New York has long since allowed sports betting in the state. However, it has only recently considered allowing mobile sports betting. The big difference with mobile sports betting is that you can wager from anywhere in the state, so long as you have a mobile device.
Because you no longer have to be physically inside a casino to bet on your favorite team, this expands the market. And New York is not alone. There's been a wave of legalization nationwide since the Supreme Court overturned the Professional Amateur Sports Protection Act in May 2018.
DraftKings (DKNG 1.03%) is the company that offers mobile sports betting in the most states, and it stands to benefit if New York follows through and chooses it to be one of the few exclusive providers of mobile betting in the state.
DraftKings is eyeing an opportunity to enter a new sports betting market. Image source: Getty Images.
Sharing the spoils
That being said, getting the New York license may not be the windfall DraftKings might expect. That's because New York is driving a tough bargain. It asks for bids from mobile sports operators that wish to gain access to the state's wealthy population. Estimates suggest that operators will have to offer over 50% of overall revenue to the state as tax revenue to gain one of the few licenses the state will provide. To put that figure into context, neighboring New Jersey takes 13% of gaming revenue as tax.
Still, the New York market can be enticing. The state estimates it will bring in $482 million in tax on total gross gaming revenue of roughly $1 billion, which would leave roughly $500 million in annual revenue to be split between mobile sportsbook operators.
In all of 2020, DraftKings reported revenue of $615 million, so entry into a market the size of New York's is tempting. The company already offers its service in 12 states, representing 25% of the U.S. population. If it gains entry to New York, that will raise its reach to 31%.
What this could mean for investors
The devil will be in the details. A 50% cut-out paid to the state may not be such a bad thing if DraftKings can be one of only two or three operators given a license. In that scenario, DraftKings will have a high likelihood of generating upwards of $100 million in revenue from one state alone, which would certainly make it worthwhile. And with only a few operators granted a license, the company would not need to spend as heavily on promotions to attract customers.
In contrast, a 50% state tax on gaming revenue and licenses granted to a dozen operators could make the proposition not worth going after. Nevertheless, CEO Jason Robins indicated the company would be placing a bid to participate in the state. Shareholders will be following intently. The New York gaming commission has indicated it would look at the history of applicants and how high a tax rate they are willing to offer in determining licenses.
Investors can assume the CEO would not put forth a bid that would be detrimental to the company, so an announcement of approval could send the stock higher.
