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If you can't get through a football game or Twitter scroll without seeing an in-your-face promo for online sports betting lately, well, you're not alone.

Offers such as “Bet $20, win $125 if Aaron Rodgers throws for one passing yard” or “Place your first bet up to $500 risk free” have become ubiquitous, as sportsbooks continue to dangle the prospect of essentially free money in hopes of acquiring a customer base that will bet and—more often than not—lose money over the long haul.

These offers have exploded as a pandemic-weary public has proved the perfect target for betting startups, many of which are rushing to exploit ever-loosening state rules on betting. "Throughout the pandemic, there's definitely been a sharp increase in mental-health issues and addiction," says Eric Fields, a psychologist who specializes in addiction therapy. "This time has been extremely vulnerable for people who've already had an addiction or mental health issue, and for people that haven't had one, they now may be at risk for developing one. Being home all that time just leads people to have this kind of susceptibility to do short-term fixes, to get some kind of instant gratification."

Estimated to generate between $7 billion and $8 billion in annual revenue by 2025, the U.S. legal sports betting market as a whole already pulled in just over $900 million in revenue in 2019, and that's with less than half of states having legalized the practice. Chris Grove of the research firm Eilers & Krejcik Gaming said that sportsbooks are generally paying several hundreds of dollars in customer acquisition costs in hopes of acquiring lifetime values in excess of a thousand dollars per paying customer.

Currently, 25 states and Washington, D.C., have passed bills that legalize sports betting to date, with Louisiana, Maryland, and South Dakota joining the club this election cycle after ballot initiatives passed, according to the American Gaming Association. A few top players, such as DraftKings, FanDuel, and more established casino gambling operators William Hill and BetMGM, hold a significant lead, but that hasn’t stopped others—New Jersey currently has upwards of 15 operators duking it out—from further clogging the already overcrowded sector. Thus, operators are turning a blind eye to profit margins, sponsoring these free-bet and odds-boosting campaigns in what could be an ultimately futile effort to grab a portion of the multibillion-dollar mobile gambling market.

“With regards to the free bets and promotional intensity, it’s almost a race to the bottom,” said Daniel Stone, head of data at Vixio GamblingCompliance, a gambling industry intelligence firm. “Even if DraftKings wanted to pare back and become a bit more conservative, they are kind of led by what their competitors are doing. If Barstool comes in in Pennsylvania and goes all guns blazing, throwing free bets and being hugely generous, with the NFL season having recently kicked off, it’s hard for FanDuel and DraftKings to turn off the taps and become more cautious.”

Stone mentions DraftKings and FanDuel specifically because they’re the two biggest players in the market and have been for some time. Well before the U.S. Supreme Court overturned a federal law banning sports betting in May 2018, DraftKings and FanDuel rose to prominence as a result of their Daily Fantasy Sports offerings. Once states began to legalize mobile sports betting, DraftKings and FanDuel already had access to a user base that other competitors didn’t.

“DraftKings and FanDuel have established this lead really on the basis of this huge, ready-made DFS user base just sitting there ready to be cross-sold,” Stone said. “They’ve been able to monetize those people and build huge sports betting businesses at a far lower customer acquisition than an MGM or a Caesars that is starting from more of a standing start, trying to cross-sell older slot players in their databases in Indiana or Illinois which might not be such a perfect fit for sports betting.”

Starting with a large active user-base hasn’t necessarily meant that either DraftKings or FanDuel are profitable, though. DraftKings reported operational losses in both 2018 and 2019, and while the pandemic's interruption of the sports season certainly didn't help matters, the company failed to turn a profit again throughout the first six months of 2020. FanDuel, despite 45% year-over-year revenue growth in 2019, also turned a loss last fiscal year. Revenue will keep on growing as more states continue to legalize the practice, but betting operators still must spend to both fend off new competitors with huge marketing and promotional campaigns and invest in product improvements and employee growth in an industry that already runs on tight margins.

"Now, we're hugely in growth mode," Mike Raffensperger, CMO of FanDuel, said. "We are investing to launch in new states, and that is a function of getting a lot of customers and having them try our products. And so, ultimately, that means in these early stages, we're investing more than we're making at a revenue standpoint."

While the established players like FanDuel, DraftKings, BetMGM, William Hill, and BetRivers vie for market share, there is a flood of competition from newer entrants. PointsBet and Barstool Sports, owned by Penn National Gaming, are just two of the latest companies to try to get in on the action, and they’ve brought with them their own flurry of promos as they enter new states. Barstool in particular has caught Stone's eye. “Their audience is kind of perfect to cross-sell to sports betting,” Stone said. “I know there will be people under 21 among those, but these are young, sports-obsessed guys who are already sports bettors. They’re invested in the Barstool brand as evidenced by their success in other areas. They think they have this captive, ready audience to parlay into sports betting quite effectively.”

The economics of mobile betting

Out of all of the money wagered on legal sportsbooks, operators keep only around 5% to 7% as revenue, according to both the American Gaming Association and Stone, and that's before paying out regulatory fees and taxes, which can be as high as 50% of revenue in some states. Throw in employee salaries, overhead, and marketing expenses—which Vixio said can make up over 50% of overall revenue alone—and online sports gambling just isn’t a moneymaking business at this point.

In fact, DraftKings recently reported $133 million in Q3 revenue––good enough for a 98% increase from the same period last year. However, the company's sales and marketing expense increased to $203 million in the same quarter, as it spent on deals with the Chicago Cubs, MLB, ESPN, the New York Giants, and Michael Jordan, among others. Such spending allowed DraftKings in part to grow its user base––measured in monthly unique payers––by 64% in Q3, but also was a signal that profitability still may be far down the line.

“At the moment, it does feel like it's growth at all costs, market share at all costs,” Stone said. “People don’t care about losing money—DraftKings is losing a fortune yet has this eye-watering valuation. It’s not about rational cost control seemingly; people want to be among those winners in four or five years. Maybe then, the focus will shift to cost control and profit from that point on.”

For now, the emphasis remains on becoming one of those “winners.” If Stone is right and the U.S. sports betting market ends up mirroring that of the much-further-along U.K. one, then there will likely be only five to six betting operators, if that, that amass more than 10% market share. With far more than six players in the market right now, that means there will be a whole lot of losers.

The competition has led to some rather creative marketing ploys.

FanDuel, for example, is offering some previously unheard-of concepts like refundable "Same Game Parlays" and crowdfunded sports bets. Both of those offers, if you are unfamiliar, function to almost completely minimize risk while keeping the rate of return (or the odds) untouched.

“We are investing to launch in new states and that is a function of getting a lot of customers to try our products,” Raffensperger said. “Fundamentally, we do want to be generous to our customers and make sports betting fun. We believe over the long run, and we’ve seen it in our numbers thus far and in the market share reports, that that generosity pays off in retention and loyalty.”

Danger ahead?

It certainly does pay off—to the tune of up to $2,000 in average customer lifetime value in some cases, according to Stone. While that number is attractive to gambling operators for obvious reasons (and is the primary driver of this current promotional environment), it also has the potential to be a problem for both the industry and its customers.

Keith Whyte, executive director of the National Conference on Problem Gambling, said to look no further than what has happened throughout Europe. Legalized across most of the continent well before it was in the U.S., online sports gambling erupted a few years ago in countries like the U.K., Spain, France, etc. Seeing a multibillion market, sports betting operators began a massive race for market share.

Soon enough, advertisements were everywhere. On soccer clubs’ jerseys, constantly throughout television broadcasts, in sports stadiums, on streaming platforms, across social media, etc. Sports betting operators were willing to spend hundreds of millions of dollars to eventually capitalize on the massive amounts bettors will end up losing over the long term. Pay upfront marketing expenses, win market share, then reap the rewards. Simple enough, right?

Well, not exactly. The boom in betting was quickly followed by backlash from the public, media, and government as problem gambling habits became more and more common. According to Fields, it's the intermittent nature of these promos that drives compulsive behavior.

"They want you to win that first bet, because that's going to make you feel like you're actually good at it," Fields said. "And then kicks in the intermittent reinforcement schedule, and this is the strongest reinforcement of behavior. If you keep losing, and you never win, it's easy to give it up. If you keep winning, and then all of a sudden start losing consistently, it will be easier to give it up. However, according to research, if you win once in a while, it will be the most difficult to break that behavior pattern."

Indeed in Europe, restrictions were soon placed on where and when they could advertise, and operators were required to invest money into gambling addiction prevention messaging.

Within a few years, Whyte warns that the exact same progression could happen in the U.S.

He argues state governments and operators should instead play the longer game of making customers more sustainable. In other words, they should reduce the frequency and intensity of the ad campaigns, invest more into addiction prevention efforts (treating gambling as if it were alcohol), place limits on betting amounts and numbers of transactions, and, in turn, ensure that customers don’t burn out. Whether operators will heed this advice or proceed without caution remains to be seen.

"Obviously, it might not be popular with some shortsighted operators, but the longer-term ones know that if they keep someone around, they have better lifetime value because acquisition costs are really expensive," Whyte said. "So spending a little bit of time trying to make these customers a little bit more sustainable is clearly in their economic best interest, not just their ethical best interest."