Tax hikes on sportsbooks’ revenues caused Boston-based bookmaker, DraftKings, to announce a surcharge on winning bets beginning next year. However, the hue and cry from its customers coupled with the lack of cooperation from its competitors, caused the company to rescind its policy.
But how DraftKings and others will navigate increasing tax rates from states that want more of the digital sports betting pie is currently under consideration.
Bold Step Stumbles
In early August, DraftKings shook the sports betting landscape by announcing the imposition of a surcharge on winning bets beginning in 2025. However, that threat was actually a highly calculated bluff that was called when another industry titan, FanDuel, announced they would not be following suit.
This left DraftKings in a precarious position with FanDuel and other mobile sportsbooks speaking out against any such house tax on winning wagers, painting DraftKings as a greedy sports betting option that should be avoided.
Although Rush Street Interactive, through its mobile sports betting platform BetRivers, was one of the first gaming companies to decry DraftKings’ money grab, it wasn’t until Flutter Entertainment, the parent company of industry leader FanDuel, announced the following at its second-quarter earnings call.
“We have no plans to introduce a surcharge for winners,” said Flutter CEO Peter Jackson.
And just like that, DraftKings reversed course only 13 days after announcing its impending surcharge policy.
Next Move
DraftKings CEO Jason Robins quickly backtracked, citing concerns from its customers, but the rebuff from its archrival, FanDuel, was the primary reason. Had DraftKings gone it alone, there were grave concerns that whatever profit boost the company gained from the surcharge tax would be eliminated by a lower drop in volume.
“Clearly, this was something that our customers—they didn’t like this type of solution,” Robins said. “Our thinking behind it was, well, we can invest more in promo [for] you and other things because we’re going to be collecting more upfront. But we got feedback that people didn’t like this particular solution, so we changed it.
“But there might be some other sort of solution ultimately that we pursue that does get a more favorable response.”
The Boston-based bookmaker and FanDuel comprise a duopoly in the U.S. mobile sports betting landscape that controls approximately 73% of the market. Should customers begin seeking alternative sportsbooks without the charge, that share could erode rapidly, leaving DraftKings with irreparable damage to its reputation.
Stock Market Rebound
DraftKings’ stock price took an immediate hit, dropping to a nine-month low of $29.83, but bouncing back after announcing it would not be implementing the change. As of this writing, DraftKings is trading at $39.68, illustrating the relief investors felt after cooler heads prevailed in the company’s C-suite.
Nevertheless, DraftKings’ drastic cause of action should be an eye-opener to states that are contemplating raising their rates. Online sportsbooks will be forced to take measures in those markets to remain as profitable as they are now, and some of that could come in the form of decreasing promotions, both in terms of size and frequency. Sportsbooks could choose to offer less favorable odds in those states as well.
But even these strategic policies could very well trigger a cause-and-effect response by the betting masses, who may decide to take their business elsewhere, where there are no tax implications for online sportsbooks operating outside the purview of American regulatory bodies. Should that happen, not only will the sportsbooks’ handle suffer but so too will their revenues, which ultimately means the states will begin receiving less money despite their higher tax rates.
Stay tuned.
