DraftKings abandoned plans to impose a surcharge on winnings in high-tax, non-monopoly states yesterday (13 August) after its primary competitor ruled out introducing a similar policy.
The decision to drop the controversial scheme less than two weeks after announcing it comes following social media backlash and divided opinions from analysts.
As announced alongside DraftKings’ Q1 report, the scheme would have charged a “nominal” fee on customer winnings in states with a sports betting tax rate above 20% of GGR.
DraftKings said yesterday in a statement posted on X: “We always listen to our customers and after hearing their feedback we have decided not to move forward with the gaming tax surcharge.
“We are always committed to delivering the best value in the industry to our loyal customers.”
The announcement came less than an hour following the end of Flutter Entertainment’s Q2 earnings call, where CEO Peter Jackson’s said the business had “no plans to introduce a surcharge for winners”.
Not one of DraftKings’ competitors committed to implementing a similar policy, although Penn Entertainment’s Jay Snowden said they would observe its rollout with interest.
Rush Street Interactive was the most combative, issuing a statement with a veiled criticism against DraftKings.
The press release stated the BetRivers operator would not impose a surcharge, therefore reaffirming its commitment to “providing exceptional value to its customers”.
The abrupt end to the scheme has ended hopes it might lead to a significant reallocation of US market share.
However, all US operators will still need to grapple with how to treat the several high-tax jurisdictions as investors continue to push for profitability.
For example, Illinois’ announcement it would hike sports betting taxes in May led to operator share prices tanking, as investors worried other states would follow in its footsteps.
Analysts takes: reversal should remove uncertainty
Analysts at Truist Securities argued the decision to drop the scheme could positively affect DraftKings’ share price.
They said: “The reversal should remove some uncertainty around execution risks (inc. market share and/or reputational impact), but also raises the question of how DKNG can offset the impact and/or if guidance needs to be tweaked.
“We’ll wait for more colour on mitigation, but think recent DKNG stock underperformance may reflect a more bearish view around surcharge risks which now appear N/A.”
While some analysts had previously offered lukewarm praise for the policy, with some highlighting its potential to improve EBITDA, not everyone was as positive.
At the time, analysts at Regulus Partners urged DraftKings to drop the “self-defeating” policy.
They said: “The fact that there is no structural reason for a critical mass of competitors to copy DraftKings means that they won’t, leaving DraftKings exposed as palpably offering worse value to customers with winning bets.
“Since all customers win sometimes (they might not withdraw) this is a tax on everyone, not just ‘winners’; DraftKings customers will less to recycle into more betting and gaming, which creates a classic Laffer effect of higher charges making less revenue for those that stay, while many customers will feel short changed and simply leave.
“We cannot think of a better way to destroy a brand proposition based on product, value, and customer service – and DraftKings has nothing else to offer.”