Tiger Woods of the United States celebrates after sinking his putt on the 18th green to win during the final round of the Masters at Augusta National Golf Club on April 14, 2019 in Augusta, Georgia. Andrew Redington | Getty Images

I was rooting for Tiger Woods to win the Masters this month. And I wanted to watch him attack Augusta National's last nine holes without mixed allegiances. There was just one problem. I'd placed a bet on Francisco Molinari to win, with 22-to-1 odds. I live in New Jersey, so I'd been able to place the bet right from my mobile phone. Since New Jersey legalized sports betting last year, gamblers have placed more than 34 million bets on the DraftKings and FanDuel platforms. The two companies, competing against about a dozen rivals, have 83% market share in New Jersey. To put that in perspective, New Jersey's entire population is less than 9 million. Any state can legalize sports betting after a landmark Supreme Court ruling last year. So far, New Jersey is the only state where FanDuel and DraftKings are up and running, although laws allowing mobile sports betting have been passed in seven other states. Fortunately, there was a way I could root for Tiger and exit my Molinari bet early. I logged on to FanDuel, where I'd placed my bet, and discovered the app was making me an offer. I could cash out on Molinari, before the tournament ended. He was -13 after nine holes, three strokes ahead of Tiger Woods and others, who were tied for second place. Perfect. I would forgo my option to win $220 from my $10 bet (I'm not exactly a high-stakes gambler) and walk away with $147. I'd make a significant profit and watch the back nine unencumbered by split emotions. But I was in New York that Sunday, just across the New Jersey border. Mobile gaming applications know where you are and won't let you bet outside the state. My only option was to call someone to log in to my account with my private password and make the bet. (Spoiler alert: I didn't). I watched Molinari blow his lead and my potential profit evaporate. Such is the state of mobile sports betting -- both transformative and disorderly. The theoretical market for DraftKings and FanDuel is huge. Americans gamble more than $150 billion illegally on sports in a year, according to estimates from the American Gaming Association. About another $5 billion comes in legally. For March, FanDuel took in $13.3 million in online sports bets for New Jersey, taking more than 50 percent of the New Jersey market. DraftKings generated $7.3 million in internet sports wagering revenue. "Our original estimates for the New Jersey market have been very, very, very materially exceeded," said FanDuel Chief Marketing Officer Mike Raffensperger. "Gambling is still dominated by an illegal grey-and-black market, whether with local bookies or offshore operators, that have been in place for a very long time. In a regulated, consumer-protected business, we're very optimistic that we can actively displace that as more responsible actors."

FanDuel Sportsbook at Meadowlands Racetrack Source: FanDuel

But while mobile sports gaming has tantalizingly large market projections, getting from today -- where I can't cash out a bet because I'm in the wrong location -- to a seamless experience where millions of Americans can participate, will be a long and arduous slog. Tech giants like Uber and Facebook have used a "move fast and break things" mantra to gain vast scale quickly. Gambling companies, meanwhile, must navigate a grab bag of regulations, tax rates and legislation that will limit the addressable market for years to come. "If we're looking at the U.S. over the next five years, if you take New Jersey as the template and put that over every other state, it would be a huge mistake," said Richard Carter, CEO of SBTech. His company has agreed to provide mobile betting technology in Pennsylvania, New Jersey and Mississippi for Churchill Downs, a $3.8 billion company that owns racetracks and casinos throughout the U.S., as well as casino company Golden Nugget. "There is no doubt both FanDuel and DraftKings will have large market share," Carter said. "But different states will have different market leaders. You need market access. Some states will be lottery-only. Some states will be limited to tribal gaming. Some states won't allow FanDuel and DraftKings to use their brands. They'll have to use the casino brand. There are lots of nuances. You have to take each state as it comes."

The promise of sports betting

Until last year, legal sports betting in the U.S. was primarily limited to Nevada, which voted to allow bookmaking in 1949. The business is fairly straightforward. The house, or bookmaker, sets a line that's meant to convince an equal number of bettors to take each side of a wager. Then the sportsbook takes a cut of each wager, or "vig" -- typically a mid-single-digit percentage -- for playing market maker. The goal is to break even on the actual bets and profit on the vig. Sometimes the house gets its initial spread wrong and has to adjust as a flood of bets comes in on one side or the other. If the bookmaker doesn't adjust in time, it can end up taking big losses or winning more than expected. This happened at The Masters, when sportsbooks lost millions on Woods' victory, who was originally an 18-to-1 shot to win his first major since 2008. The popularity of sports betting could offset the low margins. Less than a year after legalization, internet sports betting in the first quarter of 2019 amounted to $862 million in New Jersey, compared with about $216 million for terrestrial casinos. With combined market share of 83%, that suggests FanDuel and DraftKings cleared more than $700 million worth of bets. Many sources in the industry say that the companies have a take of about 5% of each bet, which puts the two companies at $35 million in sports gambling revenue, just in the first quarter. And that's just in one state.

New Jersey Governor Chris Christie, who was instrumental in legalizing sports gambling in New Jersey. Getty Images

For years, lawmakers stopped sports betting from spreading too wide. In particular, a 1992 law called the Professional and Amateur Sports Protection Act effectively prevented legalization in all but four states. A legal challenge led by former New Jersey Gov. Chris Christie led to the Supreme Court striking down the PASPA as unconstitutional in 2018. Since then Delaware, New Jersey, Mississippi, West Virginia, New Mexico, Pennsylvania and Rhode Island have all legalized sports betting. A total of fifteen states could legalize by the end of the year and 30 by next year, according to Patrick Keane, CEO of The Action Network, a research and analytics company dedicated to sports gambling. But legalization is only step one for any company interested in getting a mobile sportsbook up and running.

'A Wild West scenario'

In each state, online betting companies such as FanDuel and DraftKings have to apply for supplier licenses, an arduous process that requires reams of paperwork about the financial histories of key employees and anyone who owns more than 5% of the company. Each state runs its own licensing process, meaning the same type of background checks are conducted over and over again, taking years to complete. (Companies can get temporary waivers to operate while regulators conduct their due diligence). Once licensed as a supplier, online providers must cut deals with existing land-based casinos for so-called "skins," giving them the right to operate in each state. DraftKings announced a deal with Caesars in February to give it market access in 12 states outside New Jersey. Caesars received DraftKings equity for the skins access. FanDuel struck a similar agreement with Boyd Gaming last year. In other cases, online providers strike revenue-sharing deals with existing casinos for skins. Thus far, no states have a system in place where mobile operators can apply for a direct license and avoid the revenue or equity share, although Massachusetts is contemplating it.

FanDuel betting booths Source: FanDuel

New Jersey allows each existing casino to give out three skins to individually branded websites. So, while FanDuel and DraftKings dominate the market today, they face competition from more than a dozen online sportsbooks, including from casinos Caesars, Golden Nugget, MGM and international providers such as William Hill, Bet365, Kindred Group and The Stars Group. Each state has different rules about how many skins it is willing to give out. Pennsylvania laws allow just one skin per casino, making access more competitive and therefore expensive for online companies. Pennsylvania plans to legalize online sports betting to existing casinos within weeks. But Pennsylvania plans to tax sports betting at a whopping 36% rate. That's in addition to a $10 million licensing fee for sportsbook operators, making the venture far less profitable than in New Jersey, where the tax rate for land-based betting is just 8.5% and online betting is 13%. Making things more complicated, some states such as Delaware don't have any existing casinos. In that state, the lottery runs legalized sports betting, meaning DraftKings and FanDuel may be shut out completely. Other states, such as Nevada, are protective of land-based resort casinos because of their job creation and tax revenues. Anyone interested in mobile betting must go to a physical casino to sign up before they can play -- far different from the "sign up in minutes from my couch" New Jersey experience. Nevada hasn't given DraftKings and FanDuel supplier licenses to compete with incumbent operators.

A man makes his bets at the FANDUEL sportsbook during the Super Bowl LIII in East Rutherford, New Jersey, February 3, 2019 Eduardo Munoz | Reuters

In addition, tribal gaming dominates the casino industry in several U.S. states, including California, Florida and New York. It's still unclear exactly how Native American-owned casinos will play into the sports betting landscape. The Department of Justice's interpretation of the Federal Wire Act could also affect how interstate sports betting is legalized as more states pass their own individual laws around gambling. Will a mobile operator need a state license in order to cash out a bet across state lines, or only to place a bet? Those types of questions are still largely unanswered. "It's a bit of a Wild West scenario right now," said Keane. "The interesting thing about the United States is it's basically 50 different countries. If you're in Europe, it's a very different proposition than figuring out even the East Coast of the U.S. The legislators have different goals and different processes. New Jersey has been the most forward thinking and thoughtful about being a mobile-first state. Many of the other states have been in a protectionist stance. Mobile has won and will continue to win. All of these operators need to get wise to that." DraftKings is optimistic that the New Jersey model will spread to the rest of the country. "It's going to take some time for a national roll-out, but as legislators start looking at what New Jersey did to create a tax stream and remove the illegal market, legislators want to move faster," said Paul Liberman, co-founder and chief operating officer at DraftKings. "New Jersey has done a great job of developing a regulatory framework that works for both businesses and the state. We believe over the next few years we'll get a dozen or more states to adopt it."

How DraftKings and FanDuel vaulted ahead

FanDuel and DraftKings are both privately held, venture-backed companies. FanDuel was founded in 2009 and has raised more than $400 million. Last May, U.K bookmaking business Paddy Power Betfair took a majority stake in the company, seeing a big opportunity after the Supreme Court decision. DraftKings came along in 2012 and has raised more than $600 million, according to Crunchbase. Both companies could go public in the next year or two, according to people familiar with the matter. The two start-ups were richly funded in their early days, allowing them to spend hundreds of millions of dollars advertising four years ago to build customer rolls. At the time, the companies were frantically signing up players to compete in Daily Fantasy Sports, a competition where users choose players and use real-life statistics to compete against others for prize money. During one week in November 2015, DraftKings outspent every other company on the planet in weekly TV advertising. It had a valuation of about $1 billion at the time. FanDuel wasn't far behind, spending more money on TV advertising in 2015 than it had in total 2014 sales, according to estimates by research firm iSpot.tv.

From left, the three co-founders of DraftKings, Matt Kalish, Paul Liberman and Jason Robins, pose together in their Boston office on Apr. 24, 2017. Pat Greenhouse | Boston Globe | Getty Images

The two fantasy sports leaders later tried to merge -- one way to end an advertising battle. Both companies were also trying to weather a series of settlements with state regulators over deceptive advertising practices. But regulators blocked the deal in 2017, and they dropped the transaction. In retrospect, now that online sports gambling is becoming legal, the 2015 mad rush for customers looks like a brilliant strategy. DraftKings has 11 million customers on file, which the company can try to convert to sports betters. FanDuel has more than 8.5 million customers. "We've already invested quite a substantial amount of money to acquire customers," said DraftKings co-founder Liberman. "A large part of why FanDuel and DraftKings are doing so well in this market is that established customer base." "Did we go a little bit overboard? Maybe," Liberman said. "There were definitely some deals that weren't the best, but to this day, I think were we to do it again, I think we'd probably do it similarly." That same type of ad blitz isn't likely to repeat itself, said FanDuel's Raffensperger. His company has already shifted away from so-called "direct response" marketing, which attempts to get customers to sign up for a product immediately, and more toward advertising that builds a brand, he said. "I think we are much more interested in making a product," he said. "We're definitely taking a different strategic focus." But even if the company's ad strategy isn't direct response, the companies are still trying to convince customers to sign up immediately -- by literally giving away money. DraftKings offers $25 in free bets. Australian company PointsBet offers a $50 bonus. Most of the major companies also offer "risk-free" bets for signing up, where the sportsbook will refund initial bets that end up losing. At any given time, a sportsbook may offer five or more promotions, including betting on non-game events such as the NFL Draft, which frequently change day to day or week to week.

Innovation required

Eventually, traditional sports betting will be a sucker's game, predicted Paul Martino, a former FanDuel board member and venture capitalist at Bullpen Capital. High customer acquisition costs, between giving away free money for betting and advertising, will be a huge barrier to entry. FanDuel's Raffensperger said it took the company about a year to earn back a customer's acquisition cost with DFS. Already, mobile products offer a slew of so-called prop bets and parlays -- stringed-together wagers that increase odds -- associated with various sports. For a given baseball game, you can bet on if the number of runs in the first inning will be even or odd, if an individual player will hit a home run, and whether or not there will be a grand slam in the game. Each of these bets comes with associated odds. A $10 bet on if there will be a grand slam might pay $80. A bet on "no" to the same question will win you about 33 cents. In some circumstances, algorithms provide early payouts to bets, such as my Molinari bet, to give sports gambling a stock market feel.

FanDuel mobile app Source: FanDuel

There are also in-game bets, which maximize "engagement," or ongoing attention to game. That is a word which is music to the ears of professional sports league owners and commissioners such as Adam Silver, who runs the National Basketball Association and has led the charge for legalized gambling for about five years. Fans "want to bet throughout the game, so they're betting on quarter scores, on particular players, on free throws and everything else, and independent of whatever revenue stream comes from licensing our intellectual property to those gaming companies, it results in enormous additional engagement in fans," Silver said at a 2017 panel on gambling at Manhattan's Paley Center for Media. SBTech is working with various leagues to build technology around putting chips in balls, uniforms and equipment to allow for more prop bets, such as whether or not a golf shot will be within six feet of the pin. NFL in-game betting is particularly reliant on the speed of data because strategies change so quickly depending on game situations, which subsequently changes odds, SBTech's Carter said. You'll also likely have a Netflix-like recommendation engine that pushes your favorite bets on favorite sports, Carter said. This technology actually already exists, albeit in a somewhat primitive form, he said.

Adam Silver, NBA Commissioner. Getty Images