DraftKings Tests Subscription Pilot In New York, Considers Expansion

On the eve of the NFL playoffs, DraftKings is rolling out an innovative subscription service that brings the high-margin Costco model on recurring subscription revenue into the sports betting ecosystem.

Patterned after subscription models at Uber and Robinhood, the company is testing a pilot program in New York aimed at incentivizing rewards for a subset of players. The premium service, DraftKings Sportsbook+, will provide subscribers with “stepped up,” boosts on certain parlays, a preferred wager among Millennial bettors. DraftKings, the first major sportsbook to test the subscription model in the U.S., will offer Sportsbook+ to select customers across the state.

“We’re constantly communicating with our customers to understand the products they use and love in their daily lives, and exploring how we can apply those insights to DraftKings,” said Corey Gottlieb, chief product officer at DraftKings. “This process led us to developing a low-cost, recurring subscription designed to provide customers with exceptional value.”

After abruptly pulling a proposed customer surcharge over the summer, DraftKings went back to the drawing board. Weeks later, CEO Jason Robins teased the idea at an industry conference without revealing the details. Now, the question is on whether the concept has lasting power.

Combating Elevated Tax Rates

New York handled more than $20 billion in legal sports wagers last year, lapping the field by a wide margin. But DraftKings is not offering the service to every customer in the Empire State. Though the company has not disclosed the percentage of customers who are eligible for the program, there are indications that the current incarnation will just be an “initial test.”

Subscribers of DraftKings+ will receive unlimited “boost” tokens that can be applied to parlays, as well as Same Game Parlays, according to the company’s terms and conditions. Customer profits for two-leg parlays will increase by 10%, with step-ups for each leg. As a customer takes on added risk, a bettor’s opportunity for a higher profit will grow exponentially. A bettor that hits a parlay with more than 10 legs will double their profits. The wagers are limited to parlays where each leg has odds of -500 or shorter.

The perks are comparable to ones offered with Robinhood Gold, a paid subscription service that debuted in 2016. The online brokerage offers Robinhood Gold subscribers with additional perks such as: IRA matching, lower margins, and a cash sweep program. Through the program, members can earn a 4% annual percentage yield on uninvested brokerage cash that is swept to participating banks. Members of Sportsbook+ will receive ancillary benefits for entering the program, even as some customers question if the monthly fee is too much.

It should come as little surprise that DraftKings chose New York for the pilot. In fiscal year 2023, New Year generated $713.5 million in tax revenue from sports betting, according to The Tax Foundation, which bills itself as the nation’s leading voice on tax policy. Only three others – Pennsylvania, Illinois, and New Jersey – eclipsed tax collections above $100 million, the nonprofit found.

New York imposes a nation-high 51% tax on sports wagering gross gaming revenues, sharing the top spot with New Hampshire. Many operators have excoriated the rate, contending that it restrains market participants from reinvesting into their companies through advertising and other promotions.

“New York will provide an interesting test case for this because you have tremendous volume in critical mass that can hopefully offset some of the burdensome tax rate that the state offers,” said Brendan Bussmann of B Global Advisors. “It’s one of the only ways you can balance the inability to make a profit in the market.”

The elevated tax rate generated thoughtful discussion this week on a prominent investor call. If the cost of apples suddenly soars, a major grocery chain such as Kroger may be forced to pass the costs to the customer. Whereas the bulk purchase of 10 apples may have cost Kroger $10 in the past, unexpected supply chain disruptions could send costs soaring to $20 for the same quantity. In that case, a Granny Smith apple that carries a price tag of $1.50 in a produce aisle may jump to around $2.50.

Bussmann drew comparisons to Starbucks in enumerating the challenges a sportsbook will face when encountering excessive operating costs. Three years ago, Starbucks raised the prices for certain drinks in response to various micro and macroeconomic concerns, including a hike in minimum wage. At the time, USA Today reported that a venti cappuccino in South Florida went for $4.95, a price even lower than the $5.45 charged for the same cup in New York City. For the DraftKings and the FanDuel’s of the world, the companies can respond by offering less favorable odds to bettors in high-tax jurisdictions.

DraftKings floated the idea for a surcharge shortly after Illinois enacted a progressive tax policy last July. Under the policy, Illinois established a tier system with a floor of 20% for operators on the low end of the spectrum. The scale contains numerous step-ups per bracket, with the ceiling at 40% of an operator’s gross gaming revenue (GGR). Speaking at a Bank of America conference weeks later, Robins suggested that it didn’t make sense to “eat any tax increase,” if other states followed.

Subscribers of Sportsbook+ will receive the first month for free through a promo code. From there, DraftKings will charge a fee of $20 a month. Once subscribers receive a token that can be applied to various parlays, those bets will be limited to a max wager of $25.

The Subscription Frenzy

Amid rapid digitization and the rise of streaming services, the subscription economy has surged over the last 15 years. A 2022 study from the Harvard Business Review found that the economy for subscription-based products grew at a rate of “five-to-eight,” times than traditional businesses over the previous decade. As sportsbooks engage in a prolonged battle for market share, others may follow the lead of DraftKings. In recent years, online retailers have used subscriptions as a customer retention tool through personalization and enhanced premium benefits.

While Robinhood averaged 11 million monthly active users over last year’s third quarter, the company is continually searching for ways to bolster volume. DraftKings is launching the subscription service as Robinhood mulls whether to enter the sports betting game.

“I think it is a smart concept as other industries have had success with premium subscription models – Uber, Robinhood, and Twitter/X,” Craig-Hallum Senior Research Analyst Ryan Sigdahl told me. “Hell, it is Costco’s business, investors love high-margin, recurring subscription revenue.”

Sigdahl believes the service could be a value-add for high-volume players, while helping the company drive loyalty. Still, he is unsure if bettors will be willing to pay more just for the opportunity to bet at better odds, albeit with negative expected value (EV). On Twitter, bettors appeared split with the prospects. One bettor griped at paying a premium for high-risk parlays, while another took exception to paying $20 a month when DraftKings estimated it would generate revenue of nearly $5 billion last year.

Conversely, a Silicon Valley venture capital associate lauded DraftKings for its ingenuity in crafting the idea. James Kaplan, a tech investor at Menlo Park firm NEA, drew comparisons with Uber One, a membership experience plan launched in 2021. Uber One members receive a 5% discount in certain eligible trips through Uber One credits. There, DraftKings takes a page from Uber with its “stepped up boosted tokens,” for select parlays.

In November, Uber announced that the membership program had more than 25 million members, representing a year-over-year increase of 70% from the third quarter of 2023. Months earlier, the company pledged to offer more perks after membership fees topped a run rate of $1 billion. At times, Uber One membership has comprised more than 25% of the overall customer base for the ride-sharing giant.

Based on the figures, DraftKings could reap a considerable windfall if a minimum of 30% of New York customers subscribe to the service. Under a bullish scenario, DraftKings could retain $10-$15 per subscription after accounting for customer payouts.

If considerations such as customer loyalty and user engagement are factored, the value of the subscription could be as much as 2-3x of the collected payment, according to industry estimates. DraftKings averaged monthly unique payers (MUPs) of 3.6 million in the third quarter of last year.

Creative marketing could enable DraftKings and FanDuel to widen the gap between competitors. Also this week, DraftKings unveiled a partnership with Delta that will result in the placement of various DraftKings’ games on Delta seatback screens (FAA regulations prohibit real-money wagers when a flight is airborne). The two sports betting giants enter 2025 with an online sports betting market share of around 80%. If the two establish a duopoly in the coming years, investors may start to apply higher multiples to the companies, more in line with digital companies such as Uber, JMP Securities analyst Jordan Bender wrote in a research note.

Loss Aversion

The concept of loss aversion may also be closely monitored as the industry evaluates the implications of the subscription service. A bettor who plays all six Wild Card favorites in a parlay this weekend will receive a payout of +794 at DraftKings ($10 to win $89.43). The customer will qualify for the profit boost since the Ravens (Moneyline -500) are the largest favorite on the board.

A bettor can parlay the NFL favorites with a bevy of singles matches at the Australian Open, but will be only allowed to place certain ones. Consider a 12-team parlay with six opening-round favorites: Jannik Sinner (-5000), Casper Ruud (-600), Tommy Paul (-525), Karen Khachanov (-800), Madison Keys (-700), and Jasmine Paolini (-525). A 12-team parlay will pay +1839 ($10 to win $193.93). The bettor, however, will not be eligible for the boost since each leg is above the -500 threshold.

Conversely, the bettor can substitute the tennis stars with six other favorites. Instead, let’s say the bettor opts to use Jessica Pegula (-450), Naomi Osaka (-450), Donna Vekic (-400), Elina Svitolina (-380), Frances Tiafoe (-380), and Reilly Opelka (-330). The massive parlay has odds of +3372 ($10 to win $347.21). This parlay will qualify for the profit boost. An astute tennis bettor will be shocked if Sinner, the defending champion, is upset in the first round. A defeat by someone such as Vekic or Opelka is more common given the depth in pro tennis. The restrictions prevent a bettor from placing a chalky parlay that ventures into positive-EV territory.

Leading books have grappled with unfavorable sports outcomes in recent quarters. The trends prompted DraftKings and Flutter to revise their 2024 U.S. financial guidance.

As for the profit boosts, it is not uncommon for companies in other industries to charge larger fees for certain trades. Robinhood, for example, charges more for option trading activity than for stock trades. Retail brokerages make money by selling customer orders to market makers, which make a profit on option orders. In turn, market makers tend to make a larger profit on options due to wider spreads.

Robinhood charges $0.00016 per share for equity sells, which is far less than the $0.00279 per contract on option sells. The platform handles hundreds of millions in options contracts traded per quarter. It also charges $0.04 in options regulatory and OCC clearing fees.

The New York State Gaming Commission (NYSGC) approved DraftKings’ subscription plan, Covers.com reported. Although the subscription fee will not be subject to the state’s 51% sports betting tax, operator revenue from wagers placed within the plan will be, an NYSGC spokesperson told Covers.

Potential Expansion

One question for regulators in other states is whether the subscription is directly linked to betting activity. If so, a regulator could subject the fee to the same tax treatment as sports wagering. Sigdahl can see the concept possibly passing by state gaming tax, while Bussmann views a scenario where others could follow New York.

“If this works in New York, I could see DraftKings rolling this out to states like Illinois and others that have high tax rates, with the eventual goal to roll it out across the entire portfolio of states,” Bussmann predicts.

As with companies such as Robinhood, DraftKings can broaden the subscription service with other perks. Mike Dzikowski, a self-proclaimed DraftKings armchair CEO, suggests that the operator can add sweeteners such as bet insurance to the subscription program. Investors should expect more clarity from DraftKings when the company releases 2024 fourth-quarter results next month.

“As we test this new offering, we’ll refine our approach in order to provide the most engaging customer experience,” Gottlieb explained.