ‘top’ of market share is in fact an economic race to the bottom. NJ continues to track ahead of PA at 2.5x ‘per capita’ online betting revenue if we assume a less aggressive 40% bonusing rate (taxed, slightly more mature). Given how close PA and NJ is on igaming (see below), this is still almost entirely explained by the out-of-state factor (principally NYC), in our view. NJ is therefore still not a reliable benchmark for multiplying out a TAM. PA is as a functioning semi-restricted market, which provides a run-rate of US$20 in a strong month: our ‘semi mature’ assumption of US$30 still factors in a lot of underlying growth, therefore.

However, MI shows up the clearly self-defeating nature of aggressive competition – while US $0 obviously not a real run-rate, aggressive bonusing can clearly wipe out entire markets and this remains built-in to swathes of the US state-by-state system. Indeed, there is a dangerous paradox here: the more accessible the state, the harder it is to make money. In other words, what a big TAM giveth in inflated GGR it taketh away in any hope of making a profit. If 67% of the US population gets access to online betting, this still gets us to our online sports betting TAM component of US$6.5bn: nothing has changed here.

Ironically, the best way to increase the online betting TAM in the US would be to add in horseracing – it is still running at US$5 per capita or 20% of a total online betting footprint on a normalised access basis (not far off the UK). However, this remains a segregated and disjointed market where cross-sell is weak (at best), and mass-market penetration is limited to only a handful of meetings.

That is why igaming is so important: even in a seasonally strong September for US sports, igaming made up c. 77% of reported GGR and c. 80% of revenue (excluding horseracing). Our US$100 revenue per capita is now topped out in NJ and PA (adjusting for bonuses at an assumed 40% for both), suggesting either the US can grow igaming to a far greater level than Northern Europe (ironically possible due to the paucity of sports content as well as lower personal taxes), or that it has reached maturity very quickly.

An MI figure of US$60 per capita (assuming 50% bonuses given what is going on in betting) would support a rapid but range-bound maturity curve. Given the heavily VIP nature of US igaming, there is a potential for the next wave of more mass-market growth, but this is where pressure on land-based casinos and high-value scratchcards is likely to come. It is also worth noting that all the early excitement about MI’s adoption curve and potential market size seems to be linked to incentives and pre-marketing rather than any real underlying trends: the state is still underperforming its more mature neighbours in all visible metrics (online betting handle per capita 14% below PA; online betting GGR 25% below; igaming GGR 29% below). For igaming, it is, therefore, easier to be bullish about cashflow potential than long-term growth, though even here competition is biting (eg, see Golden Nugget’s marketing).

Despite these growth limitations, the cash flow means that nothing less than the economic viability of the US online gambling market as it is currently constituted rests upon the number of states which adopt igaming, in our view. However, not only is this politically more fraught at a high level, but it captures a much less forgiving mix of vested interests: it is no coincidence that in CT igaming has been restricted to the lottery and the tribes. We remain bearish on igaming adoption for this reason, with our top-down state-by-state model still pointing to 15% in the ‘realistically hopeful’ category or US$5bn market. Igaming markets that start to bite into land-based revenues could also become politically dangerous, as we have flagged previously.

The latest statistics therefore still point to a combined digital TAM of US$12bn in revenue terms. The bullish can inflate this to US$20bn with bonuses, but this achieves nothing in terms of monetizable economic activity (ie, the M in TAM isn’t actually a market). Equally, with the two biggest states in the TAM economically or literally closed (FL and NY), while most of the rest are over-competed, a bigger TAM currently just means the potential to make bigger losses in small and mid-sized states. California then becomes key, but wagering on the politics of California is more of a lottery than a calculated bet.

Ever bullish interpretations of monthly activity statistics are as dangerously seductive as counting down the miles to Moscow: the sort of progress that looks great on a large-scale map, or in its business equivalent of a top-down spreadsheet but is in reality just a benchmark of strategic and operational overstretch. Without a fundamental rethink of how the US online gambling customer is being served by most market protagonists (operators, suppliers, regulators) it is hard to see any outcome but disaster.

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Featured article edited by SBC from ‘Winning Post’ Sunday 24 October  2021 (click on the below logo to access a full unedited version)