Wall Street often abides by the mantra that “greed is good,” but there may be more at play in DraftKings’ recent decision to introduce a controversial surcharge. This move is designed to help the company compete against the black market and offer more competitive odds to its customers.
DraftKings could reap big rewards from a new surcharge
DraftKings’ new surcharge, set to roll out across four states on January 1, 2025, is projected to generate an additional $270 million in revenue, according to analytics firm Eilers & Krejcik Gaming. Despite facing backlash from both players and rival companies, who have stated they won’t impose a similar fee, DraftKings appears committed to this strategy, at least for now.
The potential financial benefits are significant. Eilers & Krejcik Gaming predicts that the surcharge could bring in $9 million from Pennsylvania and a substantial $209 million from New York alone. The total $270 million windfall could help DraftKings manage the high costs of operating in states with steep taxes, like New York, where the gross gaming revenue tax on sports betting stands at an eye-watering 51%.
Despite the criticism, DraftKings CEO Jason Robins is likely aware of the harsh market realities. Leaving high-tax states like New York is not an option, as it would allow competitors to gain market share unopposed. In the long run, if DraftKings can use the surcharge to offer better odds, it may turn out to be a winning strategy, even if it initially upsets customers.
Rivals are watching closely as DraftKings takes the heat
While some competitors have taken shots at DraftKings on social media, others are more cautious. Rush Street Interactive has been quick to mock the decision, but ESPN Bet, which is struggling to meet its performance expectations, has said it will “monitor the situation.” Meanwhile, BetMGM, Caesars, and Penn Entertainment have remained relatively quiet, with Penn seeming to align with ESPN Bet’s cautious approach.
The big question mark is FanDuel, which could decide to implement a similar surcharge, potentially leveling the playing field and setting a new industry standard. The decision for DraftKings might not be purely about profit but rather a strategic move to strengthen its market position. If successful, it could leave competitors scrambling to catch up.
However, Eilers & Krejcik Gaming cautions that if FanDuel doesn’t follow suit and states push back due to potential lost tax revenue, DraftKings could face pressure from policymakers, investors, and the media to abandon the surcharge. The ultimate test will be whether this move leads to a significant loss of players, putting DraftKings in a more challenging position than anticipated.
