The evolution of online sports betting

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Briggs Barton: Welcome to Research Recap on J.P. Morgan's Making Sense. I'm your host, Briggs Barton, sector specialist for the U.S. consumer sector here at J.P. Morgan. And today, we have a fascinating discussion lined up with the brains of the operation, Dan Politizer. Dan covers the gaming and lodging sectors here at J.P. Morgan on the equity research side. With gaming earnings season having wrapped up and the NFL season kicking off soon, but not soon enough, Dan and I thought it would be the perfect time for us to dive into recent developments in the rapidly growing online sports betting industry. Dan, thanks so much for joining us.

Dan Politizer: Thank you for having me.

Briggs Barton: Thought a great place to kick off would be, you know, where we're coming from, where we are now, and where are things headed. As I look across the consumer sector that I cover, there's probably no other subsector with a greater secular growth angle than the online sports industry. So how would you assess industry dynamics over the last five years and then thinking about the next five or 10 years?

Dan Politizer: Yeah, thanks. So, if you go back, this whole industry really got its jumpstart in 2018 when the U.S. repealed PASPA. And effectively the federal government allowed states to regulate and legalize sports betting. Basically, since then you've had a proliferation of states do this, and you're up to about almost 40 states at this point, which offer it in some form or another. And just to give you a sense of scale, in 2024, there was a total amount of betting volumes in the industry were at 150 billion and the online sports book operators, their win of that was about $14 billion. So, you know, what's driven this growth from basically nothing to those levels of, of revenue and, and betting volume, I think it's a combination of U.S. consumers love affair with sports, the delivery mechanism primarily being online or mobile. And then the majority of sports taking place through these mobile apps that are able to cater to people's love of gambling which is inherently an addictive activity.

Briggs Barton: And then as we sit here today, what would you say are a few of the more notable themes that you're observing within the online sports betting industry overall?

Dan Politizer: Yeah, I mean, I think that the first and maybe most notable is parlay adoption. So, what is a parlay? It's a multi-string bet, which is contingent upon multiple outcomes, panning out. So I think that historically straight bets were generally how most people bet on sports, right. So you'd be in Nevada and you'd walk up to the betting window and place a bet on this team or that team to win a specific game. At this point, we have phones and we have basically limitless options for betting. And so parlay adoption has really gone up a lot. And it's, it's not just betting on multiple games, there's player proposition bets in there, you can bet within a game. So it's called same game parlay. So there's a lot of different ways to bet, but basically we've evolved from betting on a single outcome of the event to betting on multiple outcomes, tied to an event, multiple events that themselves are all tied together. And so if you think about what that mix of betting is in certain states that disclose it, parlay handle is about 30% of overall mix. So about a third of bets coming in in certain states that disclose it are these parlay type bets. Obviously this is not really possible without mobile. So mobile penetration has been a big part of sports betting and accelerated the growth of the industry. You weren't running up to the betting window every 45 seconds to place another bet, but because you can do it on your phone, you can do it as much as you'd like. You could do it as detailed or, you know, a 12 leg parlay for $6. That's not something you probably would've done in person at a betting window, but you can certainly do it on your phone. The other trend, that's kind of, more current is micro betting or, or in-game betting. So you can bet at this point on the next pitch in a baseball game, the next play in a football game, the next set of downs. This is a big phenomenon. I think in U.S. sports specifically, in that you can bet on singular plays. Whereas soccer is the most popular betting sport, obviously internationally. And you just don't have that level of granularity in terms of how you can bet on a certain play. So I think that American sports lend themselves well to that micro betting dynamic as well, along with like the pauses in play and the timeouts and things of that nature. But, you know, parlay adoption, mobile penetration, and micro and in-play betting seemed to be the big trends that I would highlight in real time.

Briggs Barton: So turning the page how would you say companies like DraftKings, FanDuel, and BetMGM most effectively differentiate themselves in such a competitive market?

Dan Politizer: I think the first way is the product and technology that they offer and the ability of the apps to offer different betting markets, parlay opportunities, the tightest betting lines, you being able to stack bets, a seamless wallet and payment approach. Those things seem basically table stakes now, but I don't think that they're by any means easy. So, I think that that's become an increasingly large differentiator. I think the level of promotionality and how they promote and target different customers is also a big differentiator. You know, the apps that know when you wanna bet how you wanna bet how much you wanna bet, those are able to better capitalize on better preferences. And then I think lastly, the type of customers and type of sports, they all have a little bit different exposure. Some have a little bit more casual bettors, some have better options for betting on the NBA versus tennis versus football versus baseball. So, I mean, there are slight variations in them, but you know, I think that it, it comes down to product and technology promotions and then customer and sports exposure.

Briggs Barton: So Dan, with technology playing a big role in the current landscape and the future outlook for growth, maybe we could dive a little bit deeper into that. Thinking about the tech stack across different offerings and what most is important to achieving success within this industry.

Dan Politizer: Yeah, I mean, I think first and foremost, it's product reliability and uptime, right? So I think we've seen a few years ago it was the Super Bowl and, in the minutes leading up to the Super Bowl, you know, a lot of the apps weren't working properly. We've certainly moved past that, but you know, when you have those kind of peak usage times, the app needs to work. If it's the final two minutes in game seven of the NBA Finals, right, and it's a close game, you can't have the app crash. So I think that that's a big piece and I think it's mostly been solved for, but you know, certainly the operators that have been around have had to live through that. I mean, I think that the technology and the risk management needed to offer parlays and same-game parlays and, and in-game parlays with live betting, that seems more ubiquitous now to us. But, you know, a few years ago, that was, that was a game-changer. And so I think that that piece of it and kind of the versatility of betting lines, you know, which, which is effectively infinite now. I think that that has really changed. So, one of the operators, FanDuel, they have this Your Way product. They've spoken a lot about it, but basically it's a sliding-scale parlay builder. So you can choose whatever player you want, however many points, rebounds, whatever metric you want to choose, you can choose how many, and effectively they will price out that customized parlay offering for you. A few years ago, that was an unthinkable offering to have. They are, similar type offerings in terms of the parlay versatility, but I think that that really requires a robust tech engine as well as risk management engine. The other thing, micro-betting, right? This requires, a repricing of odds real-time, every, every pitch, every series of downs, every throw. So you have to have really low latency, which has been a challenge for the industry. I think that latency time coming down will enable a wider breadth of products, right? But I think that's been something the industry has been trying to overcome.  I mean, I think that technology and just kind of knowing which customer is betting and, and better able to manage that risk, because I think from a responsible gaming standpoint, these companies really are trying to monitor and make sure people aren't gonna get themselves into trouble. And I think the companies, frankly, are also making sure they don't get in trouble, or expose themselves to risk, right? There's a lot of betters out there that do this for a living, and I don't think that the sports books really want to be, on the other end of that action, if they can avoid it.

Briggs Barton: And you make an interesting point on live betting there. Would be curious to, to double-click on that, and just thinking about the entire online sports ecosystem, what sorts of players tie into improving that latency so the operators can more accurately set lines in game, in faster time, ultimately to reach the bettor?

Dan Politizer: I mean, I think that, you have to coordinate with media companies. If you think about this ecosystem, right, you have the online sports bookmakers, you have the media companies, you have, you know, the leagues. And then you have basically the kind of intermediaries like Genius Sports or, or Sports Radar, which basically are, are the official stat keepers, so to speak, and provide all that data between the leagues as well as the online sports books. So, I think you have a lot of parties in the ecosystem. I just don't know how you kind of get over that latency hump. I think that you can go and watch games on YouTube TV and it's actually, you can reduce the latency and reduce the time, but I think it's always gonna be slower on linear. I don't know if there's really incentive aside from like micro or in-play betting to really get that down. And I think you always have to have some delay, right? Otherwise, somebody that's at the stadium could maybe place a bet and versus somebody sitting at home and, you know, call it in.

Briggs Barton: Dan, how should we think about tax and regulatory changes for the sports betting industry? What have we seen recently? And then, what future regulations or taxes should companies and investors be prepared for?

Dan Politizer: I think that you've seen a, a number of tax increases over the past few years, right? Illinois has actually increased taxes twice more or less. Louisiana, New Jersey, Maryland, and certainly a number of other states have considered it and not necessarily gone through with it, but it's certainly become a pretty big risk, as it relates to these companies profitability and their outlooks. I think that investors have become increasingly comfortable with that backdrop, but it is going to be an ongoing dynamic that these companies are gonna have to deal with, especially as it relates to the relationship with state regulators. I think the rule of thumb is, you know, taxes really only go up, but at the same time, these companies don't necessarily need to be victims for, you know, solving for tax deficiencies on these states. I think that other piece is you have to think about responsible gaming and customers, and you don't wanna have a scenario where customers are pushed off the regulated, legalized books and on to offshore, right, where there's not really any monitoring of that behavior and certainly no tax revenues coming in. So, I think that it's a balance, but certainly it's become an increasing challenge and increasingly common in our conversations with investors as it relates to these companies. But I do think that it is intertwined with responsible gaming initiatives and I think that knowing who's playing and who's betting and how they're betting, I think that, that, that's really important to the integrity of the sports as well. There's other kind of regulatory stuff going on. College prop betting and the harassment of college players has become an increasingly common topic. I think that, you know, micro betting, there's been a couple states that have proposed restricting that. So, it's a very fluid regulatory environment in that that's, you know, probably expected for an industry that's grown and evolved so quickly. But I think that the solution is not necessarily always just taxing, and I think that that's all we've seen so far. So I think it'll be interesting to see in the next few years how things evolve in this ecosystem, especially as there's potentially disruptive new technologies and offerings emerging

Briggs Barton: Tying it back to the fun stuff here, Dan, could you give us a sense of how companies like FanDuel, DraftKings and BetMGM are performing financially, especially thinking about the key KPIs and revenue growth drivers?

Dan Politizer: Yeah, I think that the three main drivers of revenue are handle, which is betting volume, the structural hold or theoretical win on that handle. And then thirdly, the amount of promotions that you're, deploying to drive that handle. So, handle or those betting volumes have been growing pretty substantially in the industry. It's slowed a bit lately, which has caused some debate, but again, these three revenue drivers are, are intertwined, right? So, you've had this increase in structural hold with greater parlay adoption that has offset this slowing handle growth and the amount of promotionality, which is that third lever, that hasn't really gone up. In fact, that probably goes down over time and that adds incremental revenue growth. So, these companies have all been growing pretty steadily. I mean, I think that you're looking at 20, 30% type growth for most of these companies and it's coming from those three factors.

Briggs Barton: Great it ties into some of the things that you've talked about here and earlier within the podcast, but, how would you say consumer behavior has changed in the sports betting industry, especially with the rise of more mobile and online platforms?

Dan Politizer: Yeah, I think that the level of engagement has gone up a lot. There's several reasons for that, right? So, I think that you've seen a lot more parlays and parlay adoption, and I think that online sports betters inherently like parlays. And the technology has gotten a lot better. I think that you also have more customized offerings around which to bet, specifically on parlays. Call it, player prop bets and, and all types of different ways that you can bet along with those parlays has made for a pretty compelling and versatile and effectively limitlessly customizable product. You also have had more betting volumes because you've built this product that's much more versatile and you've really reduced the friction of betting, right? This is a predominantly online digital offering at this point. And so, the ease of payments and betting has really come down. You're no longer walking up to a betting window. You're simply, you know, flipping on your phone and pulling up the app often while you're watching a game. So, I think that it's gotten a lot easier and there's a lot more options through which to bet. It’s become really a way to stay engaged with sports while you're watching them, right, with two screens. I think that the flip side of all this though, you certainly have to be wary of increasing addiction, especially among the customers that you're targeting, which is predominantly, a younger male type demographic. 

Briggs Barton: So Dan, as we wrap up today, how do you see the biggest opportunities and challenges for the online sports betting industry over the next five or 10 years?

Dan Politizer: Yeah, so within the U.S. right now, we're, we're approaching 40 states that have legalized sports betting in some form or another.  I think the biggest opportunity though is still the additional states. So the ones where you don't have anything is California, Texas, Florida, Georgia. Those are the four states we'd call out with sizable populations and probably an appetite for regulated and legalized sports betting. Florida does, to be fair, have sports betting, but it's only one, one operator that's offered through, so legalization in some of the larger states seems maybe one of the biggest opportunities. I would say that, you know, the integrity of sports, you know, that's going to be kind of episodic and coming up as something that is an opportunity and a challenge, right? Because the leagues have become increasingly intertwined with sports betting as opposed to seven years ago when they were fairly opposed to it. So I think maintaining that integrity is really an opportunity because there's still, skeptics out there. I think that prediction markets, that's come up a lot recently. There's smaller, scrappier operators that, you know, frankly remind me of the Draft Kings and Fanduels of the world, you know, 5 or 10 years ago, when they were starting to make inroads with daily fantasy sports. So the Kalshis, the Polymarkets of the world that have basically come up with a exchange product, and through this exchange product you can bet on sports, or you know, it's a binary outcome event. But I think that that's a really interesting part of the ecosystem that continues to evolve, and I think for Draft Kings and Fanduels, and MGM and all the big operators in this industry that are regulated, they're trying to navigate this increasingly, uncertain environment because if you are an online sportsbook operator,  you don't wanna lose share to the prediction markets, You don't want them to come in and basically take your customers and offer a very similar product. But at the same time, they have shown that they have free range across basically every state to go and offer a product because the prediction markets are basically under federal jurisdiction, not state jurisdiction. So, you can use prediction markets to bet on sports in California and in Texas and in Georgia, and in pretty much every state right now. So if you're the online sportsbook operators, yeah, this seems easy, right? You just go out and acquire one of these companies or you come up and build your own prediction market offering. But these sports betting companies need to balance their relationships with regulators that don't want this product because there's no tax revenue tied to it. And then there's a big tribal presence in California, and the online sportsbook operators are trying to get sports betting legalized in California and need to work with those tribes. So they have regulatory interest they need to kind of manage. And I think that also the online sportsbook operators often have online casino operations and they're trying to push and lobby and get legalized online casino in a lot of these states with those same regulators that are basically saying the prediction markets are not a regulated product. So I think you have a very interesting evolving ecosystem here where the sportsbook operators are figuring out how, how to basically capitalize on this opportunity without,  shooting themselves in the foot and damaging the relationship with, with the regulators. But right here, as we sit here today in the summer of 2025, the prediction market seems like it's, it's the biggest potential opportunity and, and probably more so than a risk right now 

Briggs Barton: Alright, Dan, I think that's a good place to wrap it up. Thanks very much for joining, and thanks very much to everyone who listened in to Research Recap on J.P. Morgan's Making Sense.

Dan Politizer: Thank you so much for having me.

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