Where Opportunity Meets Ambiguity: Will Licensed Operators Soon Enter The ‘Sweepstakes’ Space?

“Rumors.” “Murmurs.” “Rumblings.” These are the words gambling industry insiders are using to answer the question of whether they’ve heard about any regulated U.S. sportsbook or casino operators entering the red-hot arena of social gaming with sweepstakes prizing.

You won’t get anyone on the record saying, “Oh, yeah, Operator X is building out a sweepstakes site right now.” But everyone has caught wind of some unconfirmed nugget of some sort.

The social-with-sweeps space has the rapt attention of the gambling world. There’s money to be made, there’s a relatively low barrier to entry, there’s controversy and debate over its legality as an unregulated gaming product — it’s the vertical that the industry can’t get enough of. And as the regulated operators fight tooth and nail (or boost and whale) for their slice of the pie, they’d be foolish not to at least consider opening sweepstakes-oriented gaming sites.

Especially when there are still 12 states with no form whatsoever of legal sports betting and 43 states that don’t permit regulated online casino play. That adds up to a lot of customers who can best be reached by companies with social/sweeps options.

“There are already regulated content and service providers working in the social sweepstakes space, and there are certainly murmurs of more regulated actors, including operators, getting involved,” said Matt Kaufman, the managing director of digital & interactive gaming for market research and consulting firm Eilers & Krejcik Gaming.

Would entering the space be the smart move for those operators at this point?

“I honestly think the answer depends largely on the operator’s relationship with whichever regulator issued them a license,” Kaufman said. “I think there are currently companies whose in-house attorneys have OK’d launching a product in terms of legal compliance, but for whom the threat of a regulator potentially revoking their RMG (real money gaming) license is the major concern holding them back from actually doing so.”

Predicted movement in 2025

During the Global Gaming Expo (G2E) in Las Vegas a couple of weeks ago, Eilers & Krejcik delivered a presentation on the state of the industry, and it contained a couple of predictions for 2025 relevant to the RMG/sweeps crossover. One of them: “A retail casino will acquire or launch a social sweepstakes casino.” The other: “There is a significant M&A event involving the online gambling and sweepstakes gaming verticals.”

The analysis continued, “The regulated operator who finds comfort with the social sweeps model (or iterates the model to one they’re comfortable with) will be rewarded with a massive competitive advantage.”

FanDuel is currently the No. 1 operator in the regulated U.S. space, and Peter Jackson, the CEO of its parent company Flutter, gave every indication while speaking separately at G2E that his company will not be first to pursue that competitive advantage.

“We are only focused on operating in areas that are regulated,” Jackson said. “To the extent that these things are regulated, we will participate.”

(It should be noted that Flutter does currently operate unregulated businesses in the U.S., as DFS is unregulated in many states and the “skill game” known as FanDuel Faceoff is not regulated.)

Whether and when social/sweeps will become regulated is very much an open question. In September, a group of 11 companies operating in the space formed the Social and Promotional Gaming Association (SPGA), a trade group that, among other aims, strives to address social gaming’s legality and potential future regulation.

“The SPGA and its members support any legislative or regulatory developments that bring increased clarity to the sector and actively engage in dialogue with policymakers on these topics,” an SPGA spokesperson told Casino Reports. “With that said, it’s important to note that sweepstakes promotions are regularly employed by a wide array of businesses in and outside of gaming, including numerous blue-chip consumer brands. There’s also robust consumer demand for social casino products and a documented history of augmenting that demand with sweepstakes and other marketing promotions.”

In essence, the SPGA’s stance is that social gaming with sweepstakes prizing is in no way illegal, even if it may be unregulated. But as long as it exists outside the strict parameters of regulation, FanDuel’s stated plan is to stay away.

There is already some intersection

That’s one major operator’s view. But others are dabbling — if indirectly.

BetMGM does not have a sweeps-connected operation, but MGM is a shareholder in PlayStudios, which incorporates MGM’s IP into social casino products. There are also slots game manufacturers — not regulated operators, though many of them work with regulated operators — that own social casinos or provide content to them. And most social casinos run sweepstakes contests, even if it’s not the core of the business for all of them.

So there are existing connections, with one or two degrees of separation for the most part, between regulated operators and sweepstakes gaming.

Per the Eilers & Krejcik predictions mentioned earlier, even if a FanDuel, DraftKings, MGM, Caesars, etc., doesn’t launch its own social/sweeps site, one of those companies acquiring such a site is well within the realm of possibility.

“The question of M&A in categories outside the gaming regulatory structure is ultimately a question of how the commercial opportunity intersects with the regulatory ambiguity,” said Chris Grove, a partner emeritus and strategic adviser to EKG. “Many major licensed gambling operators and suppliers offer products or service markets with no existing licensing or regulatory structure. So, there’s obviously some threshold level of comfort with participating in an unlicensed or unregulated business. Where you set the slider on that as a regulated operator or supplier varies from company to company, and the size of the opportunity is a factor in that decision-making for most. It is a balance between risk and reward.”

The potential reward is two-fold: Launching a sweepstakes casino or sportsbook can generate profits directly through patronage of the site, and it can build a player database — something of particular value on the iCasino side given how few states currently regulate the activity.

“I think the benefits extend in both directions,” said Kaufman. He noted that VGW, which operates Chumba Casino, LuckyLand Slots, and Global Poker, has publicly available profit-and-loss statements, which show the company generates a modest 11% EBITDA margin. “So this is not a fantastic model from that perspective, but obviously with enough revenues, even a relatively weak margin can result in a strong business overall.

“I’ve been a proponent of leveraging social sweepstakes casinos as a database building tool; I think the regulated casino market would love to go back in time and get a second shot at entering the DFS space early on, as we now see the immense power that databases can have. Building a customer base of adults who like playing casino games can certainly be a powerful advantage when more states legalize and regulate RMG online casinos.”

How the industry evolves

Kaufman’s reference to the early days of the daily fantasy sports space is apt. DFS emerged from a few enterprising individuals looking closely at the laws surrounding sports betting and online wagering and determining that, as long as athletes from multiple games were involved, fantasy sports contests with predetermined prize pools could exist as a workaround of sorts. (Later, the operators got more bold and introduced “single-game showdown” contests as well.) DraftKings and FanDuel emerged over time as the dominant forces in the DFS space, and then managed to successfully parlay that into positions atop U.S. regulated sports betting.

The social/sweeps space is similar, in that a handful of entrepreneurs acted on their belief that the gaming would be legal as long as their sites feature two forms of currency and customers aren’t technically purchasing the one that can convert to real money — and gradually, the model gained steam.

“This is one of the primary ways the industry evolves,” Grove said. “Sometimes these new models get there, and sometimes they don’t. No one can tell you for sure how this one will work out, but what I can say for sure is this is just the latest in a long line of new products that ultimately drive innovation, evolution, and growth for the regulated gambling industry.”

For those regulated operators who are sheepish about leaping into the sweepstakes game, there is the option of dipping a toe with a purely social-model, free-to-play site, one without sweepstakes prizing or the opportunity for customers to make cash withdrawals.

We asked Kaufman if running a social casino would ease the transition to doing so with a sweepstakes element.

“The transition from a traditional social casino model to a social casino with significant sweepstakes prizing is actually fairly complex,” Kaufman responded. “While traditional social casinos don’t run KYC (know-your-customer) or AML (anti-money laundering) checks, payment processors require social sweepstakes casinos to take the same approach to KYC/AML as real-money casinos due to the potential for users to receive cash prizes. There are also a variety of other operational considerations including collection of sales tax on in-app purchases, where most traditional social casinos rely on Apple, Google, and other third-party app stores to collect tax for them, but most social sweepstakes casinos are web-based and are independently responsible for sales tax where it’s applicable.”

So, going from social to sweeps isn’t as simple as taking a fully baked cake and spreading a layer of icing on it. That said, regulated operators already have experience with KYC, AML, and tax payments. So perhaps this is an approach to watch for, a major operator launching (or acquiring) a social casino without sweepstakes prizing and then enhancing the product with sweeps later.

If you believe all the rumors and murmurs, some of those moves are already being made. It’s just a matter of making sure the reward outweighs the risk before they go from rumblings to releases.

“Social sweeps M&A is hypothetically interesting to regulated operators,” Grove said. “But I think most regulated operators will want less regulatory ambiguity around the category before committing to any major M&A.”