DraftKings Inc. (DKNG) Earnings Call Transcript & Summary

But your folks are lobbying the regulators to intervene?

I would say more, we want to understand what the constraints of what we can offer are. And I think that that's part of where we are right now in the space, right? There's going to be people -- companies that are pushing the limits. And I think for us, having clarity. Again, it comes back to competition. We want to be able to compete. So we want to be able to offer the same things that anyone else out there offers. And then once you do that, then it's competitive. And it's great for the consumer. And whoever has the best experience and whoever has the best operation comes out on top. So I think for us, having clarity on what we can do and what we can't is important, and I think the same rule should be applied to everybody. So that's really where it comes from. But to Amy's point, I'm not a lawyer, I don't think Amy is a lawyer.

I'm definitely not a lawyer.

I can't opine on these things. I think it's up to the states to decide what we're seeking is, "Hey, what can we do? What can't we do?" And in a perfect world, we'd like to be able to offer the same thing that anybody else can. And if we can, then great. And if that's what maximizes competition, and that's what creates the best environment for consumers.

Are you concerned at all about the -- it's been brought up to me in other conversations that there's an unfair playing field if fantasy sites are offering parlays that look exactly like the parlays that get offered on legal sports books?

Well I think if you start with, and let's maybe for a moment park the question of any particular ones, but more generally speaking, I think everyone would agree that if a product is legal in a state that anybody who can get a license and qualify and meet all the criteria and all that should be able to offer it. And if it's illegal, then it shouldn't be offered, and there should be some sort of enforcement taken. So what that actual definition is, I agree with Amy, is not up to us to decide. But I do think that hopefully, nobody would disagree with that. So once you have that definition, then I think going out and applying it in a consistent manner, where if there's a product that is legal and we're able to offer it and compete, then we can. And if there's a product that isn't, then that's clear, too. And I think that's how you create not just the best environment for company -- for companies, but for consumers. Because again, it's up to the states, if they want to offer -- if they want to allow unregulated products in their market that in some cases don't have consumer protections or KYC or other things, that's up to them. But in the end, we expect to be treated the same way. So if you want to regulate something, regulate it. If you don't, don't, but I don't think that having inconsistent rules for different companies is in the best interest of the consumer competition.

Do you recognize, because you went through the founding of DraftKings as a fantasy sports site. Can you see that playbook? Have you been there before? Have you been where you're trying to navigate different regulations and laws in different states? I mean, is that something that you recognize from these smaller competitors?

Well, I think we recognize that now. I mean it's the same thing where -- it's exactly what I'm saying. Like it's figuring out as it's being built, what the right rules are and how to best follow them. And so I think looking back at that, yes, I do think Daily Fantasy Sports is a great example of a product that went through regulation. It is now regulated in a lot of states and there's rules that are clearly defined and need to be followed, and I think that's great. I think that's how we got to a place where it was clear for us, for consumers what was legal, what was allowed, and I think that's a great outcome for everybody. So definitely had our own experience navigating that and I actually think it's very similar to now because we're still figuring out around the nation/states legalized. They're mostly similar, but some of the laws are a little different than others. Some of the regulations are different. And sometimes, it's not exactly clear, right? So you have to go and say like, "Okay, this is what it says. What exactly do you mean? What do you want us to do." But I think that, that also is it creates opportunity because if you can figure out what the exact constraints are, what's possible, it actually creates lanes of innovation. One of the things about regulated markets is there is friction put in place for consumers, like that's part of regulation and it's deliberate, and there's a reason for it. It's to do things like preventing miners from getting on and stuff like that. So creating an experience where you are minimizing the friction for the people that you don't want to create friction for that actually are the right people, responsible gaming, age, all those things, and still having the appropriate controls in place to protect the vulnerable, to make sure miners aren't using the product. I think that is a lot trickier than a lot of other products that don't have that same constraint, but it also creates an opportunity to really figure out how to innovate and create a smoother customer experience.

Yes, Contessa, I think the -- that to me is one of the real issues here, right? When the lines start to blur between games of skill and real money wagering and you don't have the same KYC protections that we have. If you're -- it's very clear. You're 21 and up and you can bet legally. And when those lines start to blur and you're inviting a younger audience into, I think, what many would consider to be real money wagering, that's a very clear line. So I think that's, again, it's up to the states to adjudicate that. But when we spend a lot of time focused on responsible gaming and making sure that we're educating even the 21- to 25-year-old that we know is more at risk. That's where I think it starts to become a concern.

What's the role of artificial intelligence in this industry moving forward? How is that going to morph and change how you operate?

Listen, I think, let's be honest, AI and many forms of disruptive technology is an area that we're all trying to figure out as quickly as possible. And I'd argue as an industry, we're probably barely scratching the surface on what we can do. Look at Bill Miller, he brought a guest speaker to one of the AGA events, a gentleman named Mike Steve who is the founder of the Disruptive Technology Center at Stanford Engineering. And it was fascinating for him to talk about the pace of change is exponential for technology, but the ability for corporate America to keep up with that, that gap keeps widening every day for us. Listen, I think it's endless on the opportunities in terms of the actual personalization of the experience. We're using a lot of it in our customer operations and be able to service our customers, both more effectively and efficiently. One of the things I love is the use of AI for responsible gaming, right, to be able to use artificial intelligence too in sophisticated data to spot problem behavior before it becomes an issue and to be able to proactively take action. So I think there's a lot of upside. The flip side, you've talked a lot about cybersecurity and threats. You've got a lot of bad actors who are also using this technology to very specifically target platforms and individuals. And so I think we need to understand both sides of the equation.

Isn't there a potential there, too, for all of this data and information and this incredible, the algorithms that feed us -- and we've seen it in social media that can pull you further and further to the extremes, right? It just feeds you more. Is there a potential downside to all this technology when it comes to gambling that, "Yes, you're getting all this information? Yes, you can disrupt the behavior and provide some stop gaps and some protections." But it also could be used to lure people into being habitual right on the border problem gamblers?

Well, first, I think what you're talking about with AI, and AI is sort of a loaded term because like there's a lot of things people refer to as AI that are really machine learning or that broad category and what you're describing is an issue everywhere. I mean I hear stories of Armageddon coming, like Terminator is going to happen because of AI. So in any field, any industry, applying a technology that powerful in the wrong way can certainly do bad and applying it in the right way can be very powerful in the good -- in the positive direction. So I don't think we're any different in that sense. But it's, again, the responsibility of the operators in the regulated market who have some oversight to make sure that they're doing it the right way. But again, it ultimately falls on the operators just like every other industry to make sure we're being responsible in using the technology for a good purpose and not in a way that creates any negativity.

There's also -- I look at pickle ball, which my producer is a fanatic about.

[indiscernible]

It's a fun game.

I know because now I've played it.

It's good, isn't it?

And yes, all it takes is one amazing whack and you're like, "Hey, I can be good at that, like golf. One great shot. Yes, you could be a great golfer, if you just played more". But there's so many sports now. It's not just football. You mentioned the prevalence of women's sports. How fun is it. I mean this whole city is crazy over F1 and what's coming down the pipe, how fun is it to think about using the platforms to give people an opportunity to experience new sports?

Yes. I mean to your earlier question around where can our products go, right? And we think about this both in terms of the assortment and the experience, but there's still a lot of categories, right, that we haven't fully penetrated. F1 is a great example. It's going to be here in November, though I'm sure you saw the same thing, but the engagement for the Miami F1 event was phenomenal, there'll be hundreds of selections and great promotional offerings. And I think it's another -- it's the narratives that are emerging around events like F1 are really exciting. The other thing that we're experimenting with right now and you can do that a little bit easier with some of these once you step outside of the NFL and the NBAs, the ability to experiment with some of these -- the live streaming and the integration of the live event with betting. I think there's still more runway there as well.

In fact, when we were talking about what other technological advances need to happen. What about latency? Where does that stand in terms of disrupting in-game betting?

I mean I think one of the biggest challenges for in-game betting is the latency because people want to be watching the game, not just following it on the app when they're betting. And I think having more low latency options for customers will 100% increase live betting. I've tried it in different sports, and it's hard when you're watching. You're like a play behind and that's either confusing if it's like a live bet that has nothing to do with the next play to virtually impossible if you're trying to bet on the next play. So I think it's a big opportunity and key to unlocking live betting.

And in this room, I'm sure that there's a lot of people who would love to be supplying the technology or the systems or whatever that propel your sports books. How much are you still looking out of house for that kind of advance? And how much are you bringing in-house to do it yourself?

I'll start. I mean, listen, there's certain -- historically, our philosophy has been for the core bedding product in the engine. We want to try to control that as much as possible. But we work with tons of third parties and many of them are in this room, right? Whether it's data suppliers or geolocation services, payments providers. There are certain parts of the value chain that candidly just don't make sense for us to own. What's important is to make sure that those integrations are as tight as possible, right, because those third-party integrations potentially can pose vulnerabilities. But there's -- this ecosystem exists because in some cases, we actually shouldn't own certain parts of the value chain.

Yes. I mean, I think I completely agree with Amy. There will always be third parties we partner with. It's too complex of a product to think that 100% will be in-house. The way we think about it is really along two dimensions, what we want to bring in-house in terms of prioritizing. One is anything that from like a cost perspective is just getting very expensive and there's ways partners will, as you get volume, give you discounts and things like that, that offset it. But sometimes, it just becomes so expensive that the investment makes sense to bring something in-house. The second way that we look at it is where we feel like we're being held back in some way from being able to create the product and the experience that we want. And that could be either because there's just certain things that we want to build or do that we can't do unless we have control over other parts of the ecosystem or performance issues. If you have a third party that you're relying on, it's continuously going down or having performance issues, like -- so that's really how we look at it, is if the product experience can be better in a way that matters and is going to be needle moving, then that's one way. And then if it's really expensive -- but there will always be things that for a variety of reasons, either because it's not our wheelhouse and expertise or because we just have a great partner that's doing a good job, and it doesn't make sense for us to bring it in-house and I don't think that will ever change. So.

When you were watching the impact of the cyber intrusions at Caesars and at MGM, did you -- how did you treat that internally with your people? I mean, was there a refresh or a rush to make sure that your cyber insurance is up to date. What was your reaction, Amy?

Listen, I'm sure Jason is -- your company is the same way. It has to be a top priority, right? If you look at the reason consumers come to our platform in the first place is because they trust us right? They are giving us some of the most confidential and sensitive information we're like a financial institution. And listen, I think this is a job where you're never done. You're fighting a war on -- you have to have multiple lines of defense. There's no one tool or technology. So you're working with best-in-class providers. That being said, there's always -- because bad actors are so sophisticated, there's emerging trends that we all need to help each other spot. So on the one hand, it's always a priority. On the other hand, these moments are also wake-up calls to say that you just -- you have to be vigilant, it is a 24/7 battle. I do think it's one of those areas. Obviously, there's a lot of competition with folks in this room, but I think this is an area like responsible gaming and other areas where we can collaborate and share insights and learnings, right? And when we're spotting behavior, whether it's here in the U.S. or overseas, that we're sharing some of those insights with one another because I think it's ultimately it's best for our consumer and for the industry.

Yes. I think that last part is very important. I mean, there are a number of areas that our companies collaborate on. This is absolutely one of them, and it's in no one's interest. I mean I feel really bad for MGM, especially like that was tough, and it can happen to anybody. It's not like they're a bad company. It really can happen to anybody. And the reason it can happen to anybody, and this comes back to your question on what do we do. The one thing we did is we went back and reminded employees of this. Almost every time this happens, it's not because you had some security glitch or you didn't have the proper protection. It is because somebody on the inside, whether intentional or they got phished or something like that. Somebody got ahold of their credentials, that is almost always how it happens. And these phishing attacks have gotten really sophisticated. I get things sent to me that look what Jay, and I'm not sure, and I send it to my security team to check it out.

To the point sometimes where legitimate e-mails, you look at it and you're like -- you suspect that they're not legitimate. So it's very confusing.

I know, I've had emails I've forwarded to my security team, like is this is real? They're like, "Yes, like you should respond to that person. How long has it been since they wrote you." Totally -- I mean it's very sophisticated, but it is almost -- we used it as an opportunity to remind our employees, "Listen, when this happens. It's usually not because we had bad security systems, it's because somebody got duped or somebody was a bad actor on the inside. And we got to just always stay vigilant. It is everyone's responsibility to be looking out for this. Even if you don't get phished, if you see it, report it, because other people in the company are probably being scanned by the same attack." And I think it's just something that everybody needs to own and keep top of mind because that -- I mean, it's not always that usually is what happens. It's usually something like that.

Well, and we saw it not just with the cyber intrusions, but even in the summer where there were casino highs that were because of social engineering. And...

Totally.

And solving for -- by the way, that's how singularity happens, that the AI is trying to solve for human inefficiency...

For AI, you can have somebody call you. It sounds like your boss, and like it's an AI. And I mean there -- it is getting more and more sophisticated how they're doing this. And AI is going to take it to the next level because you can have somebody that looks and sounds like somebody you trust coming and asking you for information. It's just -- it's going to definitely be something over the next 5 to 10 years that -- it's already, but I think even more so, you're going to see innovation in the hacking and in the cyber crime space. And it's another one where I think we need to do our part, but also really important for law enforcement to take action and to focus on this because that's the biggest deterrent is that people are getting caught and they're being caught punished for it.

I want to talk a little bit about big media. Of course, ESPN coming in [indiscernible] and a customer base in a different way. Amy, how has your focus on media played out? Are you finding a return on that investment already? Or do you think it's going to take longer buying the TV network, TVG and rebranding at FanDuel and -- what's your goal in terms of using media to power the business?

Yes, I think there's 2 parts to that. One is, obviously, FanDuel and DraftKings have invested significant amounts of money in media over the course of the last, really, decade to build the brand to make sure that we're driving the right levels of acquisition to our platform. And I think we've been very thoughtful about what deals we do and what deals we don't do. And there's obviously lots of different channels that we're trying to reach consumers. And I think we're at that tipping point, especially with NFL, wherein as more of the population comes online, where the shift goes more towards national media. So there's I think one element, which is just how does your media strategy evolve as you go from a relatively low percentage of the U.S. being legalized to a majority over time? For us, for FanDuel TV, we had the assets, right? So we owned and operated a linear TV, OTT apps. These were assets that were going through millions of house. It was with the TVG brand and in horse racing exclusively. So the vision behind it was really quite simple, as I say, we have these amazing assets, but it's not doing anything to build the FanDuel brand. So effectively, what we've done is try to leverage this as an always-on marketing channel, and racing is still very much at the core. We now have our racing product integrated into sports book and so the combination of that with great talent has been really compelling. But we've also experimented with [ great shoulder], premium content with Kay Adams and Shams Charania, who's very well known in the NBA community. And really, that becomes a content creation vehicle for you where you're able to push that to multiple distribution platforms, right? Social, digital, fast channels over time. So it's been a great 1-year experiment, and we're still evolving the strategy.

What about iGaming. I know that you -- DraftKings has made some real headway and so has FanDuel in the competition in the iGaming space and part of the -- I mean Rhode Island is going to happen a monopoly now when they launch iGaming. Where do we go from here? How do you continue to grow if more states are not willing to embrace regulation rounds iGaming?

I mean, first, I think they will. I don't think that -- sometimes things happen over time, and everybody is excited and we all want it now. But it takes time, especially when it comes to legalizing and regulating and all that sort of stuff. But I think it's going to continue to be something that we see more and more states take up. I think really, there's 2 elements that I think are important. One, which I think is already pretty well known is the amount of tax revenue that can be generated. But the other thing, which I think is actually much credit to the AGA for this, very well accepted and known in sports, but it's not yet with iGaming is that there's a large legal market. And I think that is a core piece of why states have, of course, like we don't want -- this is already happening in our borders, let's legalize what's regulated. Almost every offshore sports book has a casino tab. And there is a large online casino market as well. but nobody talks about it. It's not a social of an activity, I guess, and it's just not as well known. So I think we need to do a better job getting the message out there and educating people that it's actually quite similar to the sports story. There is -- this is not bringing something that people are not already doing into -- and creating that, it's actually taking a market that is quite large and already exists in an illegal zone and regulating it and doing it the right way. And so I think between sort of as time goes on, that tax revenue and also some education around, this is really the same story of sports betting. We're going to protect consumers, obviously generate the tax revenue. We're going to make sure that miners, the people with responsible gaming issues are protected, and we're going to do it in the right way. But you can't do that if you're pushing everything into the illegal market. So I think as more and more states and more people that clicks for them. And even by the way, in sports, it's still not -- even AGA has done an incredible job, there are still people that, you go around, they're like, "Yes, once we are betting on this, won't there be like some college kid that fumbles." So I'm like, "Don't you understand people are already betting on that game." It's not once we have. We already have it. It's do you want it in a way where we're actually catching people and doing this in a way that protects consumers? Or do you want to continue to relegate it to the illegal market? And I don't think that is as well known or thought about in the iGaming space?

Are you excited about the prospect, Amy, of iGaming being a bigger and bigger every year that goes by part of the overall business?

I mean it's an important part of the ecosystem. And I think one of the things that it's interesting to Jason's point, it's happening already, right, whether we want to accept it or not. The other thing is, obviously, this is a challenge if you're an owner of a big brick-and-mortar casino, but some of those casinos, they're either in the big destination markets or in some cases, in very regional markets. So I think over time, to Jason's point, if we can figure out how to thread that needle between the fact that it exists, the revenue is not going to the states. If you look at the numbers right now, only 13% of the population can bet legally or engage legally in iGaming, and it's a great experience, right? When you get that cross-sell between a sports betting user and iGamer, it just contributes to the overall ecosystem. Obviously, on us to make sure that we manage all that within spend limits and responsibly, but I think it improves the overall offering over time.

Last question, who's going to the Super Bowl, Amy?

Who do I want to go? The Buffalo Bills. We'll see.

Jason?

I'm going to the Super Bowl. You know that. It's going to be fun this year in Vegas.

Jason is going to be playing the Super Bowl.

I won't be on the field, but I'll be there. I don't know, there's a lot of great teams. It's definitely competitive. I mean, that's what you love about the NFL, is that the competition and the quality of games are just -- it's amazing. And it looks like right now, it's the Eagles or San Francisco in the NFC, but that could easily change with some injuries or just as the season goes on. So too early, I think, to be calling that, but it definitely should be an exciting game. A monumental moment, by the way, Contessa. I'm glad you brought up. That is a monumental moment having a Super Bowl here. Like, I think people haven't -- that is something that's going to be, I think, a really big moment for the overall industry. If you think about where the NFL or any of the sports leagues were less than a decade ago to actually think we have a team here, we're going to have a Super Bowl here, pretty cool.

Well, as I said yesterday, I lived in Wisconsin where if you don't join the Packers Colts, you die. And so I was really excited for the game the other night. I think a Raiders', Packers matchup is awesome. It was sad that it ended the way that it did, and I felt bad for my cheese heads out there, weeping into their beer, but what are you going to do? Amy, thank you, Jason. Thank you. Thank you all for having us. Appreciate that.