Research
FORUM TRANSCRIPT

DraftKings – Tech Stack Positioning & Implications of Potential Entain Acquisition – 6 October 2021

  • Public Equity
  • TMT
  • North America
Premium Unlocked

Specialist

Former director at DraftKings Inc

Agenda

  • Online sports betting and iGaming industry trends, focusing on DraftKings (NASDAQ: DKNG)
  • Tech stack positioning
  • Implications of DraftKings' potential Entain (LON: ENT) acquisition
  • Customer acquisition dynamics and mid-term outlook

Questions

Transcript

1.
Could you outline some of the key participants’ product offerings and their positioning within the online sports betting and iGaming market?

Specialist (SP): I think when you think about the key participants, it’s always the big three, MGM, DraftKings and FanDuel, and then if you look at the second tier, it’s the Caesars and the Barstools. I think a lot of people think  that Barstool at some point will enter that top tier but will never quite be the top three. I think when you look  at each one, they have various different pros and cons as a business model, and what they do is they play to  their business model and the strengths that they have. For example, DraftKings is a technology company. They  started as a marketing analytics company, it’s become a technology company, and their key and their  differentiator is they want to build everything in-house. I think I mentioned earlier that I built the player  account management, so everything from registration to deposit, etc, and then we do our own casino games. I  think everyone probably knows they acquired SBTech and now they’re looking to continue to purchase further  technology companies. They see their benefit as being in-house and bringing everything in-house, whether it’s  from what a user interacts with all the way to who’s creating and trading their lines and who’s creating their  casino products. 

If you look at FanDuel, they were acquired, as probably everyone knows here, by Flutter, and Flutter’s biggest  advantage across the whole world is that they are a really, really strong sports betting operator. If you think  about crux sports betting, sports betting know-how, they’re probably one of the top two, and maybe you could  say Bet365 is the other one, with that expertise in the world. I think that’s when you see they came in and they  purchased FanDuel. They made a really good start here in the US, because across the world they’ve done this  forever, whether it’s buying Sportsbet in Australia, whether it’s buying Sky Bet in the UK and obviously Paddy  Power, Betfair. That’s their advantage. What they are looking to do, from a technological stack, is to bring  more in-house. They’re not as fully in-house as DraftKings is, but they definitely know the advantages. They used Gan previously for a lot of their player account management stuff and they want to move a lot of that in house, bringing the fantasy and the sports betting banner together through the technological stack. 

I think if you look at BetMGM, and we can talk to Barstool as well, BetMGM, I’m sure everyone knows now, is  a JV where them and Entain, which is essentially an operator from the UK, came together and said, “Entain,  through their business with Ladbrokes, Coral, have a lot of understanding of the sports betting market.  Through their Bwin product, they have a lot of technological know-how of how to run a sportsbook across  multiple countries,” so they brought that half to the US and MGM brought MGM. They’re known for a brand,  casinos, so their physical retail product, as well as the brand. They brought that together, so different pieces  brought different know-how. Entain, with Ladbrokes, Coral, brought the operating side, Bwin, they’re a  company that brought the technological know-how, and BetMGM, or MGM, sorry, brought the brand that  could compete with a FanDuel or DraftKings with such a strong presence in the US. They’ve spent billions of  dollars on marketing. 

I think probably the other one to talk about here, Barstool is probably the only other one with such an  interaction and entangling of different companies. If you think about Barstool, initially, if you go back three  years ago, Barstool was the official partner of FanDuel, actually, which is quite interesting. They did a points  bet for a little bit, where they were a direct affiliate, and then they understood the amount of users that they  could acquire for this market and they knew that they’re, as probably everyone knows, a marketing machine.  They believed that they could, instead of just bringing affiliate dollars through referring to other operators,  create an operator themselves. Penn was a really good fit for them because Penn is a little bit of that old  school, a little bit of gaming know-how, not as technologically savvy as any of the other providers, and  obviously they worked with Kambi and Gan at the time. Yes, they brought that marketing know-how. Penn  had the operating space but not the tech, and Penn has the market entry because they have physical spaces in  plenty of places around the US. I think that’s how I sum up the technological but also the pros and cons of  each of the big three-and-a-half or the big four, if you want to put it like that.

Back to top
2.
How might some of these industry participants become profitable? Do you have any thoughts or assumptions about who will be first and last to get there?

SP: I think the way I think about profitability is different based upon who the company is and what they see  their, I wouldn’t say road map but what they think their plan is to success. I think that we’ve seen, with the  Entain deal and the Golden Nugget deal, that everyone probably knows that DraftKings plan to success is to  spend and acquire and to get bigger and bigger. I think Jason Robins had a really good quote where they want  to be Amazon, and Amazon wrote the blueprint for not being profitable until you have to be. I think when you  look at a company like that, they are going to continue to increase their EBITDA, whether that relates to  profitability, they’ll probably be a further company away from profitability. If you look at more of a standard  operator like FanDuel, they’ll look to probably reduce their spend, reduce their operating costs and get closer  to a net operating profit sooner rather than later. 

I think when we talk about a road map to that, if you see what the different players are looking at, you look at  the Barstool acquisition of TheScore and they’re looking at “How can we bring more technological presence in house, so we’re not paying the amount that we’re currently paying to a Gan or someone like that, and a  Kambi?” I think if you look at it from an acquisition perspective, they’re saying, “How can we reduce our cost  of acquisition and market expansion through TheScore in Canada?” Obviously, increasing your market doesn’t  relate to profit. What they see is they see that, “How can we bring more technology in-house, so we’re paying  less to the other operators?” I think that’s the way that most people are going to look to, “How do we get to  profitability?” I don’t think any of them are going to say, “Let’s reduce marketing spend to continue to acquire  users, because we know that 50 states are going to continue to open over the next probably three or four years,  not quite five any more, and you’re going to continue to pay to acquire.” 

What everyone is looking at from the DraftKings-Entain deal, the Barstool-Score deal, the Underdog deal is,  “How do we bring some of the technology or the trading in-house, so we’re not paying this amount of money to third-party providers?” I think the two key pieces there are the people who run the platform for these users, so  who you’re paying to actually run your app, and who you’re paying to create your lines and trade your book,  which probably I can get into it further, but Kambi is the biggest one there. Then Barstool have made  inclinations that they may not be using them by purchasing TheScore, and I think Kambi took a pretty big hit  when DraftKings purchased SBTech and started taking steps to move away from them. Those are the only  short-term team changes that have moved towards profitability, where they’ll all be above-line marketing costs  for the next 3-4 years. 

Back to top
3.
What are your thoughts around the merits and drawbacks of tech stack insourcing vs outsourcing?

SP: I think that this is pretty similar to any build, buy, partner analysis you would do in a company that  you’re starting up or even a mature company, is what is your wheelhouse and how do you differentiate? I think  the further we go along, the further you will see the big three bring more of that in-house. The smaller players  you may not, and the reason behind that, and to touch on your question, is what are you trying to do? What’s  your business strategy? What’s your end goal? If you’re a DraftKings or a FanDuel, where you’re looking to  take over the market, you want to do a couple of things, and the whole reason behind owning the different  pieces of your tech stack is (1) having full control over the customer, (2) having full control over everything  they can bet on, the risk associated with that, so essentially your lines in addition to your product, the risk  associated with taking different sides of a bet and being able to manage that risk, and (3) the cost associated  with that. If you look at the big three, and BetMGM right now is in a unique position because they’re partnered  with Entain, so you could say it’s kind of in-house, it’s kind of not, because it’s owned by one of the companies,  but you will see these companies look to bring that more in-house as you go. 

When you look at the tier 2 and below operators, and even the tier 1.5 like Barstool, it’s really what is your goal  here and what is your unique value proposition? As I mentioned before, Barstool is a marketing company.  They’re not a technology company, they’re not a sportsbook trading company, even though Penn may have a  little bit of that, and the effort to build these things takes a lot of technological resources. I think we can look at  DraftKings, for example, and the amount of technologists they have, because they have more than everyone in  the market, almost, combined. It really depends on what your play is. I think if you look at the smaller-tier  operators, they won’t worry about it because their business strategy is to do a couple of things. It’s either to  come into states that the big three don’t have market share or aren’t focusing on, for example Tennessee, go  into Tennessee, acquire a legitimate market share, whether it’s big, small or indifferent, and sell it to one of the  bigger providers. They’re a marketing-focused company as opposed to a sports betting-focused company. 

It really depends on what you are, are you a marketing company, you’re a technology company or you’re just  trying to create better offers than everyone else, and where you fit on that spectrum. Where if you look at  Barstool as a marketing company, and if you have the other side of the house, you have DraftKings, which is a  pure technology company, and FanDuel probably a little bit to the side, where they want to be a sportsbook  operator that owns their tech, that’ll really tell you what they do. If you’re looking at a Gan or a Scientific  Games or a Strive or someone like that, their long-term value is not to a DraftKings and a FanDuel in the US,  or even, to a lesser extent, MGM, but obviously they’re tied to Entain forever, forever as we see it now, which  may be three or five years if the DraftKings deal goes a different way. That is not where they’re going to make  their money. They’re going to make their money through the smaller operators that want to come in, make a  land grab and either own the state or get sold. That’ll continue to happen. I think we’ve seen some  consolidation, but they’ll continue the consolidation and continue to be tier 3 and tier 2 operators that come in  and do that. They don’t have 12 months and the runway to be able to build a product. They want to do  something extremely quickly and spend their money on marketing, not development. 

I think it’s an interesting question. I wouldn’t expect that the big operators do not use technological providers  in 3-5 years, and it’ll be different just depending on where you are. I think you can look at the DraftKings  acquisitions and even the Barstool acquisition of TheScore showing that they’re moving away from that.  There’ll always be a place for that in tier 2-3 operators.

Back to top
4.
Do you think the DraftKings-SBTech tech stack is a competitive one, or do you think it is falling behind?

SP: It’s definitely a competitive tech stack. I think that if you look at the same market in the US, everyone’s  saying that they have great tech stack, and, to be honest with you, and Entain does have a good tech stack and  I’m sure we’ll get to that later, there are not that many people that are a true technology company. If you look  at a Kambi or Scientific Games, who are the competitors to SBTech, or a Gan, their technology is not that  sophisticated. Would I say that the SBTech purchase was as technologically strong as a company like  DraftKings or a tech company would have liked? I would say no. I would say that SBTech was more of the  sports betting know-how that they wanted to bring to the US, with some pieces of technology they didn’t have,  so such things as risk management, ability to trade some lines, but they don’t get a full suite. I think if you look  at DraftKings, there are only a couple of things that they don’t already own. I’m sure they would have liked  SBTech to round out all of that, and they didn’t round out all of it. They probably rounded out 50% of what  they didn’t have and the other 50%, they’re still using providers for. I think that the DraftKings technology  stack is strong. If you were doing analysis on SBTech vs the other providers before the acquisition, you would  not be saying that SBTech is the top of their technological stack. DraftKings has plugged some of that into a  fairly strong tech stack, but they definitely have more to do to have that full-service stack themselves. 

Back to top
5.
What are your assumptions on the strategic rationale behind the bid for Entain? Do you have reason to believe that DraftKings’ interest in Entain is to replace that SBTech tech stack with Entain’s tech stack, or if it represents the need for DraftKings to potentially add free cash flow and global revenues?

SP: I think that you can look at this in 3-4 different ways. I think the first way to look at it is the baseline,  which is the last comment that you just made. DraftKings, and I think from a lot of things that people probably  read from Jason Robins, see themselves as a technology company that’s looking to grow. They’re writing NFTs  now. The baseline is, and it’s similar to the Golden Nugget acquisition, “How can we acquire someone that has  great EBITDA in a market that we don’t have?” The Golden Nugget consumer base is very different to  DraftKings, so they’re actually acquiring a new user base with EBITDA. The baseline here, and it’s probably  the easiest deal to get done, is to pick up the Bwin international product, where they’re live and they’re top  one, two, three in multiple countries. That’s the baseline, and I think that what everyone knows here is there  are going to be some discussions with MGM of how this gets cut and split and who agrees to what. That’s the  baseline to a deal, is all of these other companies are thinking you could take MGM out of it, because they have  some retail stuff in Macao but they’re a US-based company. If you look at Flutter, they’re 1-2 in UK, Ireland,  Canada, Australia, so DraftKings is looking at, “How do we become that global presence as well as Bet365?”  Obviously, Barstool don’t play in that, but they’re looking at how they’re going to become global and how can  they add that EBITDA? I think if you look at what they’re trying to do, they’re continuing to try and grow,  acquire users and acquire companies. The easiest way to raise money from the market and grow is to add USD  900m in EBITDA. That is the baseline. 

The Entain stack, you can think about it in a couple of ways. I think if you think about the Entain stack  compared to the DraftKings stack, there is a lot of crossover. Entain’s stack is fairly strong within the market.  If you’re looking at who are strong global players from the technology perspective, Entain is definitely up  there. Could DraftKings bring in some of that? Yes. Have they built a lot of that so there would be a lot of  crossover and they might throw out a bit of it? Yes, they may. The piece they get from a technological  perspective that they didn’t get from either what they purchased or built is the actual physical trading of every  line that’s possible. I think if you think about where people are running to in sports, and I think everyone  knows there’s a little bit of that marketing race to the bottom going on here, but how do you differentiate, and  Bet365 have shown this around the world, and how they’re leading in multiple countries is have everything  that everyone wants to bet on at any point in time. The blueprint that they laid out was have more traders  trading more sports than anybody else.

I think that’s the biggest, if you think technological perspective, even though there are people behind that that  DraftKings would get from Entain, is the ability to trade lines extremely easily, so bet Alabama vs Clemson on  a Thursday night, not in football, in basketball, and have a half-time line, and have everything that any US  better would ever want. Right now, FanDuel is a little bit ahead of them, because they have the Paddy Power  trading. That doesn’t mean that they’re extremely far ahead, because they still also have to share that trading  team with Europe and all the sports that go on there, but I think if you think about where DraftKings is looking  to go from a technological perspective, there is be able to create their own lines at will and the ability to bring  in lines from any other provider. I think a lot of people have looked at SBTech as SBTech vs Kambi. I think  that most people will look at it in, “How can we get every single person that we want?” There are a lot of  players coming in that are doing micro markets in certain events that will give you an advantage over others.  That’s the second piece of it, or maybe the third piece if you look at EBITDA, international, technology. 

Then, obviously, the next piece is BetMGM, which is the elephant in the room that makes the deal a little  trickier than it could be, because there are multiple ways that that could play out, but obviously there’s a fair  amount of revenue and a huge US presence in the BetMGM piece of the business. Do I think that they will ever  sit there and own 50% of BetMGM? I don’t see that ever happening. There are multiple ways that that could  play out, but I think the other part to the Entain is how do they interact with BetMGM, how much do they  know about the BetMGM business and do they look to purchase the BetMGM business? Do they look to  license Entain and purchase that to BetMGM and make money off that, because BetMGM is so tied to the  business? I think if you think about it, BetMGM is never moving off Entain, never is a bad word because it’s a  bit of a controversial statement, but in the next three years there’s no way that they’re moving off Entain, so it  would have to be some sort of deal that allows them to operate on Entain, which is a stack owned by a  competitor. 

Back to top
6.
How important is it for DraftKings acquire Entain? How does it bake in the BetMGM JV and MGM’s involvement at all here, and does it have any other options to really gain international presence?

SP: It’s interesting. They’re definitely baking in the MGM revenue, because the EBITDA from the rest of the  world just doesn’t make the valuation work in how sports betting companies in the UK are valued. That offer, I  don’t know if it’s a first offer and a start of a negotiation process, but that offer, the number only makes sense  at the BetMGM 50% price. Internationally, there probably isn’t another company that could actually provide  them that international reach. Without going for an Entain, you would have to look to buy multiple companies  across multiple countries, which isn’t unheard of. Flutter has done this. William Hill attempt to do this, but  Flutter did it well. There’s no one other gaming company that you could purchase to get this unless you  purchased Bet365, but they’re a private company that are extremely unlikely to sell to anybody. They are  privately owned by a family that obviously doesn’t need the money, because of the revenue that Bet365 is  generating, and they probably aren’t that interested in selling to a larger public company. If they wanted to  just essentially purchase a company that do this, that would be the one to purchase, but that offer doesn’t  mean that you can’t purchase multiple companies that are market leaders in a variety of different countries. 

Back to top
7.
What might this transaction potentially imply about what DraftKings believes of its positioning without Entain? What might DraftKings be admitting to here?

SP: I don’t think they’re admitting to anything. Personally, I don’t think they’re saying, “We need this  technology.” I think that if you went and spoke to Jason, he wouldn’t say that their technology is any better  than DraftKings’. I think he would say that they can build anything better than anyone else because they are a  technology company in sports betting. I think he would say that they’re Uber and everyone else is yellow taxis.  I think what it does say is, and I think if you think about the DraftKings-FanDuel relationship going back to fantasy sports, he is more willing to win. He wants it more than everyone else and he’s willing to make big  moves to make it happen. I don’t view this, and I don’t think most people would view this as much as a  technological play. I think that’s the same with TheScore for Barstool. A lot of people came out and said it’s a  tech play. It is not a tech play. It’s a market access and EBITDA play. 

Do I think that that’s the more important piece to look at here, as opposed to Entain? It is extremely difficult,  when you have a sports betting company, and we’ve seen this through multiple people throughout the world,  to bring together two stacks. There it would be expecting to get a lot of value out of that. If you look at FanDuel  right now, or Flutter, they’re still running three stacks in the US, the FanDuel fantasy sports stack, which  obviously Flutter purchased, the sports betting stack, which Flutter launched here, and the stack of the  acquisition they made of Sky Bet, PokerStars, Fox Bet. It’s not that easy to combine tech stacks, so I don’t  think they would ever be sitting here saying, “We need this technology.” They would be saying, “We need this  EBITDA, because we want to be the biggest at everything.” I think it’s more likely that they are making an  MGM play here as opposed to a technology play. 

Back to top
8.
How willing would DraftKings be to entertain a solution to a deal where Entain, as a part of DraftKings, would support BetMGM with technology or operational know-how?

MD: I think that’s one of the ways that this deal gets done. One of the ways is DraftKings takes the  international properties and essentially splits them with MGM and gives them Entain. There’s definitely a  world in which that happens. It’s not unheard of in the sports betting world. DraftKings I think would be more  than happy to take a share of BetMGM’s revenue for running their tech stack. They will get less of the know how when you have a tech stack and more of just the output of what the tech stack is, so I think that they  would definitely be open to that. That would obviously allow MGM to purchase the 50% of BetMGM which  they would want to purchase. I don’t see that as being a long-term relationship. I think there’d be some  contractual length to that, maybe a three-year engagement, where BetMGM would find some way to move to  somebody else, but that’s not unheard of. I think you probably know of Kambi, who previously provided  DraftKings’ lines, and I think still does to some point but obviously lost some of that in the SBTech acquisition,  and also provides Barstool’s lines. They were a spin-off of a company that you may know, that’s in the US  space but bigger in Europe, called Kindred. Their product is Unibet. Unibet decided to spin off their back end  and now they service 16 or 17 different operators, and you know that, when you’re using them, their number  one priority is, maybe not number one priority but they always have a lot of things to do for Unibet. They’re  two separate companies but they were a spin-off of that, so it’s not unheard of and people continue to deal  with Kambi. 

Would MGM be happy with it? No. Would Uber be happy if they were using Lyft’s technology stack to order  rides? Probably not, but it may be a necessary evil. I think if MGM got the 50% of BetMGM at a rate that they  were not unhappy with, that’s probably something they could live with for three years, but it would not be a  long-term relationship. 

LL: What are some potential likely outcomes here? You’ve mentioned some scenarios where MGM wouldn’t  be happy. What would make it happy, essentially, if it came down to negotiating on this front? 

SP: I think maybe there are two scenarios that would make them happy, and you can talk probability of  outcomes, but obviously the number one that makes them happy is they own 100% of BetMGM. When they  started BetMGM with Entain, they were a retail casino provider, so they thought it was awesome that they  could partner with someone that had the sports betting know-how, but I could guarantee that they’re sitting  there right now and saying, “The MGM brand is building this business and we only have 50% of this,” and they  probably want more of it. The easiest way and probably their best outcome is that they would like 100% of that  business, and that’s an easy one, whether they need to run on Entain and then move. Whether they run on  Entain and try and build themselves would be tricky for them. 

The other option for them would be that they take part of the business and they purchase part of it as a part of  their deal, where DraftKings gets the international operator properties and MGM gets the technological stack  of Entain. That’s probably another thing that they would look at. I’m not sure if DraftKings would want that,  because that puts DraftKings in the other situation, but their international properties are run on Entain’s technology, which is owned by MGM, and they would look to move it to the DraftKings stack. I don’t think  DraftKings is sitting here right now saying, “We really want to spend the next couple of years moving our  Brazilian sportsbook to our technological stack,” as opposed to, “We would like to spend the next three years  launching California, Florida and New York.” I think they would much prefer to be focusing on that, but that is  one way that it could happen. 

The other way that’s obviously a lot bigger than the other two is that there’s some form of DraftKings-MGM  merger. DraftKings run the online base and MGM and their current CEOs or CMO run the physical space and  essentially do what they do best and let DraftKings do what they do best. Run an MGM and DraftKings banner  and have two of the top three in the US and be a powerhouse. Obviously, with the Entain acquisition, that  makes them a powerhouse internationally and certainly a dominant force to be reckoned with in the US. 

At that point in time, it makes it pretty difficult for someone like a Barstool, and obviously they have a very  loyal fanbase, but it makes it a little more difficult for them because they’re a marketing engine. You’re going  against DraftKings who’s a brand that’s so strong with the fantasy operators and MGM who’s so strong with  the gambling cohort, so it’s going to make something like a Barstool a little more difficult to pick up their  market share. FanDuel would be their only likely competitor and obviously would be taking less market share,  considerably, than MGM and DraftKings if they were to combine. 

Back to top
9.
In the scenario where DraftKings potentially needed to give up Entain’s 50% stake in BetMGM, do you think it would be willing to go that route as well, if that were a prerequisite to acquire Entain?

SP: Yes. I think that if you think about it, I don’t think anyone would go into this deal thinking that one of  their largest competitors was prepared to let the person they’ve gone into a joint venture with give their 50%  stake of what they probably see as their company to a competitor. I think that the way you can think about this  from that perspective is they’ve applied some heat to Entain and MGM by making this deal, and specifically to  MGM, and I’m sure they have a scenario that they’re looking to get to, but, by making this offer, they’ve put a  lot of pressure on MGM to make their next move. I think what everyone is trying to work out is what is the end  game that DraftKings is trying to get to. I don’t think it’s a USD 20bn-plus purchase of Entain and 50% of  BetMGM as a part of that. I think that that was an opening bid to apply pressure to MGM to get them to  whatever they would like to, whether it’s a merger, whether it’s a split of BetMGM Entain. It’s something to  put their feet to their fire, given it’s almost double what the offer was that was made to Entain previously,  sorry, the previous (inaudible 36.15) BetMGM. 

Back to top
10.
Is BetMGM self-sufficient on the technology or operational know-how to keep operating in the US market, or does it require ongoing licensing or operational support from Entain?

SP: Not at all. They’re not at all set to run this on their own. I think if you go to Nevada and look at what they  were using before they used Entain, and their app and their technology, it’s not close to what you would  consider. I think if you look at Nevada, they’re a long way behind the rest of America, but it’s a long way  behind what anyone in New Jersey or one of the other states that opened up would consider a sportsbook that  people would play on. I think if you spoke to them, they would think it’s the MGM brand that’s doing this, it  absolutely is. Customer acquisition is the key to all of this and they bring it, but they definitely get a lot from  the Entain side of the deal. They’re a physical casino company. They don’t have the technological know-how or  the technological resources at their disposal to do this. Money solves everything, so they could build this out,  as we’ve seen other companies build out sportsbooks, but it would be a long two-year, two-and-a-half-year  process for them to replicate something like Entain does for them in-house. That’s why it’s a perfect  partnership. I don’t think they were sitting here thinking they were ever going to move off Entain in the short  term. I think if they thought anything else, they thought that they would be buying Entain, so I don’t think they’ve been sitting here looking at how to scope out a tech build and, which is obviously a part of the process,  and a long part of the process, a licensing plan in all of the states they’re going live, a technological licence  anyway. 

Back to top
11.
In a scenario where BetMGM has to come off the Entain tech stack, what other tech provider options are out there for BetMGM?

SP: Scientific Games, Gan. They’re probably the two major ones on that side of the house. I think if you think  about technological stacks, you really need to think about this in three different ways. In the industry, it’s  called a PAM, a player account management system. You can also probably call it a platform. That’s the first  thing they need to solve and that’s solved by Scientific Games or Gan, which is how does a customer come and  sign up, register, use their app, etc? They’re probably the two main ones that you would go to, the two biggest  in the market. FanDuel went live with Gan when they first launched and they tried to bring it into the Paddy  Power platform at that time. They’d then also need to look at who is going to create and trade out lines. Maybe  that’s something they could bring in themselves. Scientific Games used to offer that, but what we’ve seen this  week is that they just sold their open betting product to Endeavor, so you could look at a Kambi or a Pinnacle  or someone like that to do that for you. The majority of providers in the past have gone with a Scientific Games  or someone like that, or a Gan plus a Kambi. I think if you look at a Barstool went with Gan plus Kambi,  DraftKings built their own platform and went with a Kambi for the lines, so that’s a standard combination that  you see. Then you need to partner with someone for your casino games, but Scientific Games and Gan both  offer your casino games as an option. 

That’s the partnership model you’d be looking at, is, “Who am I taking my app to that I can stick the BetMGM  logo on and I can help make sure that the software works the way it should, and who could help me with the  operating of my sports betting business, the lines, etc?” That is most likely and highly likely, now that OpenBet  no longer belongs to Scientific Games, to be a different company. That’s the way that I would be looking at it if  they’re looking to partner. They could obviously look to purchase someone in those areas or they could look to  build it themselves.

Back to top
12.
Is it feasible for BetMGM to operate independently from Entain if Entain’s 50% BetMGM JV stake is sold to MGM as a part of the Entain-DraftKings potential transaction?

SP: Yes. It’s definitely possible. I think that when you think about this market, and it’s not too different to  any other new industries that are popping up, whether it’s Airbnb, whether it’s Uber, etc, it’s all about  marketing. MGM is the brand. MGM is what people are coming back to. If you went out and asked any MGM  provider, they don’t know who Entain is. They don’t know who Ladbrokes, Coral or Bwin or the international  properties they own are. They know that they’re going to BetMGM. They see Jamie Foxx on the TV and see the  experiences, and they probably recognise the brand from the big fights, etc, and the casinos. What they need to  do is to make sure that when someone goes onto that app, whether they’re new or existing users, to use it, that  it doesn’t give them a reason to leave, which is why they need a strong technological partner to make sure that  when you go onto use it, it’s not a bad experience. It’s so easy in this day and age, and it’s only to become  easier, for people to just download a different app, almost probably have a couple downloaded and just go to  someone else. Yes, could they get the customers in? Absolutely. That’s all a branding play. The key thing that  I’m thinking about, if I’m MGM there and I’m thinking about, “Can we do this alone and make a bunch of  money?” is, “How can I get someone that I can ensure will make sure my customer experience is strong  enough so that people won’t go elsewhere?”

Back to top
13.
If MGM turns out to be okay keeping BetMGM with a long-term licence, what are your thoughts on how long that would be and what comes after?

SP: I think it would be at least three years. If you think about most companies, it’s probably 2-3. I think that  these guys would be starting from scratch, and they’re focused on building their business in an NFL season, so  it’s probably going to take them 9-12 months to work out what they actually want to do and to hire the  technologists that could not necessarily build this but advise them on which way they should go. I think the  first thing they would do is bring in people in-house with that knowledge to decide is it a build, buy, partner  scenario. I would expect that they would be signing probably a three-year deal with an option to renew for  another two. I think most of the time when these deals get done, people go in, and whether it’s a DraftKings Kambi deal or any of the other deals, they are extremely optimistic on when they’ll move over, and then they  end up extending it anyway. They probably understand that and they probably don’t want to be in a position,  with a DraftKings-owned platform, where they are trying to negotiate after the deal, because they would  obviously have next to no leverage. 

I’d expect that they probably would sign a three- to five-year deal, probably a three-year deal, giving them the  option to move off and not use them as the exclusive platform in states for the two years afterwards. The way  they would go about this is, and there are other people that use different platforms in different states, they  would continue to run MGM and BetMGM as it is now, on Entain. They would probably launch a relatively  small state on whatever other platform they were using, whether it was build, buy, borrow, sorry, build, buy,  partner. They would launch that in a small state and then just roll it out like that and make sure it worked  before they decided to move Entain. They’d probably do that throughout an NFL season and make sure that  worked, to have it all done by the start of the following NFL season. Whenever that is done, whether it’s three  from now, four from now, five from now, that’s the way that they would start to roll it out, because you don’t  want to jeopardise such a big three months of the calendar. 

Third Bridge (TB): Is it possible and do you find it potentially sensible for DraftKings to be a 50/50 JV partner in BetMGM  with MGM? 

SP: This one is such an interesting one. Is it possible? Yes, it’s definitely possible. Is it probable? I would say  no. I think if you think about the way these operators work, they don’t want to go out and spend all this money  to be able to be funnelling it to another company. It’s not unheard of. Paddy Power now, with their  acquisitions, own Paddy Power, also Flutter, with their acquisitions, own Paddy Power and Sky Bet in the UK,  so two of the big three. They could definitely do that, and I think if you asked DraftKings, they would be happy  to strike an Entain deal and become a B2B operator and take in money from all the other providers. I find it  difficult to see MGM wanting to do that. Maybe they do, maybe they’re happy just to continue to grow their  EBITDA there and make 50% of what’s coming in. I’m sure DraftKings would be happy to bring on Entain and  be a true B2B provider to a lot of other players in the market. You just run into the problem there where if the  valuation you’ve paid is included in that, maybe not the MGM side but any other provider, and it’s not just on  the operators that you own internationally, if someone leaves, your price or the EBITDA you’re making can get  pretty severely impacted. 

I think DraftKings would do it, definitely. I don’t know if MGM would do it. I think that if it did happen, this is  pretty standard in any of these deals, there would be a 50% share for a certain period of time and one of the  parties would have the option to purchase the other 50% at a future point in time. I don’t think they’re both  sitting here being like, “For evermore, let’s be 50/50 partners in this.” I think that they might be for a short  period of time, until one or the other can get into position to take the other 50%, but they would have a  contractual right to purchase that at some point in time, just like Flutter had a contractual right to purchase  the rest of FanDuel. I don’t see these guys being 50/50 partners for evermore.

Back to top
14.
Was there a scenario in which the Entain tech stack could be carved out, such that MGM could continue to use that platform in the US and then DraftKings continues to use SBTech in the US separately?

SP: Yes, absolutely. DraftKings runs on their own technology right now. When we say SBTech, the majority  of it is DraftKings, and then obviously their sports betting stuff is SBTech, but the further you go, it’s going to  become a base of SBTech and be DraftKings going forward because they’re going to build on top of it. Yes,  that’s definitely possible, but you would have to think that DraftKings or MGM would have some pretty strong  contractual rights to veto this deal for DraftKings and allow someone to do that. Why would you want to stand  up, and what I’m implying from the question is DraftKings would own Entain but they would be operating it  just at BetMGM, why would you want to stand up that tech for someone else to use? 

The other way that you could look at this, and maybe this is where the question was going, was you could  definitely spin off the US tech and create an instance and provide that to MGM for them to own and  DraftKings to own the rest. It’s possible from a technological perspective. You would just be trying to work out  the IP ownership of that, considering they probably share a lot of lines of code. Who owns what? Do they both  joint own it and they can use it for evermore when they want to or can DraftKings then take that code and use  it in their US base however they see fit? Can they use it only for their internal stack and not sell to other  people? It would more be about the rights to that technology and how it could be used. It could definitely be  split out, because a lot of this gets split out state by state as it is now, due to Wire Act and different state  regulations. 

Back to top
15.
Across some of the scenarios we’ve discussed, are there any potential antitrust hurdles that you envision?

SP: I don’t think so. I think this is one that everyone thought about early on, is how will the market view this,  and I think that if this antitrust deal was looked at in Europe, it’s probably going to come under a little more  scrutiny than it is in the US. I think there’ll be no problem with the Entain deal because there are so many  competitors to Entain out there. I think that if you’re looking at this from an MGM-DraftKings combination, if  that was looked at in Europe, you’d probably look at it differently than in the US. I think in the US, they’ll be  able to prove that FanDuel is number one right now. Flutter owns everything, Flutter owns PokerStars in the  US, TVG, Draft Fantasy, Fox Bet, as well as FanDuel. They already own so many properties and there are so  many other providers out there that are taking market share in so many different states that I don’t see this  being an antitrust issue like obviously it was for the FanDuel-DraftKings potential merger back in 2016, no,  back in end of 2017. There are just too many different players in this market that do the exact same thing and  FanDuel already own too much of it, or Flutter already own too much of it to think that someone else would be  coming in. 

Back to top
16.
What are the potential impacts that the transaction can have on suppliers to the sports books, including Sportradar and Genius Sports?

SP: There’s probably slim to no impact on them in their key business. There might be in some of their  secondary businesses, but their key business, and I believe we saw in Endeavor, which is WME-IMG, purchase  OpenBet earlier this week, but essentially those guys are stats companies and data companies that everyone  needs to power their technology and their trading. Whether it’s Entain or whether it’s DraftKings and SBTech  or Kambi or whoever it may be, there’s still going to be a need for those guys to collect data, collate data and  provide that. Will people come after that? I don’t think that’s a market that people will come after. It’s just not  a high-margin market that’s impacting the bottom line of these sportsbooks. What they may see as a small  impact on maybe more Genius than Radar, is those companies are trying to expand and to provide more analytical services and data visualisations, so different data that users can use to inform their bets. Will it have  an impact on that? Not really. Obviously, if you have someone like DraftKings who’s building and turning out  this big tech stack and they’re already doing a lot of this stuff around the world, that will use some of the  internal resources as opposed to purchasing them from a Radar or a Genius, but it’s playing around the edges,  if I was to be honest, to those core businesses, which will still be intact. 

Back to top
17.
Do you have any thoughts around official league data rights?

SP: This is a really interesting one actually, and it’s probably a lot more at the forefront given the OpenBet  acquisition by Endeavor. There’s an interesting saying, he who has the gold makes the rules. In sports betting,  he who has the data makes the rules. There will always be a place for this and Radar against, I think I  mentioned Endeavor or WME-IMG just bought OpenBet to power more of this, but having exclusive rights to  data is quite strong because that is the way that the leagues make their money. Obviously, all the leagues want  more sports betting, because it drives, they always say more engagement, but they own the stats and own the  data to all of this. They want more sports betting and they want to create an official provider for all of their  stats who then can generate more revenue for them. In the US, what we’re seeing is they will pick an official  provider. In other countries, we do see a bit of that. We also see where they essentially create it themselves and  license it out to every operator and charge a fee. 

That will be a big play, because if you look at these providers, it’s an easy way to just get into the market and  create more revenue without having to worry about acquiring users, or, if you’re looking at a B2B perspective,  going into a competitive environment to compete with others when you have the exclusive rights to data and  you can essentially hold everyone’s feet to the floor on it. Now, obviously your prices can’t be too harsh or  someone else is going to come and undercut you. Yes, data definitely becomes a pretty strong piece to this, just  because the leagues care about it so much and that’s what powers all the sportsbooks, it’s the only way you can  get it. 

Back to top
18.
What do you think about Genius Sports winning the official NFL league data rights? How might DraftKings be forced to now work with Genius in a larger capacity, and will they work across multiple sports?

SP: Definitely work with them across multiple sports, but I think when you think about these guys, they’re all  a commodity. Whoever has the data is who people want to work with. This has been going on forever, since the  days of fantasy sports. To have a fantasy sports product, you have to have the data feeds. What you’re finding  is the sportsbooks and the fantasy sports providers partner with everyone here. Genius won’t get into a  position where they can upsell and force any of the providers to use more of their services. What they probably  will do is bundle it and make it a bit more of a, “Why wouldn’t you use more services?” and then that’s how you  force these guys’ hands to actually use it. Once they get consumers that like using it, then you have the power,  because you can take something away, as opposed to have something that no one’s ever seen. That’s the way  these guys will be approaching it. It’s a little bit of the Endeavor purchase of OpenBet, is, “How can we almost  get these guys to use more of our services and prove that people want it?” All the operators want is what  customers want to use. Once they’ve proved people want to use it, they won’t take it away. I think from an  actual data perspective, it’s a commodity and whoever has the contract will get that. I’m sure if they need to  take some of the sports where they can get it from multiple providers from them in order to get a better deal  on the NFL, why wouldn’t you? It’s a purely price, commodity-based deal as opposed to anything else, as  opposed to a quality-based deal.

Back to top
19.
Do you have any thoughts around in-game betting and how it’s been progressing in the US? Do you have any estimates around what the levels might be at maturity and if that’s changed at all?

SP: I think on the live betting side, this is a really interesting one. Live betting in the US is extremely  prominent and you’re seeing more live bets than you’re seeing pre-game bets. I think this is where a lot of the  innovation will start to come in the market, and is already coming. I think if you look at a lot of these small  tactical providers, and I think you see DraftKings did a deal a couple of weeks ago, it was in the news, with a  company called Simplebet, and a lot of these companies are trying to make trading and live betting a machine  learning, data science-driven process. It is model-based right now and you would probably expect, on this call,  for it all to be data science-driven, and it’s just not. There are a lot of analytics go behind it, but it’s still a  person, in the end, doing something to make sure the line gets live. What you’re seeing in the US is people  want to bet everything at every point in time. A lot of this investment, and Simplebet is one of them, but also  the purchasing of these line creators, whether it’s SBTech, whether it’s Entain, whether it’s Kambi, is just  giving you the technology and the staff members to be able to trade anything at any point at any time. I think I  mentioned Simplebet, but what a lot of people are doing here, and them included, is at-bat betting and drives.  You can bet every single drive of an NFL game and it will change based upon what you think, if you think the  next pass is going to be a completion or it’s going to be a pick or it’s going to be a third and out, or a fourth and  out, sorry. That’s where they’re really going, and obviously in the MLB side of things, it’s what’s happening  every single at-bat, so you can bet on anything at any point in time. 

I think to loop back to the other questions, interesting here as well, those providers put more pressure on the  stats providers to makes sure things are as real time as possible, so that they can get real-time lines out. That’s  where a lot of this is going. It is like this in Europe, that live betting is pretty strong, but it’s even more so here,  and I think that’s more because of just the sports. If you think about soccer, you know what happens, I’m a  soccer fan personally, but you can have one goal a game or two goals a game. You’re not betting a change at  every point in time like you are with basketball or football. That’s why we’ve seen it so prominent. That’s been  a big push since the market went live and will continue to be a large push for the industry, is how much live  betting markets can be created. 

Back to top
20.
What is the probability of the DraftKings-Entain deal going through?

SP: As it stands, as it was offered, extremely low. I think that there’s a medium probability that there’s a  rework to the deal. MGM is involved, so I don’t think that we turn around and see, in a week, the negotiations  have gone well with MGM and they’re willing to let this happen. I think that just given TheScore and the  Golden Nugget deals and how almost efficient these guys have been in making these deals happen, I think  there’s a deal there. I think something happens, but I don’t think it’s the offer that was made. I think between  MGM and DraftKings and Entain, someone owns Entain in six months from now and it may be different  people owning different things. I think a deal definitely gets done, but I don’t think it’s the deal that  DraftKings offered. 

Back to top
The information, material and content contained in this transcript (“Content”) is for information purposes only and does not constitute advice of any type or a trade recommendation and should not form the basis of any investment decision.This transcript has been edited by Third Bridge for ease of reading. Third Bridge Group Limited and its affiliates (together “Third Bridge”) make no representation and accept no liability for the Contentor for any errors, omissions or inaccuracies in respect of it. The views of the specialist expressed in the Content are those of the specialist and they are not endorsed by, nor do they represent the opinion of, Third Bridge. Third Bridge reserves all copyright, intellectual and other property rights in the Content. Any modification, reformatting, copying, displaying, distributing, transmitting, publishing, licensing, creating derivative works from, transferring or selling any Content is strictly prohibited