DraftKings Introduces Surcharge on Winnings in High-Tax States Starting January 2025

DraftKings, a titan in the world of legal sports betting, recently announced a bold new strategy that has the industry buzzing. CEO Jason Robins, brimming with confidence in his company’s product, revealed that starting January 2025, DraftKings will impose a surcharge on winnings in states with high gaming taxes. This daring move is not just a financial maneuver but a calculated risk that Robins believes will ultimately pay off.

“It makes a huge difference to our ability to make a reasonable margin,” he told investors on Friday. “And more importantly [it will help us] to compete with the illegal market that pays no taxes and can invest 100% of revenue into their products.”

The Surcharge Announcement

The news broke on August 1, 2023, when DraftKings declared that customers in states with gaming taxes over 20%—like Illinois —would soon face a surcharge on their winnings. Robins described the fee as “nominal,” comparing it to an insurance policy that protects the company’s bottom line. He argued that while the initial reaction might be negative, bettors would come to appreciate the high-quality product and experience DraftKings offers, even if it means paying a bit more.

Just a day after this announcement, during the company’s second-quarter earnings call, Robins doubled down on the decision. He projected that DraftKings’ EBITDA for fiscal year 2025, which began on July 1, could reach between $900 million and $1 billion. This optimistic forecast is partly based on the expected revenue boost from the new surcharge.

However, the immediate market response was less enthusiastic. DraftKings’ stock took a hit, dropping 10% as investors reacted to the missed revenue expectations and the surcharge news. Despite reporting a 26% year-over-year increase in revenue to $1.10 billion, the figure fell short of the $1.12 billion analysts had projected. Adjusted EBITDA also missed the mark, coming in at $128 million instead of the anticipated $129.3 million.

In the fiercely competitive US sports betting market, DraftKings holds the second-largest market share, just behind FanDuel. Together, these two giants control about 80% of the digital sports betting landscape. Despite this dominance, the market is always ripe for disruption, and competitors are keen to exploit any opportunity to chip away at their market share.

Robins remains unfazed by the competition. He believes that DraftKings’ strategic decisions, including the surcharge, are in the company’s best interest. He also hinted that other companies might adopt similar measures as they confront the same high-tax environments.

Strategic Expansion and Customer Acquisition

Even as DraftKings braces for the impact of the surcharge, it continues to expand its offerings and grow its customer base. The company’s “monthly unique players” metric saw a 50% increase over the same quarter last year, a testament to its aggressive customer acquisition strategy. DraftKings spent $215 million on sales and marketing last quarter, a hefty investment that seems to be paying off.

Additionally, DraftKings recently launched in-house player props for major sports leagues and broadened its progressive parlays. The company also secured a new deal with the NFL, introducing a “bet and watch” option that promises to enhance the betting experience.

A significant development this quarter was the completion of DraftKings’ acquisition of Jackpocket, an online lottery platform. This move allows DraftKings to cross-sell lottery products to its existing customers and venture into the online lottery market. The acquisition is expected to significantly boost DraftKings’ customer base and revenue streams.

Robins emphasized the importance of transparency in implementing the surcharge. He compared it to taxes in other industries, which are often itemized separately and ed on to consumers. He believes that bettors will appreciate knowing exactly what they’re paying for, even if they’re not thrilled about the extra cost.

Source:

”After rolling out proposed winners’ tax, DraftKings projects $1bn in 2025 profits, fails to meet estimates”, igamingbusiness.com, August 03, 2024.

”Robins defends DraftKings’ choice to add betting surcharge in some states”, sbcamericas.com, August 02, 2024.