All that glitters is not gold, the old saying goes.
That could be the title of two recent research notes by Carlo Santarelli, the Deutsche Bank gaming analyst who has long been a sobering voice of reason amid the hoopla and hype over online sports betting and iCasino.
In the process, he saved a lot of money for investors who heeded his calls during the now months-long collapse of digital gaming stocks.
In his most recent notes, Santarelli questioned the value of using gross gaming revenues and handle as measures of the true total addressable market for digital. As before, he made his case in no-nonsense presentations supported by data.
Santarelli used New Jersey, Pennsylvania and several other states to illustrate that, after deducting promotional expenses from gross gaming revenues, net gaming revenues are appreciably lower, suggesting a substantially smaller addressable market than many believe.
Some of the numbers are stunning.
For example, in New Jersey, the average customer lost $320 last year, but the net was really just $120, Santarelli laid out in detailed calculations. In Pennsylvania, year-to-date promotional costs were 63.8 percent of gross revenue. In Michigan, they were 73.4 percent.
Gross revenue and handle amount to bogus and easily manipulated metrics. Relying on them “will simply elongate the process to a steady state, as operators attempt to continue to show gross revenue and handle growth, to satiate investor expectations,” Santarelli said.
Further, the argument that promotional costs will decline as markets mature isn’t playing out so far. In fact, promotional costs are rising even in somewhat mature markets, Santarelli pointed out.
In Pennsylvania, revenues last football season actually declined 2.5 percent when growing promotional costs are netted out.
And weaning operators off high promotional spending may be more difficult than the several-years-out projections many companies make. Again, illustrated in detailed charts, Santarelli shows that when promotional spending declines, so do gross revenues.
In the end, operators will reach a steady state in which online sports betting will be profitable, and higher-margin iCasino more so, though digital profitability will be lower than anticipated, Santarelli said.
Further, in analyzing data, investors will have to acknowledge that when promotional costs finally do drop to the often-discussed 20 percent to 30 percent of revenue, the result will be a total addressable market well below many of today’s projections.
The data and analyses offered by Santarelli support our long-held thesis that sports betting and iGaming will be tougher businesses than their touters contend.
There’s another caution that investors should consider regulatory risk.
Gambling ads flooding the airwaves, making blatant appeals to risk-taking and doing it at times and in ways sure to reach youngsters is an open invitation to sterner regulation and restrictive legislation.
We have only to look at rules being imposed in European countries to see the possible future in America. And we have only to listen to the almost blithe comments of American casino executives, who say they’re ahead of the problem gambling curve, to suspect that they don’t get it.
In the end, state governments might do the job for the industry of bringing ruinous promotional wars under control.
