Skeptics Baffle Over Fanatics’ Huge Online Sports Betting Gamble

Even market leaders BetMGM, Barstool, DraftKings and FanDuel struggle to make online sports betting profitable, but the merchandise retail giant Fanatics intends to make a huge, expensive push into the industry in 2023.

Not everyone thinks BetFanatics is a good idea. In fact, it’s difficult to find anyone outside the Jacksonville-based conglomerate that does.

“I don’t really see this,” says Oklahoma State University business professor John Holden, who specializes in the gaming and hospitality industry.

“I would love to see their plan for how they’re going to make money. FanDuel says they’re profitable now, but not by a lot, and they’re the only ones. And you don’t make the margins on sports betting that you make on selling the jerseys or other collectible things that Fanatics sells. It’s a highly competitive market and the market is pretty saturated.”

Holden’s view is shared by many. Longtime Las Vegas Advisor scribe David McKee, who tracks the industry on his Stiffs & Georges blog, agrees: “If you were asking me to put odds
on Fanatics succeeding and reinventing itself as a sports betting company, I wouldn’t give you good odds.”

Fanatics brass, many of whom were hired over from established online gaming companies, obviously feel differently. In a call with investors earlier this month, Fanatics founder and Executive Chairman Michael Rubin said the company expects BetFanatics to be live in at least a dozen states by the end of 2023 and he believes their existing customer database of nearly 100 million fans who bought sports merch to give them a gigantic jumpstart.

Fanatics spokesman Kevin Hennessey declined to comment to Playin USA, writing via email that “it’s just too early to talk on the record” about the company’s plans.

An ambitious sports betting plan like no other

Still, Fanatics provided early insight into the league they expect to be in when they joined FanDuel, Penn National, BetMGM and DraftKings in kicking $25 million last spring into the pot to support the passage of California’s doomed Prop 27. Under the terms of that gambit, only companies that could pay the state a $100 million fee and are licensed in at least 10 states could launch a mobile sports book.

The measure failed spectacularly, but for a company that, as of Election Day, had no active casino licenses whatsoever to throw that kind of cash around was a de facto declaration of intent. By then, they’d already tried and failed in 2021 to get a license to operate in New York, and that near-miss taught executives there that they needed to stock up on experienced industry hands who know how to guide the process.

Hence, the company hired FanDuel CEO Matt King in June 2022 as CEO of Fanatics Betting and Gaming. In August, the company brought on Chris Fargis, a former director of operations at DraftKings, who in November tweeted a call for sports bettors to direct-message him ideas as to “how Fanatics Risk & Trading team can give you the best customer experience.”

Then, last month, Brandt Iden became Fanatics’ vice president for government affairs, the person responsible for shepherding applications for gambling licenses through state-level processes as well as lobbying legislatures in states where iGaming is not yet legal. Iden, one of Playin USA’s 2022 Online Gambling Power Players, is widely credited with pushing through online casino legalization in Michigan when he was a Republican state representative.

“We can be the No. 1 player in the world in that business in 10 years,” Rubin told Sports Business Journal in February.  “That does seem ambitious for someone who’s not in the business today, but our strategic advantages are that we are one of the best-known digital sports brands and we touch so many fans. There’s been so much money lost in this business, but we will be deliberate and I’m bullish on it being one of our key long-term businesses.”

Fanatics has two key advantages: Massive piles of cash to spend on marketing and promotions and that all-important customer database. Last week, Fanatics announced yet another round of venture capital – this time $700 million led by private equity firm Clearlake Capital – that puts the market valuation of the company at $31 billion. The company sits on $2 billion in cash, Reuters reported.

The database, however, is seen as the not-so-secret weapon. The company, established in its current form under Rubin just 11 years ago, sells branded merchandise and collectibles around the world. What’s more, Fanatics knows what specific sports and teams interest their customers based on their purchases – information that could be valuable in crafting personalized sportsbook offers to potential bettors.

“What fanatics believes is, they won’t have to lose that much money because they have the database,” says Chad Beynon, an analyst who covers the gambling industry as managing director at MacQuarie Securities.

It is unclear exactly how big the database is. As recently as February, the site said the figure was “more than 81 million global consumers.” Just 10 months later, the company has a reported 94 million customers, according to CNBC.

Either way, it’s huge and growing. And similar to other companies that have moved from their core business into something quite different – think Amazon or Apple’s push into TV and movies – Fanatics can afford losses because the marketing muscle goes both directions. That is, not only can a sports merchandise customer become a casual bettor but a gambler can be encouraged to buy jerseys.

“Maybe this is another way to sell T-shirts at the end of the day,” Holden muses.

Big brands struggle, ESPN’s plans are stalled

The skeptics aren’t so confident about the power of a database alone – or whether there’s room at the top tier of the online sports betting market for a new player.

Holden is doubtful:

“I’m missing the evidence that will convince me that they’re going to do any better than other brands that had valuable customer lists. I mean, MGM and Caesars have good lists of the people that gamble for sure and that hasn’t really helped them. Barstool has a huge distribution list that doesn’t appear to be doing anything. Maybe this is different. It could be.”

What’s more, the top iGaming brands are already struggling to make money. In November, DraftKings stock slumped on acknowledgment that the company had lost more than $1 billion in 2022 and doesn’t expect sports betting to become profitable until the fourth quarter of 2023. Barstool, BetMGM and Caesars are all in the red, too; FanDuel in September became the first online sports book operating in the U.S. to report a profitable quarter. Only FanDuel, BetMGM and DraftKings can boast owning a double-digit share of the market.

Other upstart sports betting brands have already folded, including MaximBet and FuboTV.

“If it’s any consolation, they will probably be there very briefly and very unsuccessfully, because even companies that are experienced in sports betting are having a very hard time making a go of it right now,” McKee says. “There are a few companies, and you’ve mentioned a couple of them that have sucked up most of the market share, and there’s very, very little to go around for everybody else.”

Fanatics clearly believes otherwise – and has the cash t
o burn to make a splash. What’s more, they better get moving if they want to achieve the goal of being in more than a dozen states by this time next year, Beynon says.

“They want to be top three, that’s been a stated goal of theirs,” Beynon says. “Right now, to achieve top-three status, you need to spend money. To get into Colorado, Pennsylvania, Michigan and other markets, you have to partner with someone or you have to have some type of agreement to get in that market. And they haven’t done anything at this point yet.”

Concerns surround Fanatics’ potential marketing plan

Fanatics’ customer list may be impressive, but it also has potential to get the company in trouble with regulators, experts say. While they may know a lot about their shoppers – their team loyalties, their e-mail and cell phone numbers, how much they spend – they don’t know whether they’re over 21 and, thus, legally able to gamble. 

“Certainly directing things to the minors would violate just about every regulation that you have,” Holden says. “They might not know it, though. Sure. But to some extent, purposeful ignorance is not going to be a really strong defense here.”

McKee agrees:

“They’ve got to be very careful and really screen those databases because it’s exactly the sort of thing that could not only get them into legal and regulatory hot water, but confirm for opponents of sports betting what they’ve been saying all along, that little Jimmy is going to be betting on sports on his computer.”

Beynon is less concerned, noting that there are controls in place to prevent minors from taking advantage of whatever offers are sent their way.

“When you sign up for any sports betting site, you have to provide your social security number,” he says. “You have to provide that. So Fanatics could send out a generic email to people in the database and include some disclaimer saying you have to be 21. And then, if you weren’t 21, you would get blocked trying to sign up for that.”

What’s more, Beynon says, minors are already exposed to constant advertising from online sports books, from Super Bowl commercials to billboards behind home plate at baseball games to announcers discussing the betting lines. “Every 8-year-old who watches sports incessantly sees commercials about DraftKings and FanDuel, and they know exactly what they are.”

McKee says opponents of sports betting aren’t likely to see it that way.

“The argument would be made that there’s a significant degree of difference between seeing a commercial on TV and having a marketing message delivered to your email inbox. I’m not sure that that’s true, but it’s something that has caused a substantial backlash in Australia and in Europe and the United Kingdom, where you see restrictions being placed on where these sports betting firms can advertise and when they can advertise.”