DraftKings Inc. (DKNG) Earnings Call Transcript

Well, I think if you replace the word lose with we need customers to spend money, then yes, and that's true of any business. businesses don't work if customers aren't spending money. I think one of the things that is a challenge is that there's a lot of people out there, all of whom really are not people that gamble. They don't like it. I do. I like it. And I want to spend my money. I think it's something that brings me entertainment. And I don't view it as losing money. I view it is spending money the same way if I go out to dinner and I order a nice bottle of wine and end up spending $100 more than I normally would have if I had eaten at home, I still like that experience, and I view it as something that is worth my money and I want to spend on. And so I think if you start from the stance that like somebody who's maybe taking that position is a believer that the only reason anybody would ever want to gamble is because they have some sort of addictive personality, because why would anyone want to place something where they know they're going to lose money, you're ignoring the fact that that's not -- that's not really what it is. There actually are people who like these products who enjoy them. The vast, vast majority of customers fall into that category. And those people want to be able to get the experiences that come with spending money just like if you went and stayed at a nice hotel and spend a lot of money there, you'd expect them to take care of you, too. So I think any rewards program on the planet, any loyalty, anything like that, that you see is generally geared around rewarding the customers that spend more with you.

And how does AI make marketing to customers and potential customers easier, better, more efficient?

I think the degree to which AI is used is a bit overblown. I think it's 1 of those things that is grown in article headlines because it's got a lot of attention now and people are generally fearful of it. But I think if you ask a lot of the people who are really -- who are commenting on. What do you think that means? Like what is AI? Like what do you think us using AI means? I think you get 10 different answers from 10 different people. So I start from the stance of like, I don't really view AI as what you're saying view is the thing that's helping us write code faster in QA code and all that sort of stuff. I think we are using machine learning in many cases, to be able to say these customers have these preferences, example you like the brewers, and that's in the effort to serve relevant content to them, not in an effort to try to target people to get them to do things that they shouldn't be doing. In fact, our entire company philosophically is built around the opposite of that. We tell people that is not the way to create a sustainable business. It's not the right thing to do. Obviously, there are people that shouldn't be using the products, and we do our best to try to help identify those people. We can't do it perfectly. But we are certainly not trying to proactively target those people. I mean, that's crazy. And it's actually kind of hurtful too, to be honest. I feel like there are a lot of -- I think people don't understand that when articles are written like that, that there's a lot of people working on these things. who unequivocally know that the things that are being -- the way they're being characterized, where we characterized is just not right. And they're actually trying to do the opposite. And it makes you feel bad when you're like people are out there saying they were terrible people, and it's just not. I never -- you ask anybody on our leadership team anywhere throughout the company, they will tell you we pre-responsible gaming. We absolutely tell people if you see -- we have a whole team that we refer people to when we -- instead of targeting them, we actually do the opposite. If we think somebody have an issue, we refer them to a specialized team that looks into their case. So it's just completely not how we're built and how we philosophically and practice operate. But listen, I think, again, it depends on the person. Some people just don't like gaming and they're like, well, you guys are just -- by definition, you're going to have to target people in a various way because who else is using the product. And I can't really change their minds on that if you're starting from a stance that we just don't like the industry, and we think that you're bad people.

And to that like you never get that from me because I also like gambling and relet happens to be my game, but I find it entertaining. And so I don't have this moral high horse decline. But when I read [ ProPublica's ] article written from the first person, I'm trying to lose and like when do the responsible gaming tools come into play or whatever. When that hits, is there ever for you, like this moment of, "oh, we could do this, okay, I'm going to learn from this, here's what we need to do better." That you go back and you talk to your team and go XYZ, let's do this differently in the future.

So when that article came out, I went back, I personally looked at the entire history of that customer. I looked at all the notifications we sent. I looked at all the communications with their VIP host. And I was pretty proud of how we handled it. First of all, it wasn't mentioned -- we said hundreds of responsible gaming notices throughout that entire experience. Number two, the VIP host repeatedly said, "Hey, do you want to take a cool-off period, should you set a limit, like are you okay?" I think sometimes what people want us to do and they're like nothing less than this is okay, it's just cut people off. And we do that sometimes but it's not a clear-cut case because sometimes people who show the exact same patterns of play, one of them is an issue and the other 9 out of 10 don't. I used to A lot of the things you were saying is doing as reading I was like, "Yes, I do that, like I stayed up late, was betting on random International Sports in my day and playing casino games in the middle of the night, like, I thought it was followed. I liked it. never caused me any financial problems, never had an issue with it. Maybe I didn't get enough sleep a few nights than I should have. But I could see how somebody else who has the exact same pattern, though, may have an issue. And so it's really tricky. And so what we really try to do is we try to identify those situations and get people to then take action themselves, partly because we don't know for sure and also partly because if people do things themselves they're less likely if we restrict them more likely to just go jump on another platform, they actually exclude or cool off themselves, they're more likely to actually adhere to it. So I mean, there were just so many things that were left out of these things. And again, nothing I can do with somebody starting from a stance of they are trying to write a negative article really hard to get them to go positive. Maybe you can give them some facts and make it a little less negative. But if the goal is to start is I want to write a negative article, then you're probably going to see somebody right negative article.

Jason, do you see the same tools being needed, the same approach needed for prediction markets that exist for gambling?

Absolutely. I mean, I think for one, we're putting our money where our mouth is on that, we do that. We apply the same responsible trading tools as we use as responsible gaming tools in our predictions product. And we take the same approach with -- we have the responsible engagement team that gets referrals or people that we think need to have their accounts look and do things like it's literally the same playbook. So I think this is a great example where you don't necessarily have to reinvent the wheel here. You can just -- again, it doesn't mean we can't improve on the existing system, but there is already a decent system in place for the regulated OSV market. And people who don't understand that, they just don't have the knowledge, there's so much regulation already in this area. There are very specific rules that many of the states give us that tell us how we have to manage responsible gaming. Now we go above and beyond that. For example, we don't have to do that with predictions, but we are doing the same things that we do in OSV with predictions. But there's also at least online sports base, very clear rules on a lot of this stuff.

So I was in Las Vegas for G2E, the Global Gaming Expo, and I saw an ad for DraftKings in every state in Nevada, which is told [ Kashi ] that it has to geofence the state. Tell me how it works, where you're not just the states that you have a gaming license, but how does it work when you need to geofence out other products in other states?

So we do not offer sports predictions in Nevada. We do offer some free-to-play sports contest. And I think for a national marketing message, it's easier to say DraftKings is available everywhere, then DraftKings available in [indiscernible] whatever state. And we have disclaimers. We actually worked with the Nevada regulator, who is a great partner in this to understand what their concerns were. We were able to put some disclaimers in our marketing and ended up surprises you saw in Nevada because we are trying to not target into Nevada [indiscernible].

Probably on a national program.

Yes, it might have been a national program as we definitely are not targeting Nevada specifically with ads and trying to make it as clear as possible. You can't played the paid product in Nevada, but also have to remember with national ads, you need a national marketing message and more you confuse people, the harder it is to get that message to work.

In Florida, where you fought hard to try and get on the ballot and get the opportunity to offer commercial Sportsbook. Now you have prediction platform and Hard Rock, which has the monopoly in Florida is suing you. Why you and not FanDuel or fanatics or [ Calcin ] poly market?

I guess I don't know if you'll have to ask them that one.

No, no. I just want to know like what's your thought about why you're the target?

For whatever reason they decide to make us the target, I can't speak to why. I don't know what their motivation.

That's boring. This like -- I was trying for some...

You're absolutely right that it is very interesting that despite the fact that there's a number of prediction operators in the state were the ones that singularly got sued I was a little surprised, they didn't include others in the suit, but you have to ask them.

When you're looking at the economics of predictions and not having to pay, say, in New York, 51% tax on your business here. Is that model super appealing for you? Like would you like to have a departure from the state by state, how much money can we bring out from the Sportsbooks?

Well, I don't view them -- so assuming predictions were allowed, we would want to offer everything because it comes down to -- we want to give the customer a choice. Obviously, we would like to have level playing deals with taxes. My guess is that what you're describing is not going to exist long term that if there ends up being Supreme Court or otherwise a more permanent sports prediction market that states will turn to taxing it like they do sports betting. So that's my guess anyway. So I sort of look at it as, again, starting with the customer. And I do think that at least now, and I think arguably, in perpetuity, the Sportsbook product is a better product for a lot of things that the customer is looking to do. And you can look no further than Europe to see that. There's been exchange-based betting in Europe for many, many years. And it's a small piece of the market. It's really dominated by the traditional sports book market. And the reason for that, I think, is just a superior customer experience. And I believe that to be the case today. I think unequivocally, the Sportsbook experience is a better customer experience for most customers. Obviously, there are some that may be preferred predictions, but for most customers. That said, there are definitely some elements to the predictions products that are better or is overall some elements. And I think those products, including our product will continue to improve. So again, it comes back to, I'd like to be able to offer different options to all our customers. An example of predictions we talked about, you can do all kinds of nonsports stuff that you can't do in sports betting. And I think that's really interesting, and there is an audience for that. So...

And institutional trading, I mean, do you see a future for DraftKings and accommodating institutional money?

That's an interesting one because I think my personal belief is that the more of that you introduced into a peer-to-peer ecosystem. The faster that the retail customer will have to spend money in order to keep up. And I think that, that may create a worse customer experience than maybe having less institution. Now we can't prevent them from being on the platform, of course. But we have at least to date, chosen not to invest in product features that are geared specifically to algorithmic traders to institutional investors because we do think that creates a healthier long-term ecosystem.

Okay. I'm sorry, but we have to talk about the World Series. And the brewers have not made it this far...

I knew we wouldn't finish without this.

Since 1982, and I mean, like there's so much enthusiasm. My kids are trying to break the school uniform rules and where they're breweries to school every day. Where is the money coming in. Tell me a little bit about this small market team doesn't get to a pay its players like show a [ tonymoney ]. Talk a little bit about what you're seeing from the business side about Milwaukee Brewers being in the series?

Yes, it's interest 2 teams like that now. So...

Who?

No. I mean, well, it shows -- it's a good sign because it shows that even though, yes, it may be less common that teams on smaller payroll budgets can still compete in baseball, which I think is very important for long-term competitive parity and the support. That said, to answer your question, it's really interesting because we were just looking at this together before the panel. The vast majority of the money, almost 90% of the money game 1 is on the raise. But for the series, it's on the Brewers. So I would have figured -- who's pitching Game 1 for the brewers?

Got me.

Well, maybe it's -- I didn't look at the pitching match up. I should know that, but maybe that has something to do with it, but it was interesting. So I was surprised to see that it was so heavily tilted 1 way on Game 1 in the opposite way on the series.

Well, I mean, just out of loyalty's sake, I would think that my -- so I said it, it's not because of my last name is Brewer because I lived in Milwaukee, and in Wisconsin, if you don't get inducted into the cult of sport, meaning Brewers, Packers, Bucks, you get kicked out. And I married a Wisconsin boy, I didn't want to get it out. So Yes, that was the way to do it.

Now is your moment, Contessa.

One last 1 for you. This is it. Do you think that -- I mean, the investors have really punished DraftKings because of the perceived threat from prediction markets. Do you think when you go out and you talk about your performance on prediction markets, you start to get more credit from shareholders?

That's a great question. I would have said, yes, several months ago, I'm not as sure now because I think people just don't love the uncertainty of is this actually going to be a thing. So great if I'm underwriting growth in the next 1.5 years, but is that all going to go away. I think the more that people come to understand that we're really well positioned either way. I think we will start to overall get more credit for that. And I think people are starting to understand that. And I think the more that we can show growth in the nonsports piece, which people, for whatever reason, think is probably safer. I think that will help, too. But I also think just getting to a point where there is a court ruling and there's just some clarity and there's public markets, private markets love uncertainty. That's what they thrive on. They like big beta, big public markets or the opposite. They do not like uncertainty. They want predictable, steady earning things like that. So I do think that we are suffering from the uncertainty of it all. And I hope that we start to get more credit as we show traction and predictions, but I might just -- we might not really get full credit until there's more clarity.

Earnings next week?

Next week.

All right. We'll be listening. Thank you, everybody, for your attention.

Actually [indiscernible].

2 weeks.