Deep-pocketed U.S. sports-betting firms are paying hundreds of millions of dollars to lure American gamblers to their apps and websites. Unable to keep up with the spending spree, Canada's theScore (SCR.TO)(SCR) has eked out a virtually imperceptible audience in the U.S. states where it has launched its wagering app.
Analysts expect the David and Goliath-like situation to persist on theScore's "home turf" in Canada, with one expecting the Toronto-based company's Canadian market share to remain in the single-digits until 2030. Another sees theScore as an eventual acquisition target for companies looking to enter a market that could handle an estimated $28 billion in bets annually five years post-legalization.
The American sports betting industry has seen rapid growth since the U.S. Supreme Court struck down a law in 2018 that effectively banned commercial sports betting in most states. Today, companies like DraftKings (DKNG) and FanDuel are household names for sports fans south of the border, with the former boasting a market capitalization north of US$19 billion.
Canada's laws are catching up. The passage and royal ascent of Bill C-218 last month will allow bets on individual sporting events, opening a market with roughly the population of California to the sports betting industry at a time when the three largest U.S. states remain closed.
Ontario, Canada's most populous province and home to theScore, is expected to roll out its new gaming framework within weeks. The anticipation hasn't helped the media and gaming company's stock. Toronto-listed shares have fallen more than 60 per cent since their recent peak in February.
Chad Beynon, a New York-based analyst with Macquarie Capital, anticipates an intensely competitive market in Canada. He expects large U.S. players like DraftKings, FanDuel, Caesars Entertainment (CZR), and Barstool Sports will dramatically outspend theScore on marketing and promotion on both sides of the border as competition for customers heats up.
"Acquiring customers is all about marketing dollars and losing money right now," he told Yahoo Finance Canada in a phone interview. "A lot of companies are willing to lose hundreds of millions of dollars. That's one thing theScore isn't willing to do right now... I think that's one of the reasons why their market share is where it is."
The Toronto-based company's roots date back to a cable TV channel in the mid-1990s that initially broadcast a text-based scroll of sports scores and statistics. Since selling the TV network to Rogers Communications (RCI-B.TO) for $167 million in 2012, theScore has pivoted to a digital-first sports media model. Its main smartphone-based platform is one of the most popular sports news and data apps in North America.
The company has launched its "theScore bet" gambling app in four U.S. states New Jersey, Iowa, Colorado, and Indiana, with plans to double that figure over the next year. However, the expansion into gambling that began with a 2019 launch in New Jersey is weighing on its bottom line.
In its latest quarterly filings, theScore reported $8.9 million in media revenue, and negative $2.5 million in net gaming revenue. The company says its net gaming losses topped $6.9 million for the nine months ended March 31, noting rising costs due to "higher customer acquisition costs and increased product marketing related to theScore Bet."
Beynon estimates the company will report its first U.S. net gaming revenue in the first quarter of 2022, with Canada following suit in the next three-month period.
While DraftKings operates in 11 U.S. markets versus theScore's four, its marketing spend is proportionally much larger. Sales and marketing spending by theScore jumped by $3.3 million year-over-year in its latest quarter to $5.2 million; a drop in the bucket compared to the US$228.7 million DraftKings spent during the same period, which was an increase of 325 per cent or US$174.9 million compared to the same time last year.
"They currently have between half a per cent and one per cent share in the markets that they're operating in," Beynon said of theScore. By 2030, he sees the company commanding a 1.7 per cent market share in the U.S., and 6.5 per cent of the Canadian market.
John Levy, theScore's chairman and CEO, has been unflinchingly optimistic about the company's ability to leverage its brand and media audience into a formidable base of Canadian sports betting customers. The company was among the most vocal supporters of Bill C-218 as the legislation worked its way through the House of Commons and the Senate.
"This is our home turf, man," Levy told the Toronto Star newspaper in May. "In Canada, we already have that huge level of engagement and love of the brand. If you add [the digital audiences of] TSN and Rogers together, they don't come close to us, and DraftKings isn't close to us. There's going to be wide-open competition [in Ontario] and we're not shying away from that. It's going to be a different ball game with us being able to lead out of the gate."
Canadian media giants Rogers Communications and TSN owner Bell Media (BCE.TO) voiced support for a legal single-sports betting market in Canada while the legislation was being debated by lawmakers.
'Attractive for a potential acquirer'
Matias Dorta, an analyst at New York-based Roundhill Investments, says he has not seen theScore crack the top five sportsbooks by revenue in any state where data is available. Like Beynon, he expects big U.S. gaming players to remain on offence with heavy-handed spending at home, before pushing hard into Canada once the market opens up.
"In the current state of the market, Canada is going to be one of the biggest opportunities in North America," Dorta told Yahoo Finance Canada in a phone interview. "We don't have any of the big four [states] ready yet. New York just approved, but is not live. Florida is going through the process. And there's still nothing from California or Texas."
The US$358-million Roundhill Sports Betting & iGaming exchange-traded fund (BETZ) includes shares of theScore, as well as major U.S. gaming firms, among its assets.
Dorta and Beynon each see the conversion of theScore's media audience into paying sports betting customers as key to the company's near-term success. TheScore said last week that its main app recorded 470.2 million user sessions in its third quarter.
Dorta says DraftKings, for example, has been able to convert about 60 per cent of its daily fantasy sports users to its paid gambling apps in states that have legalized sports betting.
"I think theScore will have a similar type of experience in Canada," he said. "Their diamond situation is what they could potentially have in Canada."
"[The] customer acquisition cost is US$200 to US$600 in the U.S., so it really comes down to how valuable their database really is," Beynon added.
Dorta ultimately sees theScore as an acquisition target itself. He wonders if the company is looking to "conquer as much land as possible" in markets where its betting app is legal ahead of a deal.
"Even just the footprint is valuable," he said.
He points to Las Vegas Sands (LVS) as one potential suitor. The Nevada-based owner of The Venetian casino and resort announced plans last week to invest in digital gaming technology.
"You look at an operator like that, and someone like theScore, who let's say does take a meaningful market position in Canada, and then just has the licences and fiscal [details] figured on the U.S. side, being live in like 10 states, that could be attractive for a potential acquirer," he said.
"I think it's kind of similar to another legalization story that we're seeing, which is cannabis. It's a similar concept, where there is strategy to just being able to operate in these states. There's value there. And I think that's maybe the approach theScore is taking."
Asked about his view on theScore's potential acquisition, Beynon said: "We believe SCR wants to run the company their way."
When asked about the company's potential acquisition, a spokesperson for theScore told Yahoo Finance Canada in an email: "As a matter of policy, we don't comment on market speculation."
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.