The amount DraftKings spent on promotions for casino users in Connecticut dropped 84% in January. This follows an 11-month period during which the company often paid out more in casino bonuses than its entire gross revenue. The sudden change may relate to statements CEO Jason Robins has made to investors about focusing on cost control and achieving profitability by Q4 2023.
The Connecticut online casino market is a tribal duopoly. The Mohegan Tribe offers online gambling under its own brand, using FanDuel technology. Meanwhile, the Mashantucket Pequot Tribe uses the DraftKings brand and platform.
DraftKings 17,23 -3,58% enjoys the larger market share of the two but has been spending heavily to maintain it. Looking at the full-year results from 2022, DraftKings held 59.8% of online casino revenue. However, it paid out $210 million in bonuses compared to only $16 million by Mohegan. That’s $42 million more than it won from players during the year. Hence, its Connecticut casino turned a net loss even before accounting for taxes, operating costs, staff salaries and other non-promotional expenses.
However, it hasn’t been spending as heavily on the sports betting vertical. On that front, its promotional expenses have remained below 30% of gross revenue since March 2022. Perhaps as a result, the race with Mohegan is a much closer one. DraftKings has generally held a slight edge in sports betting revenue, but the two were virtually deadlocked for much of 2022.
The DraftKings CT Promotional Blitz Ends
Except for the first couple of weeks after the market opened, DraftKings has consistently spent more on casino promotions than Mohegan. However, that spending became massively higher starting in February 2022.
November 2021 through January 2022 were Connecticut’s first three full months of legal online casino gaming. During that period, DraftKings spent $11.4 million on promotions, compared to $4.1 million by Mohegan.
Over the next three months, Mohegan’s spending went down to $2.9 million. At the same time, DraftKings’ skyrocketed to $66.9 million.
DraftKings’ spending came down somewhat in the second half of 2022, while Mohegan’s rose. However, DraftKings never spent less than $12 million in a single month, while Mohegan never spent more than $2.5 million.
Even in January 2023, DraftKings was the bigger spender. However, the $3.5 million it spent is much more in line with its strategy in the market’s early months. It seems that the “blitz” may be over. Meanwhile, Mohegan’s spending continues to rise slowly, with $2.8 million in promotions for January.
Connecticut allows operators to deduct up to 20% of their monthly promotional spending from gross revenue for tax purposes. For the most part, Mohegan has kept its spending below that limit.
Conversely, DraftKings’s loss-leader strategy resulted in it paying taxes on $177 million in reported winnings in 2022, despite having returned those funds – and more – to players in the form of promotional bonuses. At Connecticut’s 18% tax rate, that equates to an additional loss of $32 million above and beyond the direct cost of the payouts.
In the January figures are any indication, both companies are aiming for the tax-deductible maximum in 2023. Both companies were just slightly over the limit, with DraftKings spending 20.3% of its gross revenue and Mohegan 21.4%.
As long as DraftKings maintains the greater share of the market, it should also remain the higher spender. However, taking its foot off the gas likely means its grip on the market will also loosen. Already, its share has slipped from 59.0% in December to 56.4%.
The Road to Profitability
DraftKings is known for its maximalist approach to marketing expenditures. That approach to customer acquisition initially excited investors, though the mood has since soured.
It’s not alone in that regard. “Irrational” is a word that has frequently been used to describe the US online gambling industry because the marketing approach has been so aggressive. However, DraftKings has stood out as an extreme example of that.
Now, Robins is seeking to assure investors that the company has begun to change gears. Discussing DraftKings’s Q4 financial results, he talked about “surgical decisions” and said that DraftKings’ leadership is now shifting its focus from increasing revenue to converting that into profitability.
Unfortunately, other states’ regulatory reporting doesn’t include details of promotional spending. It’s impossible to say to what extent the company’s strategy in Connecticut resembles its overarching plan. However, the sudden cutback in the Nutmeg State does jive with what Robins describes as the plan for 2023.
It remains to be seen whether his promise of profitability by this year’s final quarter comes true. However, the company did cut its quarterly EBITDA net loss by 60% from Q4 2021 to Q4 2022. If that trend continues, it does seem to be on course to reach the break-even point soon.