US private equity group Blackstone is among the biggest investors in the global gambling industry, owning swaths of the Las Vegas strip and casinos elsewhere.
But in 2021, the firm, which has $1tn of assets under management, spotted an opportunity in America’s new and booming online betting industry, in the form of a little-known Canadian technology company called GeoComply.
Before a US gambler can place a single bet online, their location must first be verified to ensure they are complying with the complex patchwork of state-specific laws that governs the market.
While it caters for clients in a fiercely competitive $15bn a year industry, GeoComply has a near monopoly on providing this service. The company processes 1bn geolocation checks every month on average and charges a small fee each time. Its clients include FanDuel, DraftKings, BetMGM, Caesars Entertainment and ESPN Bet, which between them account for more than 90 per cent of US online sports betting.
Massive market share in a rapidly-expanding industry meant the company looked a winner to Blackstone, which has already cashed out part of its investment at a sizeable profit, according to people close to the firm. The company’s founders are now considering a stock market listing, according to people familiar with their thinking.
But while GeoComply is a long way ahead for now, competitors are lining up to take a shot at the market. The business is also drawing scrutiny over litigation and restrictive contracts that have helped maintain its lead.
Founded in 2011 by husband and wife David Briggs and Anna Sainsbury, GeoComply began developing a geolocation service tailored to the gambling industry well in advance of a 2018 US Supreme Court ruling that opened up the industry, testing the product in New Jersey where online casinos were legal from 2013 onwards.
“Ten years ago, we founded GeoComply with scant resources and amid pervasive scepticism. Many dismissed the potential of our product and target market,” Sainsbury, GeoComply’s chief executive, told the Financial Times.
1bnNumber of geolocation checks GeoComply processes every month
The legalisation of online sports gambling in the US has been a game-changer for the industry. Betting had previously been allowed only in casinos in Nevada and a handful of other states. Since the 2018 Supreme Court ruling, Americans have bet nearly $300bn online.
Consultancy Eilers & Krejcik Gaming forecasts that annual gross gaming revenues of US online betting operators will grow a further 60 per cent over the next four years to $24bn.
GeoComply has been able to capitalise on this huge growth, boosted by a minority investment from Blackstone in March 2021 — from the firm’s debut $4.5bn growth-equity fund.
Blackstone was attracted by the size and speed of growth in the online betting market, and the essential role geolocation plays in meeting the industry’s regulatory requirements, according to a person familiar with the firm’s thinking. GeoComply is among the growth-equity fund’s best-performing assets.
But rival geolocation companies have also attracted investor attention. Between them, geolocation companies Radar and Xpoint raised about $80mn at their most recent funding rounds in 2022.
Xpoint — which counts Raine Group, an early backer of DraftKings, among its investors — last year won business from its first top-10 online betting operator, agreeing a contract with UK-based Bet365 in at least one of the six US states where it operates. Xpoint is now licensed in 16 states and has 19 clients, mainly start-ups.
In attempting to maintain its market share in this corner of the gambling industry, GeoComply has pursued litigation against rivals and drawn up stringent contracts with clients, raising concerns among some customers, competitors and antitrust experts.
GeoComply brought a patent infringement claim against Xpoint, but in 2022 a judge granted Xpoint’s motion to dismiss and invalidated GeoComply’s patent. GeoComply is appealing against the decision.
The FT has also examined a contract between GeoComply and a top-five sports betting operator that in effect blocked the operator from exploring rival services for a time.
The contract, which ran from the start of 2021, stipulated that for the first 30 months of the agreement, the client “shall not directly or indirectly receive or seek the provision of solutions or services which are similar to the solution [provided by GeoComply]”.
Breaching the exclusivity clause incurs a substantial penalty, in that it gives GeoComply the right to retrospectively increase all fees from the start of the agreement, according to the contract.
GeoComply has imposed similar conditions on operators across the industry, according to three people familiar with the contracts.
In late 2022, GeoComply served its client BetMGM with a $4mn breach notice accusing it of failing to transition completely to the GeoComply platform and working on replacing some of its technology with an in-house product. BetMGM declined to comment.
Nick Patrick, chief executive of Radar, which processes billions of geolocation checks for brands such as telecoms group T-Mobile, said that GeoComply’s exclusivity clause was “not something we’ve seen before . . . and it puts [GeoComply’s] customers in a tough position because it makes it very difficult to switch”.
Barak Orbach, professor of law and business at the University of Arizona, said that GeoComply had seemingly gained its monopoly through “a superior product and business acumen.” “There is nothing unlawful in monopolies that emerge this way,” Orbach said. However, “exclusivity clauses used by monopolies may amount to unlawful monopolisation or unlawful restraints of trade under US antitrust laws” as they may be aimed at “wilfully preventing the market from moving forward”, he added.
“If this wasn’t gambling, I would think you would find enforcers looking at this as a fairly serious violation of antitrust rules because I can’t imagine there’s any kind of business rationale for that [clause] other than exclusion,” agreed Peter Carstensen, a senior fellow at the American Antitrust Institute.
A person close to GeoComply said it was not unusual for tech companies taking on new customers to stipulate a period of exclusivity, in preference to a large upfront fee, to ensure initial onboarding costs were recouped.
They added that the company had always had customers that used multiple geolocation services. GeoComply’s Sainsbury said the company welcomed competition: “From day one we had to compete to win. Competition has been constant, driving us to excel and enhancing the overall market.”
Christian Goode, a gaming industry expert, said the biggest sports betting operators might look for an alternative to GeoComply as they push to become profitable in the coming year, especially if GeoComply “[over-exploits] its pricing power as a virtual monopoly”.
In the first year of its contract with GeoComply in 2021, BetMGM spent at least $7.8mn on the service, against net gaming revenues of $842mn, according to FT calculations based on internal documents. “The damn thing works but it’s expensive,” said an executive at a major sports betting operator.
Unlike GeoComply, which charges clients per geolocation check, Radar charges customers a flat fee based on the number of monthly active users gambling in a certain location. Radar’s Patrick said he expects its product would be between 50 and 90 per cent cheaper than GeoComply’s. But GeoComply stressed: “All things combined our total costs are actually lower than the alternatives.”
For now, GeoComply dominates this corner of the US gambling industry, benefiting from its first-mover advantage.
Last year, new investors came on board including Arctos Partners, a sports-focused firm that has invested in French football club Paris Saint-Germain. Blackstone still owns just under a fifth of the company, according to people close to the firm.
“No one predicted that [the US online gambling industry] would get as big as it is now or successful,” said GeoComply co-founder Briggs during a recent podcast interview.
“I never imagined in my wildest dreams that it would be that big . . . I was OK planning for a dream that I thought was pretty big and I thought: if it happens, we’ll work out the rest later.”
