Finance

Jarring Juxtaposition

The juxtaposition of DraftKings and PENN with the former’s strong profitability and the latter’s ESPN Bet early stumble is jarring and unequivocal.

Josh Burwick
December 4, 2023

The juxtaposition of DraftKings and PENN with the former’s strong profitability and the latter’s ESPN Bet early stumble is jarring and unequivocal. Despite early stumbles replete with overspending to acquire new customers, current day DraftKings resembles the old New England Patriots dynasty’s balance between acquiring new customers smartly while continuing to  hold a market leading presence. Conversely, PENN is attempting a Hail Mary late in the fourth quarter down two touchdowns with a retread quarterback via their shotgun wedding with ESPN.

Analyst Day Completes Reversal

As someone who loved the DraftKings sports betting app as a user but laughed at the crazy promotional credits and promos they used to offer, their Analyst Day metrics show that the days of crazy freebies are a thing of the past. DraftKings still offers new users free bets initially and promos thereafter, but the latter are heavily weighted to pushing their more profitable parlays, especially Single Game Parlays (SGPs).

Parlay Discovery

The most important discovery DraftKings made over the last year is that the American betting public is absolutely fascinated with parlays. Parlays for the novice are multiple-sided bets that pay increasing odds relative to the number of “legs” or games wagered. Parlays allow a bettor to wager $25 with hopes that if the moons align and all his picks win, he could cash a $16,125 ticket.

Parlay Basics

The most basic parlay involves a bettor taking two teams to win. A parlay only cashes if both games cover. If one team wins and the other loses, the ticket is a loser. If we assume 50%/50% odds, the odds of hitting a two-team parlay are 3:1 as you should hit one in four of these bets (i.e. 25%). However, sportsbooks only pay roughly 13-5 odds (or 2.6-1) not 3-1 giving the sportsbook a .4 edge (3.0-2.6). The reason being is the sportsbooks assume their edge or “vig” compounds on every leg.

If you assume a standard $110 bet to win $100 and a bettor wins 50% if he bets both games and wins one and loses the other, the bettor will net -$10 or -$5 per $110 bet or 4.5% ROI.  In a parlay, betting $110 and winning 25% of the time, the bettor loses $110 75% of the time and wins $290.40 ($110 x 2.6) 25% of the time with an expected loss of $9.90 ($290.4 x 25% -$110 x 75%) per $110 bet or -9% ROI. The sportsbook’s ROI is considerably higher with the parlay versus two straight bets.

Adding additional legs to a parlay increases the house’s edge. For example, a 5-leg parlay should pay 31 to 1 but sportsbooks only pay 24 to 1 as they compound their 110 edge across the 5 legs. It’s simply the law of compounding applied to sports gambling. DraftKings capitalized on American’s fascination with parlays by offering an increasing amount of their promos directed at increasing payouts on parlays. So with their promos, a bettor could get their odds on a 5 team parlay increased to 30 to 1 from 24 to 1 and DraftKings still had a mathematical edge as its below the true odds of 31 to 1.  

DraftKings’ Parlay Profit Machine

DraftKings has made a concerted effort over the last year to push bettors to make an increasing number of parlays and increasing the amount of parlay legs. Starting in Q2 2022, DraftKings noted a 1700 basis points increase in Online Sports Betting parlay mix which coincided with a $15 million increase in full year revenue helping to translate to a $60 million increase in Adjusted EBITDA for the year.  DraftKings pushed more customers to parlays and increasing the number of legs therein, resulting in structural hold (profit) margin increasing from 6.5% in 2021 to 7.7% at year-end 2022. The promotional push related to parlays allowed them to also decrease promotional intensity over the same period of time by over 600 basis points.

As DraftKings gathered more data on customers placing parlays they witnessed the percentages playing out, that higher leg parlays lost more frequently and helped their hold margins. In 2023, higher average leg count accounted for an additional 1.2% increase in hold margin lifting it to 9.5% for the year.

Further Plans to Push Parlays

As part of their Analyst Day on November 14th, DraftKings teased the forthcoming introduction of ‘Progressive Parlays’ a new feature that will allow bettors to “win” even if one or more legs of their parlays lose. Thus, if a customer places a 5-team parlay and wins 4 games but loses 1 he/she will not win the ultimate 24:1 payout but may win 2:1 or 3:1 their initial wager.  

DraftKings has continued to increase parlay derivative offerings with the ability to combine same game parlays, live same-game parlays and plans to launch same game parlays early cash-outs. One of the more promising product rollouts was pre-announced at their analyst day- the Progressive Parlay that no other sportsbook currently offers. This offering will increase DraftKings attractiveness and increase bettors’ focus on parlays and increasing the legs of the parlay increasing DraftKings hold margin.

DraftKings’ States Getting to Profitability Much Faster

As a new state goes live with sports betting, the operators fight to acquire the customers through a combination of promotions involving deposit matches, free bets, and increased odds payouts. The investment is highest in the first year and it scales down considerably in the second and third years. DraftKings’ earliest vintage (2018-2019) consists of 5 states: New Jersey, West Virginia, Indiana, Pennsylvania and New Hampshire. This vintage took nearly three years, 11 quarters to be exact, to reach contribution margin profitability on a trailing twelve-month basis. The subsequent vintage (2020-2021) consisting of 9 states took only 8 quarters to reach similar profitability levels. The latest vintage of 10 states, one of which is New York with 51% tax rate, is expected to reach those profitable levels in only 5 quarters.

Not only is DraftKings scaling back their marketing expenditures, but they are improving the effectiveness with a heavier reliance on parlay odds boosts that actually increase their hold margin. Interestingly, DraftKings is also acquiring customers faster.

DraftKings Points to Full Year Profitability in 2024

Even with 4 additional states/territories launching, as a result of improved economics DraftKings guided to $400 million in 2024 Adjusted EBITDA from -$100 million loss in 2023, an 8.6% margin. EBITDA margins will continue to expand into the upper 20%’s in the coming years.

ESPN Bet Parlays Stumble Already

ESPN Bet still sits atop downloads on Apple and Google Play Stores, not shocking as they are providing massive bonuses to new users (even users who used PENN’s Barstool Sportsbook in that same state). They are basically giving away $1200 in cashback and bonus bets to every user in every state it’s launching.

However, only two weeks into what should be a honeymoon as ESPN Bet throws money at customers, they are already stumbling.  In a well circulated Twitter post seen 6 million times, a bettor’s parlay was graded a push because one leg of the parlay pushed. All major sportsbooks’ grade these as a win (minus the one leg push and recalculated odds).

PENN clearly feels the effect of the $2 billion price tag (~$200 million annually) associated with its partnership with ESPN and is attempting to claw back their edge with core rules that effect parlays. PENN has still not commented despite the customer outrage. Down 8 points with 1 second left, PENN just got called for a false start penalty on their ESPN Bet Hail Mary attempt.

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