DraftKings draws losing hand in 2021, faces challenges in online play

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But much of that has been on the decline since then, and now Robins and DraftKings – one of the notable success stories of Boston’s tech scene – are facing the most difficult time of their lives. Spending on acquiring clients in a fiercely competitive market generates huge losses, securities regulators are investigating fraud charges, and even a winning streak of football favorites has gone against the company.

The emerging online betting market has entered a typical, albeit perilous, phase. The early euphoria over potential riches created exaggerated expectations that have now given way to disillusionment, said Josh Walker, co-founder and chair of Cambridge’s Sports Innovation Lab.

“It happens in all technological sectors,” he said.

And investors didn’t just punish DraftKings. The stock of rival Penn National Gaming is down 60% from its March high, and Irish competitor Flutter Entertainment, which owns FanDuel, is down 41%.

For a while, DraftKings appeared to be on top of COVID-19. After live sports resumed, more people searched for hijackings online, bringing the number of people using the company’s mobile betting apps and websites to 1.5 million per month by the end of 2020. And states like Michigan and Virginia (but still not Massachusetts) have legalized online betting, continuing the trend that began when the Supreme Court overturned a federal ban in 2018. After a solid year, revenues at the company in 2020 jumped 49% to $ 644 million.

So, in early March 2021, Robins presented DraftKings’ strategy to dominate the future online gambling market. The company could achieve 10 times the revenue and nearly $ 2 billion in positive cash flow once sports betting is legal for two-thirds of U.S. and Canadian residents and one-third for online casino games, a Robins said at a virtual event. (He didn’t carefully predict when states with this many people would allow online gambling.)

DraftKings shares soared in the following weeks, peaking at $ 74.38 on March 22 and valuing the company at over $ 30 billion.

Not bad for three co-founders who previously worked at a printing and marketing company, in a city often known to lose out to the West Coast when it comes to consumer tech.

Robins, who grew up in the Miami area and went to Duke University, first came to Boston with Capital One and was working at Vistaprint with Matthew Kalish and Paul Liberman when the three fantastic sports fanatics had the idea from DraftKings almost a decade ago. They worked in a spare bedroom in Liberman’s apartment in Watertown and built what has become one of the two biggest players in online betting.

In an interview with The Globe last month, Robins chose the tech titan Apple as the model for his business.

“Apple is a prime example of … great product focus, great customer focus,” Robins said during a session in the company’s cavernous, calm and largely empty office in Back Bay.

“It’s about serving the customer in a way superior to other places,” Robins said. “This is how you develop a huge customer base. … This is how you build loyalty. This is how you build a brand. And these are the most valuable things a business can create.

But Robins and his team now face a series of setbacks.

The first blow came in June, when Hindenburg Research, a Wall Street firm known for betting against shares, said it had short-sold DraftKings shares and accused the firm of acquiring a Bulgarian software company from games that flouted gambling restrictions in Asia. In August, it was learned that the Securities and Exchange Commission was investigating. DraftKings said it had full control over the acquisition and that the SEC investigation “does not suggest any wrongdoing.” (Famous short seller Jim Chanos piled up last week, saying he was betting against DraftKings.)

SEC investigations typically take months, and penalties for any violations found can be severe. Electric truck maker Nikola, an earlier target of Hindenburg, will pay $ 125 million to settle a complaint with the SEC.

The following error occurred in September, when a securities deposit of UK gambling company Entain, which operates online services and owns betting house chains, revealed the interest of DraftKings. for a $ 22 billion takeover. Analysts were puzzled as to how the U.S. company could target a more valuable rival and struggled to understand why DraftKings wanted to own so many small outlets in Europe. After a month of rumors and uncertainties, DraftKings walked away.

Analysts speculated that the acquisition could have been too expensive or too complicated, given that Entain has an online gaming joint venture in the United States with MGM, a rival to DraftKings.

DraftKings plans to expand globally, Robins told The Globe, who made Find a potentially intriguing fusion target.

“I wish it was easy enough to say that I want to do this in 2026 and that there will be exactly the right thing available at exactly the right time,” he said. “But it doesn’t work like that. So you have to see different things. “

Robins said that when DraftKings started holding internal planning meetings for next year, internal expansion options looked more attractive than a merger. “I remember coming out of a session we had and thinking that I feel a lot more excited about the things we just discussed and that we are going to build next year than I do at About this agreement, “he said. “And that’s when I knew it was a good time to cancel it.”

A bigger challenge may be that the effort to win more big guys isn’t really the future, according to Walker of the Sports Innovation Lab. The ultimate pot attracts the billions of people who don’t already gamble in casual betting and “social games,” he said. DraftKings “has some very tech savvy guys at heart… but I don’t think anyone has cracked the code yet.”

For now, DraftKings and rivals like FanDuel and MGM are spending billions to entice hardcore gamers with TV commercials, mobile ads, or any type of advertising they can buy, not to mention exclusive deals with the teams. DraftKings spent $ 703 million in the first nine months of the year on marketing.

Robins didn’t want to detail future products, but the company is already selling popular crypto items known as non-fungible tokens, or NFTs. And in the records, the company said it was working on betting and contests for eSports video games and simulated NASCAR races.

The latest blow came in DraftKings’ third quarter earnings report last month, with revenue of $ 213 million, which was below expectations, and a loss of $ 314 million, which was more. important than expected.

A big problem in the quarter was bad luck. In the NFL, the lack of upheaval helped players who had chained multiple games to win more frequently as they tended to favor the favorites. The additional winnings cost DraftKings around $ 25 million.

And yet, the opportunity for the company is still enormous.

The success of DraftKings depends on the number of significant players who will remain standing in online betting after most states legalize. Robins sees the market ending like other areas of consumer tech, split between a couple of huge players (think Apple and Google in phones, or Uber and Lyft in ridesharing).

“Being able to build a meaningful state-by-state presence is not easy and there are only a handful of companies that will be able to keep up with this pace,” Robins said. Although there are more than two dozen online betting services in some states, for the most part, “they will either be acquired, or they will throw in the towel, or they will disappear,” he added.

But analyst Edward Engel of Roth Capital Partners in New York said major casino owners like Caesars, MGM, Wynn and Penn National Gaming could easily get bigger online once the market matures.

“Shareholders won’t let DraftKings lose hundreds of millions a quarter indefinitely,” Engel said. “At the end of the day, they will have to step back, and what people are missing is that these physical casino operators with their online apps are not going anywhere.”


Aaron Pressman can be contacted at aaron.pressman@globe.com. Follow him on twitter @ampressman.

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