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Lawsuits and market data have revealed the extent to which US online gambling companies rely on VIP players to grow revenue, but just how vulnerable is this reliance on big spenders to a regulatory backlash?
Many gambling markets, along with many consumer and luxury industries, are skewed toward big spenders.
The importance of VIP betting in the US has been highlighted by this year’s New Jersey online gambling monthly reports, plus a combative lawsuit between two major US operators: DraftKings and Fanatics.
In various markets in Europe, loyalty programmes that seek to extract high volumes of revenue from VIP players are discouraged or effectively outlawed.
In many cases these tough regulations were triggered by high-profile problem gambling cases centred on players who had lost large sums after being plied with special treatment by gambling companies, demonstrating the potential for regulatory risks in a US market where there are currently less specific rules addressing VIP programmes.
New Jersey Division of Gaming Enforcement data suggests that VIP programmes are causing wide swings in revenue in the state, with sports-betting revenue for Fanatics’ PointsBet soaring ten-fold from December to $28m in January, falling to $7m in February, and rebounding to $20m in March, catapulting the company to a 23.5 percent market share from low single digits just a few months earlier.
Fanatics’ rapid growth appears to have come at least partly at the expense of DraftKings, as it fell to a 20 percent sports-betting market share in March, or third place behind Fanatics and FanDuel.
That swing may even be due to a single customer, according to California-based consulting firm Eilers & Krejcik Gaming, who cited sources describing that customer as “the biggest losing player in the regulated market by a mile”.
However, the company contends the statistics may not be alarming.
“Gambling is far from the only business that leans on VIPs,” said Chris Grove, a partner with the firm.
“Some operators rely more on VIPs than others,” he said. “The concentrated nature of VIP play and the competition for those players mean that the ultimate value of VIPs may not be as significant as the [gross gaming revenue] numbers of a given operator suggest.”
Still, the changing dynamics of the New Jersey market also coincide with a high-profile lawsuit this year between PointsBet-owner Fanatics and DraftKings.
Two DraftKings executives have claimed in court testimony that they were offered up to $10m to jump ship to Fanatics by ex-DraftKings VIP representative Michael Hermalyn as part of what DraftKings called his “disloyal scheme”.
Hermalyn has denied stealing trade secrets and making such offers, but a judge’s preliminary order has barred him from using confidential information and soliciting DraftKings employees.
It is questionable whether many operators could be profitable in many US states without a heavy reliance on VIP gamblers, according to one London-based consulting firm.
Regulus Partners’ Paul Leyland used the 80-20 principle to contend that only an operator “confident of bagging whales” along with a critical mass of regular users can succeed in the fragmented and costly US market.
The so-called Pareto principle suggests that many businesses get 80 percent of their revenue from 20 percent of customers.
In 2019, 5 percent of players made 75 percent of bets and wagered 65 percent of the money on New Jersey’s regulated online gambling websites, according to a 2020 Rutgers University study.
If a “public-political backlash” against sports betting triggers regulations “that impact the attractiveness of the market to VIPs and regular users, [it] risks completely hollowing the market out”, warned Leyland, a former William Hill executive and equity analyst.
Any US operators that rely exclusively on the mass market would “have absolutely no chance of generating a return”, Leyland said.
Are the risks growing?
In recent months, VIP programmes offered by US operators have started to court a greater degree of media and regulatory scrutiny.
A February Wall Street Journal article detailed the case of a Pennsylvania psychiatrist who reportedly won $500,000, then lost nearly all of it in one day.
The player then gambled away $400,000 of her own money. She reportedly received bonus credits, encouragement and gifts from VIP player representatives at DraftKings and PointsBet.
Citing internal company documents, the Wall Street Journal reported that VIP sports bettors representing 0.5 percent of PointsBet’s player base generated more than 70 percent of the company’s revenue in 2019 and 2020.
Fanatics, the sports retail giant diversifying into sports betting, acquired PointsBet’s US operations last October for $225m. On May 8, it launched its own brand in New Jersey and said it transferred all PointsBet players to its own operations.
Citing the Journal story, U.S. Senator Richard Blumenthal, a Democrat from Connecticut, wrote to the CEOs of eight prominent online gambling companies in March, asking them to provide specific information about their VIP operations and urging them to “end any promotions or marketing practices that encourage ‘high-value gamblers’ to continue spending money through exploitative bonuses, credits and enticements”.
The Pennsylvania psychiatrist’s ordeal is not unique, claims Les Bernal, national director of Stop Predatory Gambling, an advocacy group that opposes legalized gambling in the US.
Bernal said the non-profit group is currently working with a midwestern businesswoman who lost $2m over six months gambling online.
“There was no previous indication this person would ever have become an addict,” Bernal said, claiming that VIP representatives “were putting $3,000 to $5,000 in this person’s account every week”.
VIP programmes are “based on exploitation, taking the casual player and turning them into an everyday gambler”, Bernal said.
Others are also critical of VIP practices in the US market.
Most US operators offer responsible gambling tools, including a time-out feature that allows players to temporarily exclude themselves from gambling for three days, noted Isaac Rose-Berman, who writes a blog called “How Gambling Works”. He also describes himself as a “professional gambler”.
But when those players return after their time-out, they are sometimes offered bonuses to continue gambling, Rose-Berman said.
Rose-Berman also noted that promotional bonuses are generally far more generous in the US than they are in the UK market.
For VIPs, a standard offer is “50 percent of your next deposit up to $3,000 matched in bonus bets”, which means someone who deposits $3,000 gets $1,500 in bonus bets, he said.
But Rose-Berman said he has seen 100 percent matches up to $5,000, and 50 percent matches of up to $10,000, while players may be provided with “a bigger, more generous offer” after losing their entire balance.
The VIP crackdowns
In the more mature online gambling markets of Europe, policymakers have enacted regulations that have made VIP programmes difficult if not impossible.
In Germany, for example, gamblers are subject to monthly €1,000 ($1,077) deposit caps across all operators, with the only exception being if operators apply for individual players to exceed the cap and adhere to strict standards.
Sweden only allows bonuses at registration, so any loyalty programmes cannot offer incentives of financial value.
Gustaf Hoffstedt, head of the Swedish Trade Association for Online Gambling (BOS), said some operators have completely stopped catering to VIP gamblers, and have set a deposit cap, typically €2,000 a month.
He said he believes companies that set the deposit cap have lost customers, partly to companies that have not set a cap, and the rest to unlicensed operators.
Hoffstedt also cited statistics that suggest that pandemic-era caps on bonuses of €10 and weekly deposit limits of €500 triggered an erosion in channelisation, particularly in online casinos.
“It is a bad idea to only create a legal market for low- and medium-volume gamblers,” he said. To keep players in the licensed market, “allowing certain VIP offers may be a price we must be prepared to pay”.
The UK, still the world’s largest single regulated online gambling jurisdiction, does not set deposit limits or ban VIP bonus programmes.
Instead, the Gambling Commission has introduced tightened due diligence guidelines, adding requirements for licensees to establish that a player’s spending is “affordable and sustainable” and part of their leisure spending, to assess whether there is evidence of gambling-related harm and to stay vigilant for signs of such harm.
The commission’s 2020 guidelines followed a survey that showed at least one operator got 83 percent of deposits from 2 percent of players.
The commission also found that VIP schemes were mentioned in 70 percent of regulatory penalties for failures to prevent problematic gambling.
For example, in 2020, Betway was assessed a then-record £11.6m ($14.5m) for VIP-linked violations between 2014 and 2017.
The UK’s Betting and Gaming Council trade group responded to the regulatory scrutiny with voluntary guidelines for members, including barring under-25s from VIP programmes, and ending incentives based on player losses.
The Gambling Commission has no independent numbers on VIPs, but operator statistics suggest that VIP gambling business has fallen by 70 percent to 90 percent since big fines started and the guidelines were rolled out, according to Tim Miller, executive director for policy at the regulator.
Miller contends that although there is no reliable data on whether big spenders have fled to the black market, the regulator’s tighter rules have not significantly hurt channelisation.
There are no equivalent restrictions to those of the UK, Sweden or Germany in the US as things stand, although some states do have regulations that touch upon higher-volume players.
For example, New Jersey rules require operators to automatically monitor player activity and intervene with a responsible gambling message or more direct action based on certain triggers, such as deposits of more than $10,000 in a day or $100,000 over a 90-day period.
New Jersey, New York and Connecticut are also among states that require players to acknowledge the availability of responsible gambling tools when their lifetime deposits exceed $2,500.
Spokespersons for the American Gaming Association (AGA) and the newly formed Responsible Online Gaming Association (ROGA) did not directly comment on whether more rules or guidelines should be in place for US VIP programmes.
ROGA said its goal is to fund research to help “drive responsible gaming education and awareness and encourage responsible advertising and marketing practices within the industry”.
The AGA said it works with regulators and the federal government to help “promote responsibility, protect consumers and safeguard competition integrity”.
“VIP programs uphold these commitments, deploying extensive Know Your Customer protocols alongside customer service representatives trained in responsible gaming promotion and problem gambling prevention,” a spokesperson said.
A Fanatics spokesperson referred Vixio to the AGA’s remarks.
DraftKings did not respond to requests for comment for this article, but the company’s head of responsible gaming relations, Christine Thurmond, spoke on a panel addressing VIP policies at last week’s SBC Summit North America, held in New Jersey, where operator representatives unanimously said that they had never been prevented from intervening with a potential problem gambler because of a commercial relationship.
“People can ebb and flow in this space and you kind of have areas where they go into risky behavior and then they come back out,” Thurmond told SBC Summit delegates.
“What we want to make sure is that we all agree that problem gamblers, people who have trouble controlling their gambling, it’s not a sustainable player base.
“If it gets to a point where somebody is really having difficulty and they’re communicating with our customer service and our player protection team engages with them, we do not have a problem saying ‘okay, this is it, you're not allowed to engage with our platform anymore’,” Thurmond said. “And I think, ultimately, people probably appreciate that.”
Additional reporting by Matt Carey.
