Are Promotions Powering Sports Betting Revenue?

Last week, the state of Pennsylvania became the latest in the US to unveil record wagering levels during the month of September. But the figures also show that the fledgling US sports betting sector could be over-reliant on the use of bonuses and other promotions. 

Pennsylvania is significant because the state’s regulator runs a unique reporting system that records the full amount that each operator has given out in what is known as ‘promotional credit.’ This category covers things like bonuses and free bets, and the figures revealed a surprising picture. 

Going All-In on Free Bets

The figures for September show that operators in the state took a solid $13.1 million in online sports betting revenue. But they also gave out an eye-popping $12 million in promotional money, which equates to around 92% of their standard online revenue. The result was a taxable revenue figure of $1.1 million, leading to a take of $390,000 for the state due to its 36% tax rate. 

Some of the figures for individual sportsbook operators were particularly remarkable. For instance, Barstool Sportsbook, which has only been operating in the state for two weeks, gave away almost $2.2 million in promotions, despite having lost $656,000 in revenue. DraftKings exceeded that figure, offering punters $2.3 million in promotions, while FanDuel, which recorded revenue of $6.6 million, gave away a huge $4.2 million in bonuses and other credits. 

The result is that a significant proportion of the sportsbook revenue recorded in Pennsylvania during September came from operators recouping the bonus money they’d handed out to players. 

Operators Spending Big 

These numbers have been inflated to a degree by the start of the NFL season in September, which was accompanied by a rash of customer-enticing measures and bonuses. And the unpredictable early season results in this year’s tournament may also have played a part, suppressing operator profits and thereby inflating the percentage revenue figures for bonuses. 

Yet the overall picture is of operators spending huge amounts of money on promotions, way more than their counterparts in the older European markets. Digging into the figures from Pennsylvania shows, for example, that Unibet has offered promotions covering around 93% of its online revenue in the state, while DraftKings has handed out 58% of online revenue to date. By contrast, European sportsbooks usually come in at around the 10% mark. Even allowing for the scramble to gain market share in the growing US sector, the figures are remarkable. 

Favorable Tax Regime

One reason why operators appear keen to go down this path of huge promotional outlay is the tax reporting system that exists in the state. Operators in Pennsylvania are taxed on their net revenue after the deduction of promotional credits. So, for example, DraftKings was able to show a net loss on revenue of $920,000 for September, which can be used to offset future tax bills. Yet when it comes to financial reporting, they can claim gross revenue of $1.4 million by including bonuses. 

This may have some attractions for operators in the short term but longer term, it could lead to problems. For a start, the Pennsylvania Gaming Control Board is pushing for a change in the rules so that revenue is taxed before promotions are taken into account. More significantly, it raises the issue of long term sustainability and, for an industry that is still regarded with suspicion by many in the US, the potential reputational damage associated with being seen to encourage gambling.