DraftKings Introduces Fees To The World Of Sports Wagering

DraftKings recently reported its first ever profitable quarter, at the midpoint of the company’s 12th year of business. It’s not that DraftKings doesn’t have a product that people want—the company reported about $3.7 billion in revenue for fiscal year 2023—but it has been their practice to spend a lot of money on driving eyeballs (and suckers) to their business, historically devoting half or more of their revenue over a given period to sales and marketing. Those marketing expenditures have dropped significantly as a percentage of revenue so far in 2024; meanwhile, DraftKings hauled in over a billion dollars in the last quarter. As a result, for the first time ever, the company turned a profit: about $64 million, or roughly 13 cents per share of common stock.

This did not inspire the huge increase that a simpleton investor might expect to see in the value of DraftKings stock. For one thing, I am told there has been a historic global stock sell-off, that trading platforms are kerploding all over the place, and that several stock markets are possibly on fire? For another, DraftKings’s brush with profitability did not suddenly wipe out the competition: Gambling is a crowded, booming industry in the U.S., and just as the streaming wars have become a prolonged battle of attrition, the online gambling wars might not be settled until some of these online sportsbooks are swallowed up or stamped out and the field consolidates. Even a stock buyback plan, like the one DraftKings announced in its quarterly report, has not convinced investors that the company is meaningfully more stable today than it was last month. In fact, DraftKings stock was about two bucks cheaper per share this morning than it was on the first trading day of 2024.

But revenues and profits are pointing up, and DraftKings is pulling all levers. Here’s a new one: Fees! The company announced Thursday that starting in 2025 it will take three to five percent back from winning bets placed in a handful of U.S. states. Those states, says DraftKings CEO Jason Robins—including Illinois, New York, Pennsylvania, New Hampshire, and Vermont—charge too much in taxes on gambling revenues. The company plans to forward some portion of that burden onto its users, although the details and messaging are still being refined. Robins compared his company’s proposed new winning fees to the way that a restaurant, for example, forwards sales tax expenses on to its patrons. “We decided that the best course of action is to do what really every other industry— whether it’s hotels, taxis—whatever else you buy generally has some kind of tax,” he explained to CNBC.

But those don’t fit together very neatly, do they? For one thing, the 4.3 percent that a retailer pays in sales tax in Virginia is forwarded along exactly to the purchaser. DraftKings says it will apply its fees to winning bets made in states that charge over 20 percent in taxes on gambling revenue. But DraftKings is neither adding 20 percent to all transactions regardless of outcome, nor forwarding along the difference, point for point, between 20 percent and the given state’s tax rate. So, for example, Illinois recently rejiggered its tax rate on gambling revenues, from a flat 15 percent to a sliding rate with a base of 20 percent and a maximum of 40 percent. New York, New Hampshire, Vermont, and Pennsylvania, meanwhile, charge a flat 51 percent. Pennsylvania raked in a record $2.54 billion in gambling tax income in the last fiscal year; Illinois reported about a billion dollars less, and with its new sliding rate forecasts a relatively modest $200 million in increased tax income. Figuring out how to distribute these fees without at least giving the appearance that Illinoians are subsidizing DraftKings across New England will be a challenge.

Then there is the threat to DraftKings’s business. “Obviously, we could see some customers drop off, and player betting activity, if they don’t like it,” acknowledged Robins, to CNBC. The Illinois Gaming Board lists 16 licensed casino operators in the state, and a further two outfits whose license applications were deemed “preliminarily suitable.” DraftKings will be the only outfit in the state—and, indeed, on the continent and possibly anywhere on the planet—to charge these winning fees, presumably because DraftKings is the only one having a hard time figuring out how to turn a reliable profit from the phenomenon of people torching their own hard-earned dollars wagering on future events. If every sportsbook in New York, for example, is kicking 51 percent of its take back to the state, why on Earth would anyone choose to do business with the one of them that is using that tax as an excuse to wring a few extra bucks out of its customers?

The Sports Betting Alliance is mad at Illinois, the third-largest sports betting market in the U.S., for increasing its gaming tax, claiming that the maneuver will “cause real harm.” But Illinois governor J.B. Pritzker, who wrestled the new budget through an unusually contentious process, figures his state is acting responsibly and reasonably, pointing out last week that the rate in Illinois is still much lower, even at the high end, than rates in states where gambling is still chugging along. “They’re not leaving New York, and they’re not leaving the other states,” Pritzker said Wednesday. Indeed, New York raked in about $1.75 billion in tax and licensing revenue, just from mobile online wagering, in the first two years since it was made legal in the state; the New York State Gaming Commission reported nearly $2 billion of mobile sports wagering in May of 2024, generating about $203 million of gross gaming revenue and netting the state about $104 million in taxes. Gambling is alive and well in New York, despite the state’s aggressive tax rate.

There’s also a way of looking at this as DraftKings charging the fees to the wrong end of each bet. The company’s gross revenue over a given period is essentially the vig plus losing bets minus winning bets; what is left over at the end of that equation, the house’s take, is what is taxed. Paying out to winning bettors makes that revenue number smaller, and thus shrinks the company’s tax burden. That’s a funny thing to consider: Charging an extra fee on winning bets naturally loads more of the burden onto the net-winning gamblers, who are already contributing to the lowering of the company’s tax bill.

If DraftKings truly wanted to pass along this cost of business—in the way that a coffee shop adds a couple dimes to the cup o’ joe that I pay for, versus the one that they give me for free when I get 10 holes on my punchcard—it would charge the fee to losing, rather than winning, bets, thus shifting more of the burden onto net-losing gamblers who after all are more responsible for generating the revenue pool from which DraftKings pays taxes. Obviously that would be unpalatable and insane, but this flagrantly ridiculous exercise at least gets to how tricky it will be for DraftKings to compare their new fees to the tried-and-true sales tax method. A fee on winning bets is arbitrary, constructed to satisfy a threshold of general palatability more than it is to meet any standards of logic. If losing on DraftKings bets cost you more than you wagered, only the very most deranged gamblers would continue to wager with DraftKings. On the other hand (and perhaps as an added bonus for DraftKings), the good gamblers—net-winning types—might be the first to jump ship from DraftKings and earn an extra three to five percent someplace else.

At any rate, operators are making money hand over fist in an exploitive industry; taxes are how states redirect what they can of that sordid business back toward the common welfare. DraftKings, a self-proclaimed disruptor with an eye on conquering the sports gambling world and a business model that delivered operating losses in 45 of the last 46 fiscal quarters, figures that whole deal is cramping its style. “Above a certain level,” Robins explained, “we can’t invest in our product and customer experience in the way that we need to.” DraftKings needs all that revenue, you see, in order to refine their methods for sucking the cash out of your wallet and depositing it into theirs. Fees might be the next frontier, or this might be DraftKings disrupting first and foremost its own damn business.