iGaming Daily

Jessica Welman (00:02.467)
For over a year, sportsbooks have threatened to do something about the tax rates in places like New York. DraftKings finally took action, announcing that it will be implementing a roughly 3 % surcharge on all winning bets in four different states with particularly high tax rates. Then the internet exploded. DraftKings stock dipped dramatically over the weekend. It did rebound a bit yesterday.

Is this a colossally bad idea or is the DraftKings market share simply too big to fail? We're going to discuss the ins and outs of Fiegate on today's episode of iGaming Daily. iGaming Daily is brought to you by OptiMove, the number one CRM marketing solution for the iGaming market. That first free month still up for grabs. OptiMove .com forward slash SBC. We've got the link in the description below. With that in mind, I am Jessica Wellman.

editor of SBC Americas, joined by my former colleague, the man behind the Straight to the Point newsletter and podcast, Steve Roddick. Steve, you said on Twitter about this that you try really hard not to be too critical of the gaming industry, but this is a moment where you might need to not be so nice.

Steve Ruddock (01:15.712)
Yeah, this was one of the first times where I would have trouble defending the action of the particular sportsbook, so DraftKings. It's still yet to be seen if others are going to follow in their footsteps. We have one that said they wouldn't, but obviously, Rivers is a little bit lower down on the totem pole than...

some of the other operators that we'll probably hear from this week or next. But yeah, it's definitely a decision by them that I think there's a lot of layers to it that need to be unpacked. I do not think it's just a straight we need to make more money off of the players. Otherwise, they wouldn't have been so publicly facing about it. It's easier ways to tack on a little bit of extra revenue through just changing the odds or putting the surcharge in and let people figure it out for themselves. So yeah, there's a

Jessica Welman (01:58.754)
Yeah.

Steve Ruddock (02:05.868)
of layers to this one.

Jessica Welman (02:07.683)
Yeah, I covered a lot of it in the intro, but for those who haven't heard the gist of this on the earnings call, DraftKings said that in Vermont, Pennsylvania, Illinois, which recently doubled its tax rate and New York that winning betters. So if you place a winning wager, you will pay a 3 % surcharge on your winnings to help mitigate the fees that come with.

that particular or the tax rate that comes with those states. The threshold was over 20 % so that's four states right now. There are a lot of states right at 20%. I think to me, I don't know about you, like you said, the most shocking thing to this was how they were just almost rubbing it in the face of winning players that they're the ones that are gonna pay for this.

Steve Ruddock (03:02.366)
Yeah, there's a couple of possibilities here. I mean, I guess my previous comments on Twitter, I can kind of sort of make an argument for for DraftKings now, which is, are they number one, trying to apply pressure on states that are either considering high tax rates or considering raising their tax rates? Very strange way to go about it, in my opinion, because usually lawmakers don't do well to what I would consider a threat.

Number two, which I've seen kind of hinted at here and there is, is this a way to backstop if they're not allowed to limit winning players from now on? So there's, if you look at the way this is structured with it being basically an extra charge on winning, there would be possible for DraftKings to

push winning players out and by not offering extra bonuses whereas a losing VIP player might get extra bonuses that offset the surcharge and again I don't even know is the surcharge equal across the board I have no idea I don't know

Jessica Welman (04:15.171)
think it's 3 .2 % flat on everything.

Steve Ruddock (04:18.266)
Are they going to enforce it on every player? The VIP is going to get special treatment? Will states respond to that? And then again, there's the bonus question, right? So it's pretty easy for them to just say, well, we'll just give you extra bonuses and that will take care of your surcharge. So you don't have to go anywhere else. But those other guys, yeah, they can definitely go over to the other companies.

Jessica Welman (04:38.755)
So I believe it was about a year and a half ago that Christian Gnetsky and Jason Robbins appeared before New York lawmakers. And as you noted, they don't take well to threats. They basically said, you know, this tax rate sucks. It's untenable. We will inevitably have to alter pricing if this continues. And one of the lawmakers was like, well, if you have a worse price,

they just go somewhere with a better price and they, Jason Robbins who I'm always like, more media trading wouldn't hurt, basically said everybody would manipulate their prices. At which point, they got real fired up on the lawmaker's side. They were like, yeah, that's illegal. We would not let you do that. So it does also make me think, is this surcharge also, you know, he mentioned other industries.

I don't think it's just, other industries are doing it and we do it. I think it's, nobody has fallen to some sort of monopolistic tendencies lawsuit with these surcharges. So we probably have more legal cover rather than all of us baking in bad pricing for this particular market is maybe another reason why they went this

Steve Ruddock (06:02.274)
Yeah, and it's it's a funny thing because they it almost appeared to me during that the hearing you're talking about that when they agreed to the 51 % rate in New York, they expected it to be lowered in the future. And similar to the Illinois situation where when the idea of raising the tax rate to 35 % was thrown out, they

basically said, our lobbyists will win the day and they'll see why this is a bad idea. And that actually ended up being worse for them. It almost seems like Illinois said, you know what, you guys are going to pay an extra 5 % because you're kind of annoying us right now. You other guys will just raise you up a little bit, right? So that

from my understanding of the whole Illinois situation, from the people I spoke with, before they really started pushing back against it, lawmakers were willing to accept a rate in the 20s somewhere. So was going to be more of a moderate increase. But I think the pushback against it helped change their minds. And it's one of those things where

I feel bad for the industry in a sense with what happened in Ohio and what happened in Illinois where they basically signed a law and then a year to a couple of years later, they're paying a different rate. Yeah. Right. A very, very strange thing. But again, I hear

Jessica Welman (07:28.215)
or six months in the case of Ohio.

Steve Ruddock (07:34.464)
behind the scenes rumors there that that was always going to be the situation. That was how it was signed. And there was already chatter about that at the very beginning. How, you know, how true those are was anyone's guess, but that is what I've heard. So I do feel bad for the industry that they're dealing with this, but at the same time, a little more tact with how you go about reacting to what would be

Jessica Welman (07:48.845)
Yeah, and

Jessica Welman (08:00.963)
I mean, in New York, it was a competitive bidding process. And it is because a cohort of people put in at 51 % that they remember we didn't even think they would have nine operators. We thought it would be a smaller market. because they threw, I mean, they lobbed that grenade on themselves that I only have so much.

sympathy for them. will say though, you know, to your point at Nickel Gease, there was a panel where government affairs people are telling a room of lawmakers why they need to pay less taxes. as I told a colleague, I was like, this is kind of like the the Kobayashi Maru situation where it's just unwinnable to go in a room full of lawmakers and explain why you don't need to pay as many taxes. But, you know, they they did their best with what they were given.

that it is a tough situation because you're an industry with very little overhead. You're an industry that's not bringing a tremendous amount of jobs to the table. And we read all of these giant numbers because handles what's getting reported. It's hard for lawmakers to not be like, okay, well, it seems like you can afford

Steve Ruddock (09:14.972)
Yeah, when you're you're you have two missions. Mission number one is to cry poor and tell lawmakers how much money you don't have. And mission number two is to tell your big numbers to investors and anybody who's thinking about purchasing stock. So you have this this double edged sword that they're trying to deal with. And I think what's happening is

they were hoping to compartmentalize the investor relations and lawmakers are picking up on that. So they're hearing this and they're hearing our path to profitability is here and we're profitable in these states. And that's where everything kind of goes sideways. Especially, think a lot of the couple of things I think people lose sight of number one, like surcharges in other states and other industries. A lot of those go towards things.

they're not just random charges, like some of them are for like road improvement and things like that with taxis. There's different pension funds, there's different things that these are earmarked for. I mean, there's other ways to frame it that it's yeah, it's still just the company charging you more money for it. But it is like a specific thing. This is just more, hey, we're just going to charge you more because these states

charge us more. And so what I said in my actually my newsletter today, I think, is well, what about the states to charge 10 % you can give a discount there. If 20 % is your bright line. Okay, so if somebody charges 10%, do you offer better odds

Jessica Welman (10:49.379)
I also, I noted this on Twitter when someone was making this argument, Pennsylvania allows unlimited promo deductions that like, you can cry tax rate, but, and yeah, even in actuality they're paying what, like 23 %? So it is kind of over 20%,

Like you already have been able to write off millions and millions of dollars in promo credit. That was one where I'm like, you're really gonna do this in a state where you already have things not so bad.

Steve Ruddock (11:25.012)
Yeah, for me, I understand Illinois, that's where the rug was pulled out from you a little bit. The other states are just, it's hard for me to come up with a reasonable defense of doing it there. You agreed to the terms, nothing has changed. You agreed to it, you kind of assumed that the states would then revisit it because you're such great people and do all of these great things. But

at the end of the day, it's still gambling. Like that poll from New York is a great microcosm of this whole discussion. Prostitution wasn't just more popular, there was less opposition to it. And that was the big thing that I noticed in it. It wasn't the popularity of

Jessica Welman (12:10.027)
Yeah, that one got spun is look at the support and I was like less than half the population wants this. That's not a good thing.

Steve Ruddock (12:17.362)
Yeah. And it was less popular than prostitute legalized prostitution. So that kind of tells you where the general public's mindset is on gambling. Another thing like I kind of mentioned once is that hotel resort fees. I don't know anybody if you explain that to be like, yeah, that's that's actually a good

Jessica Welman (12:21.837)
prostitution.

Steve Ruddock (12:39.018)
like they should be doing that. Whereas if you said high tax rates on gambling, there's a lot of people that would say no, it should be higher, just like cigarette tax, right? No, the federal government should be taxing it too. And then that's kind of where my biggest concern with this is, it's not so much of what this becomes, maybe everybody adopts it and the two years from now, nobody even thinks about it, it's just common practice.

it's what it leads to down the road because you're saying it's acceptable. Anytime we have a policy that we don't like, we're just going to pass it off to the consumer. And like I said, they're not in states that have industries friendly policies, rewarding the consumer with

they're offering the same product. So are they going to start writing off the federal excise tax? Is that is that what we're going to do? We're going to have a surcharge for that on every betting slip, because the federal government taxes you like there's there's all of these things that for me, this is like one of the I think the story I could write about it every day for like three months and still not touch all the angles.

Jessica Welman (13:45.143)
Yeah. No, this one too.

I think everybody processes and understands that businesses have to make decisions in order to maximize their profit margin and that sort of thing. I think particularly with what Rush Street said yesterday,

It's an interesting contrast of what the decisions being made are. Specifically on the earnings call, Jason Robbins was asked, like, well, are you pulling back marketing costs in these markets? And he's like, no, why would we do that? Whereas, you know, there was a story that got some industry play last week that Rush Street is cutting back extensively with affiliates. And I will say in a state like Pennsylvania that is fairly mature,

I think that makes a lot of sense. You're almost five years in there. Why spend a bunch on acquisition at this point when the new acquisitions are probably in untapped markets that affiliates aren't touching anyways? So we have one operator saying, well, we just cut marketing costs. And the other operator is like, well, we just offloaded it to consumers.

I had people pushing back at me pointing out how much more money DraftKings makes than Rush Street, which is true, but you're talking about a very short -term vacuum right now and we don't know what the fallout of this is going to be. That maybe in the long term, this is a play that benefits Rivers.

Steve Ruddock (15:21.428)
Yeah, I think in the short term, will benefit everyone but DraftKings or whoever goes along with us. Because I just think even though this isn't happening till January, and again, this might be a trial balloon, and they just say, guess what, guys? We're not going to do that. We changed our minds. We listen to your concerns. And they just pull it back. We'll see. I saw an interesting podcast yesterday where somebody was saying,

you know, January is a kind of a funny time to try that. So maybe it just gets pushed back and they just keep delaying it. But I think, yeah, I think immediately, I think people already think it's in place. I don't think people understand the charges and the odds well enough to even know if there's a surcharge. That's why the public facing this of it really threw me for a loop at first. I think that's what

Jessica Welman (15:57.505)
Yeah, that's a huge handle month for sure.

Steve Ruddock (16:16.96)
what made my brain go to this is a terrible decision. Sometimes I feel, and they're usually correct in this, but that they can outfox the lawmakers and regulators. And normally they're correct. They have a lot of smart people working for them, but you're a poker player. If you're thinking level four and your opponent's thinking level one, it doesn't matter how smart you are.

Jessica Welman (16:44.845)
Yeah.

Steve Ruddock (16:44.95)
They're just seeing the one thing you're kind of out foxing yourself at that point. And this might be one of those situations where they might be out foxing themselves.

Jessica Welman (16:54.955)
Yeah, okay, we're starting to run short on time. So I think it's time to kind of shift to what does success with this particular choice look like? Because there was a lot of backlash on Twitter that this is gonna fail and Twitter is Twitter. I think even Novi Williams made the most salient point about this, which is, this was kind of noted in the earnings call.

you would have to lose in these states half of your revenue to people that are, you and Jason Robbins again, just kind of said, I think people get pissed off, but I think they're too lazy to leave. I didn't use the word lazy, but that was kind of the implication. Like we know how people are, they get grumpy, they don't do anything about it. And you would need to lose, you

500 million in revenue if you had a billion in revenue, you'd need to lose half of it before this surcharge financially is a bad decision. But I think there are other things at play. So I'm curious, what do you think are kind of the other factors that determine whether this is a good idea or a bad idea or if it works?

Steve Ruddock (18:15.018)
Yeah, I you summed it up perfectly because if the climate stays exactly the same, the surcharge is great idea, right? They're going to make more money, right? They're not going to lose that many customers, especially if they can offset it with bonuses to keep some of their bigger players happy. The issues become what are the knock -on effects from this? Do regulators then start saying,

well, if the surcharge Illinois, I've seen some rules that kind of make it. I don't know if they can just add a surcharge. Steve Brubaker has been posting about some legislative. So any horse racing? Yeah, it's Steve. So he's posting about ADW and horse racing surcharges, and those were all passed legislatively. So there's there's that aspect of it.

Jessica Welman (18:52.552)
If anybody knows esoteric rules in Illinois, it is Steve Brubaker,

Steve Ruddock (19:06.754)
what if a state just says, know what, you can't do that, or we're going to tax your surcharges at 80%. State can do whatever it wants. And I'm also curious if other states go, well, if they're just going to add a surcharge, we'll just raise our taxes, because we're not getting a lot right now. So they'll just, they'll deal with it that way. They told us they couldn't, but now we see how they can. So there's there's all these things where in

It seems like a good idea and it could very well be a good idea. And like I said, two years from now, we could just be saying, yeah, it's standard. But there's also a lot of things that could happen

you don't really think about. It's the same thing with marketing. Massachusetts limiting batters, that totally changes things if that happens. If states pull back on marketing and what you can do totally changes how these companies approach these jurisdictions. So I think it's one of those things where we really probably won't know how successful it is or what even success looks like for quite some time.

Jessica Welman (20:13.453)
Yeah, I mean, I think the biggest question mark, does anybody follow suit with this? You know, we talked about it a little. I assume some of the benefit of the surcharge is that you're essentially, it's not new revenue that you have to pay taxes on. You're taking money from your revenue to offset taxes, whereas if you just baked it into pricing that you hold higher, you're actually creating more taxes for yourself.

That's kind of the smart part about this. That's the one part of it where I'm like, that's actually kind of smart. To your point about limiting betters, no better way to get winning betters off your platform than to give them bad pricing. Appeal to the price sensitive people and get them to run.

We shall see what happens with it. Like I said, stock prices across gaming got destroyed yesterday. I mean, across the US, I think they got destroyed yesterday that it's hard to tell how much of the stock shares are doing because of this. There was an announcement of a billion dollars in buybacks. So that's kind of the upside for shareholders. So we will keep an eye on that on SPC Americas. In the meantime, Steve,

plug to end this. For those who do not know straight to the point, who needs to subscribe to this newsletter? I will say, I check it every day. I appreciate we should be giving you some sort of affiliate dollars for how many times you send people to SBC Americas. Thank you for the support. You guys should check it out, but in your own words, who is this newsletter

Steve Ruddock (21:52.64)
Yeah, so it's an independent newsletter so I can pretty much link to whoever I want to link to and point to whatever story. So I tend to curate the news for news of the day, add some different insights where needed. It's basically for anybody who's interested in legislative, regulatory or industry goings -ons. If you're very just into sports betting, iGaming, iLottery.

Definitely check it out. And if you are in the industry, that's where most of my subscribers come from is industry folks. Yeah, definitely for you. At least that's what I'm told by them.

Jessica Welman (22:33.225)
All right, well you've got that, you've got the podcast. I had a blast on the episode that I was on and that more than any podcast I've been on by the way is the one that people come up to me they're like, I heard you on Steve's pod. So quite the audience for that. Be sure to check that out. Check out all of the news about the DraftKings Fiegate. We've got all the updates on SBC Americas and keep tuning into iGaming Daily because it is earnings season so we've got tons to go over in the next couple of weeks. See you guys next week.