Why The DraftKings Surcharge Is A Terrible, Horrible, No Good, Very Bad Idea
Why The DraftKings Surcharge Is A Terrible, Horrible, No Good, Very Bad Idea
DraftKings announced yesterday ahead of Q2 earnings that it would add a “surcharge” to winning bets in the four states where sportsbooks face the highest tax burden.
More here; here’s what it would look like in practice:
Long story short: In addition to the vig, bettors will now be paying a surcharge of some amount in Illinois, New York, Pennsylvania and Vermont.
The decision was universally panned on Twitter. DraftKings CEO Jason Robins defended the move as necessary, called the surcharge “nominal” and compared it to taxes and charges on things like hotel rooms. More on all that in a bit.
Let’s start here: Extremely high tax rates are bad! They aren’t great for growing the market, and at the end of the day, they do make it more difficult for online sportsbooks to offer a better product. Online sportsbooks compete with 1. offshore sportsbooks 2. daily fantasy pick’em apps and 3. sweepstakes sportsbooks that don’t deal with similar taxes.
However, at the same time, DraftKings is reaping what it sowed. They and other sportsbooks agreed to operate in New York under a 51% tax rate in exchange for market access. (It’s also interesting to note that DraftKings pays a 51% tax rate in New Hampshire as part of its agreement to run a monopoly in the state.)
Closing Line Consulting
Need help with gambling content, navigating the North American gaming industry, communications/PR, or research and analysis? I have a consultancy to help in gaming and beyond. Reach out if you want to have a conversation. Learn more about CLC here.
To surcharge or not to surcharge
DraftKings is free to do what it wants. If it thinks that customers will be happy to bear the extra cost of a surcharge, that idea will be proven or disproven by the market. Analysts were mixed on the news.
The metagame of this seems to be rooted in several ideas that I’ll break down:
Customers won’t care
The idea behind the surcharge is that customers are very used to stuff being added to our bills and we don’t bat an eyelash. Hotels, restaurants, etc. Why would it be any different at a sportsbook?
I’ve long said the majority of bettors aren’t price-sensitive and just want to get bets down. I think that dynamic changes if you hit customers over the head with the idea that they are now paying more for the same product. The surcharge is right there on every bet slip! The psychology of it seems far different from the charges we get before checking out or paying for a food bill that we gloss over.
DraftKings is betting it’s the same dynamic, but it doesn’t seem the same to me. Who’s right? Again the results will bear this out. I’ll be happy to admit defeat if DraftKings implements this and crushes it.
Others might follow suit
DraftKings is the canary in the coal mine here, going out on a limb to see if this will work in the real world. If it works and revenue increases, it wouldn’t be shocking to see other sportsbooks copy the strategy.
But for now, I’d wager other sportsbooks see this as a competitive advantage in these states.
A source I spoke with at another US-facing sportsbook scoffed at the idea that they might implement a similar surcharge in the future.
Lower tax rates?
The surcharge also appears to be part of an effort to push for lower tax rates. In the example, the language passes this off to Illinois. To be fair, Illinois did recently change its tax regime.
But nothing has changed in the taxation in the other three states other than DraftKings’ desire to make more money. “States are charging us too much!” DraftKings seems to be saying with the surcharge.
There are an absurd number of steps in between “implementing a surcharge” and “reducing taxes” from a policy perspective. There are so many that it’s difficult to see such a gambit doing anything beyond backfiring. I wouldn’t be stoked if I were a state that licensed DraftKings and sees the state being blamed for the surcharge.
Long live the surcharge! Or not!
Based on feedback so far, DraftKings could easily cut bait on the whole thing and no harm done. However, it would be wild if they didn’t already game-theory the surcharge; the reaction seems pretty predictable.
A far better tack would have been to increase vig slightly in these states, which the average customer would probably shrug their shoulders at. (Yes, more vig is also bad but better than a surcharge.)
You can argue this is a transparent way to charge more. But in some ways it’s almost less transparent because DraftKings is implying it’s the state’s fault; I reject that idea everywhere except Illinois. There’s also little transparency on the existing vig!
I’ve doubted DraftKings plenty of times, but they’ve been right more than they’ve been wrong in the run-up of legal sports betting. But I seriously doubt as we sit here the sports betting surcharge will be something that survives in the long term.
The Closing Line is a publication of +More Media.
For sponsorship inquiries, email dustin@closinglineconsulting.com or scott@andmore.media.
