Sportsbook Business Is Consolidating At The Top, And Fast

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In the third quarter of 2022, and for the fifth straight quarter, the online sportsbook market share for the combined forces of the Big Two — FanDuel and DraftKings — and the Next-Biggest Three — BetMGM, Caesars, and Barstool  grew.

It was 92.4% in Q3 2022, according to research compiled by Vixio. To compare, the number was a still-huge 87.9% in the third quarter of 2021, and that was up from an all-time low of 75.2% in Q3 of 2020.

FanDuel is doing the heavy lifting here, with about 40% of the market share, and, truth be told, Caesars and Barstool only grab about 4% each, but they’ve clearly been growing month by month, so why not include them here?

The upshot of all this is there are nothing but scraps for the rest, to the tune of 7.6% of the market (and shrinking).

It certainly leads one to wonder if the Great Sportsbook Wars are over. And, more importantly, if there’s room for anyone else.

Oh, Herfindahl!

For starters, it would help to figure out if the online sportsbook industry is different from other industries. Is the market concentration normal or not?

The Herfindahl index is a popular measure of market concentration,” said Lloyd Danzig, the managing partner for Sharp Alpha Advisors. “Markets with an index that exceeds 0.25 are typically thought to be highly concentrated. The U.S. sports betting industry currently has a Herfindahl index of approximately 0.35.”

Also known as the “Herfindahl-Hirschman Index,” it’s a remarkably simple tool to use: Square the market share of each firm and then add up the numbers. By that measure, FanDuel and DraftKings by themselves push the number to 0.25. So, yeah, you might say the industry is currently concentrated.

As for BetMGM, Caesars, and Barstool?

“You have the next cohort of omnichannel companies that have structural cost advantages, given they have direct market access in many states, they have a brand and a database and an omnichannel cross-sell, and are trying to retain the customer both as a land-based customer and online,” said Ryan Sigdahl, a partner and senior research analyst at Craig-Hallum Capital Group. “BetMGM is quite far ahead, and Caesars and PENN/Barstool are next in line. They don’t need the market share online like DraftKings and FanDuel, and online doesn’t have to be as fruitful as a result.”

In short: Their land-based properties are still the main game, with online as a complement. 

“Beyond these five, though, it gets really challenging,” Sigdahl said. 

Brendan Bussmann, the managing partner at B Global, thinks the lower-tier online sportsbooks aren’t quite dead yet.

“There has always been an ebb and flow in the gaming industry, and I would be surprised if you do not have the same thing occur over time with some additional [mergers and acquisitions] activity while also having other disruptors come into the marketplace because of a better product or a technology advance,” he said. “While these big brands — either because of their land-based ties or initial position in the market — will hold their own, there is always someone that will be gunning to be within that mix.”

Bussmann points specifically to smaller operators with their own land-based ties.

“Those with land-based ties still will be able to make a regional impact even if they are not part of the big five,” he said. “This will mirror what we see in the gaming space today. But you never know when one of those may catch fire and be able to compete on the big stage.”

Speaking of the big stage …

Enter Fanatics

Fanatics Sportsbook is expected to launch far and wide in 2023, and with it comes a big question: Will the online merchandise behemoth be able to make a dent at the top?

“There is no doubt that Fanatics will have a momentous launch and rollout, with significant capital to fund customer acquisition and a large existing database to convert into real-money gaming users,” Danzig said. “The biggest questions as to their success surround the success rate at converting users in the database and the [lifetime value] expansion they achieve by cross-selling users between gaming, merchandise, collectibles, and other potential verticals.”

Bussmann is keeping an equally open mind.

“They have a significant sports-focused database of customers,” he noted. “The question is how much do they know about those customers, converting them over either as new market entrants or from another operator? They have perfected the sports side of the holy grail with merchandise and experience. Let’s see what they can do within the sports betting sector.”

Sigdahl, however, sees a rockier path for Fanatics.

Fanatics, everyone is thinking about it,” he said. “‘Man, they have a big database, and man, they have great talent, but they don’t have a product yet. And what we’ve seen at Caesars, at PENN, these companies that have big aspirations and unique go-to-market strategies, they can’t win without product. So we’ll see what they come to market with.

“I think they’ll be successful, their ability to cross-promote, coming at it from a different angle,” he continued. “Plus they have an extremely experienced management team. They have the team, the financing.”

But …

“I don’t think they’re as competitively disruptive as many are perceiving them to be,” Sigdahl said. “They’ll make a business out of it, but I don’t think they’ll elevate themselves into the upper echelon. In fact, I think Caesars, Barstool, and BetMGM have a better database for online gambling, and so I think Fanatics will be hard-pressed to make that category. They have assets that make them really compelling, but I’m not as convinced they’ll be as successful right out of the gate as others might think.”

In the end, Sigdahl sees every company looking far up at FanDuel, and pretty darned far up at DraftKings.

“The market has been and continues to be maturing and evolving quicker than we even anticipated, but market share is consolidating at the top, and that will continue,” he said. “FanDuel dominates the industry and actually extended its share, which many thought was impossible given how far ahead they were. We’re seeing DraftKings take market share, and everyone else lose share. The lion’s share will be controlled by a strong few at the top. FanDuel is already proving it — DraftKings can and will.”


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