We are entering into a paradigm shift in the U.S. legal gaming market, which until recently had enjoyed a stable equilibrium, defined by four pillars forming the foundation of the industry.
The first group comprises land-based casinos focused on building and operating mega-resorts in iconic cities like Las Vegas. The second group consists of regional operators who have built casinos catering primarily to local customers. The third group includes the tribal casinos, and lastly, the fourth group comprises technology companies manufacturing and supplying gaming applications to the other three groups.
Historically, the fourth category has been B2B companies who were not looking to trespass into the business of their customers. With the reversal of the Professional and Amateur Sports Protection Act (PASPA) in 2018, a paradigm shift started to happen. In no time, a significant number of states legalized sports betting and a small number legalized iCasinos. However, in the last couple of years, we have been at a stalemate due to politics and protectionism surrounding the business.
Most of the paradigm shift has been due to money pouring in from Wall Street into technology companies such as DraftKings and FanDuel as B2C operators with enough capital to expand beyond sports betting and the goal of elbowing their way into anything gaming without having a land-based operation similar to the first three groups. These companies started spending their raised funds on promotions with the goal of pleasing their investors with market share and revenue metrics on the basis that profitability will come next.
The industry has experienced explosive growth, with $120 billion wagered on sports in 2023. However, it is not clear how much of this is due to unsustainable promotions. If we use simple math and assume a 10 percent hold, every dollar of promotion creates ten times in wagering handle just to recover the promotional cost, not counting wagering taxes if the state does not allow the deduction of promotions.
What is clear is that any company that entered the space in the last five years and had no iCasino offering has been losing money, with many already having left the U.S. market. Additionally, those who are still in the space are not breaking down their results between sports betting and iCasino, obscuring the true financial health of their operations.
In Nevada, which has a mature casino and sports betting business and could be used as a good case study, it has always been about casino-style gaming with sports betting treated as an amenity. Although online business is different, the underlying foundation that sports betting is a low-margin and high-risk business does not change the overall calculus. Moreover, since the business can only be offered on a state-by-state basis, an operator cannot fully take advantage of economies of scale by operating in multiple states.
Another factor contributing to the paradigm shift has been the advent of iCasinos, which has revolutionized the gaming landscape, moving the focus from physical locations to digital platforms and hybrid games—a combination of live-dealer games with a slot machine twist, allowing high potential payouts and labor efficiencies. This shift has been driven by advances in technology, changing consumer preferences, and evolving regulatory environments, offering a level of convenience and accessibility that traditional casinos simply cannot match.
In 2022, tribal casinos in California spent hundreds of millions of dollars on TV ads campaigning against propositions by these companies, who also spent hundreds of millions of dollars to legalize online sports betting, knowing that it could be an entry point to iCasinos and were willing to outspend anyone to protect their turf.
Similarly, the Seminoles in Florida have been fighting multiple court battles to stop others from coming in and recently received a favorable decision from the U.S. Supreme Court, which potentially could provide a roadmap for other states that are dominated by tribal casinos.
Currently, the newcomers offer iCasino games developed by suppliers in the six states that have legalized the business. Under pressure from their investors to deliver bottom-line results, they are looking to develop their own virtual and live dealer games. This move could further put them at odds with every group, including the fourth group who are currently supplying them with their games and the foundation to increased competition.
The paradigm shift we are experiencing is disrupting the industry, leading to new innovations which ultimately could be good for casinos and the players. As the iCasino sector continues to grow, it is reshaping the dynamics of the gaming industry. Traditional casinos are now exploring ways to integrate online platforms into their business models, creating hybrid experiences that combine the best of both worlds. Regional and tribal operators are also expanding their online presence to reach a wider audience and remain competitive in this evolving market.
In conclusion, while sports betting has garnered significant attention in recent years, it is the rise of iCasinos fueled by investment capital to develop new technologies that is truly transforming the gaming industry. This shift from brick-and-mortar establishments to digital platforms represents a new era of convenience, innovation, and growth, redefining the way people experience and engage with casino-style gaming.
