BetRivers owner Rush Street Interactive (RSI) has managed two consecutive quarters of adjusted EBITDA profitability thanks in large part to the performance of its sportsbook, but its Q3 investor presentation emphasized the future potential of the online casino vertical. RSI’s quarterly gross gaming revenue grew 15% year-over-year to $170 million, and it expects its 2023 total to come in at around $675 million. The presentation also highlighted the impact COVID-19 has had on the online gambling industry.
RSI’s business highlights for the quarter focused mainly on product improvements for its sports betting vertical. Its new Prop Central feature serves as a hub for specialty bets and helped drive a higher hold percentage.
Like most of the industry, RSI has reduced its promotional spending. A new “Squares” promotional game has compensated for that with a more engaging way to dispense funds than conventional bonusing.
However, most of the discussion of future plans centered around the potential of online casinos. Just over half of all states now allow online sports betting. Yet even when Rhode Island launches next year, there will only be seven with online casinos—including three monopoly or duopoly markets.
Once RSI takes over the Delaware monopoly from 888 Holdings, it will be offering online casino games in five states. Yet that’s only 28% of the 18 to which it has market access lined up. By contrast, it is already live with 71% (15 of 21) of its online sports betting market access opportunities in the US.
Where both exist, iGaming (online casinos & poker) outperforms online sports betting by about two to one in revenue. Moreover, only about 12% of the US adult population has access to legal online casinos, compared to 48% for online sports betting. So there’s more room to grow there.
Different Cohorts: Early Adopters vs. Pandemic Boomers
Perhaps the most interesting graph included in RSI’s investor presentation is the one shown here. It presents quarterly net revenue for all online verticals, broken down by the year each user signed up. Naturally, each cohort’s contribution rises through the first year as more users sign up. After that, there’s a tendency for revenue to fall off as users’ initial enthusiasm wanes, or they move on to other sites.
At the bottom of the graph is the 2016-2018 cohort of early adopters in New Jersey. Next are 2019’s arrivals, mostly from Pennsylvania, with a few sports bettors from Indiana joining at the end of the year. After this comes 2020, the year in which COVID-19 shut down retail casinos and sent gamblers flocking to online apps. Although there were two state sports betting launches that year, COVID-19 also caused the cancellation of most sports seasons, so the bulk of the immediate revenue from that cohort can presumably be attributed to the online casino vertical.
Accompanying this was a surge in promotional spending, which peaked in 2021-2022 and has been coming down since. So, there are two effects at work simultaneously, which are hard to separate. But what’s clear is that, in combination, they produced a boom period for online gambling, after which growth has cooled off somewhat.
More Recent Cohorts Appear Less Loyal
One thing that stands out is that the rate of decline of each cohort’s contributions has been much faster since COVID-19 and the rise in promotional spending. The spending by the earliest adopters has continued almost unchanged since 2019. Even the 2019 cohort’s spending remained virtually unchanged through its second year and has declined at a compounded quarterly rate of only 3.5% from its peak to the present day.
Conversely, every subsequent cohort’s spending dropped by well over 20% through the first four quarters after its peak. The 2020 cohort’s spending has declined at a compounded average rate of about 5.4% from the peak to the present day, while the rate for the 2021 and 2022 groups is more like 7.3%. (These rates are estimates computed from measurement on the graph and may be imprecise due to the limited resolution and lack of access to source data.)
This seems to correlate more with promotional spending than with the pandemic boom. That is, users enticed by generous bonuses appear to be less loyal, based on this graph. However, it’s too early to tell what effect the cutback on spending in 2023 will mean for that cohort.
Retention and Product Quality Are of Increasing Importance
Also worth noting in that graph is that the arrival of 2023 signups has barely compensated for the falloff in revenue from the previous cohorts combined. To some extent, this is natural and inevitable as an industry matures and there are fewer potential users that have yet to be reached.
User acquisition has slowed down to an even greater degree than revenue growth might suggest. Revenue is up 15% year-over-year, but the number of active users for RSI increased only 4% in its online casino markets, while an 8% increase in average revenue per active user helped cover for that.
Meanwhile, the expansion of the market has slowed down. Absent new states coming online, eventually, the only genuinely new potential users would be those moving to a regulated market from elsewhere and those reaching gambling age for the first time.
From the beginning of 2020 through the midway point of 2022, RSI launched products in 13 new markets, or an average of about five per year. Over the last year, there have only been two more: Maryland and Ohio.
These factors all contribute to RSI’s game plan going forward. The need to retain users during a period of slow acquisition means focusing on product quality. Maximizing revenue from those users means emphasizing the casino vertical. RSI estimates that a single-vertical casino user is worth five times a single-vertical sports bettor, while a hybrid sports-casino player is best of all, being worth 14 times as much as the pure sports bettor.
Where Might BetRivers Online Casino Launch Next?
Unfortunately, like the rest of the industry, RSI is partially at the mercy of lawmakers when it comes to its online casino plans. The last few years have been duds, legislatively, with Rhode Island being the closest thing to a success story. However, it opted for a lottery partnership monopoly, which it handed to Bally’s, so that won’t be much comfort for RSI or other operators.
RSI’s list of untapped online casino market access opportunities consists of the following states. Of these, only those marked with an asterisk are on the shortlist to potentially pass an iGaming bill next year, and most of those have less than a 50/50 chance, by my assessment.
- New Mexico
- New York*