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Little-known Canadian company plays key role in US online gambling

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Meet the Blackstone-backed business that cornered a crucial part of the U.S. betting market

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Private-equity group Blackstone Inc. 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 US$1 trillion 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 Solutions Inc.

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Before a U.S. 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 GeoComply caters for clients in a fiercely competitive US$15-billion a year industry, it has a near monopoly on providing this service. The company processes one billion geolocation checks every month on average and charges a small fee each time. Its clients include FanDuel Inc., DraftKings Inc., BetMGM, Caesars Entertainment Inc. and ESPN Bet, which between them account for more than 90 per cent of U.S. 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 sizable 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.

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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 United States Supreme Court ruling that opened up the industry, testing the product in New Jersey where online casinos were legal from 2013 onward.

“Ten years ago, we founded GeoComply with scant resources and amid pervasive skepticism. Many dismissed the potential of our product and target market,” Sainsbury, GeoComply’s chief executive, said.

Only in casinos

The legalization of online sports gambling in the U.S. 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 US$300 billion online.

Consultancy Eilers & Krejcik Gaming LLC forecasts that annual gross gaming revenues of U.S. online betting operators will grow a further 60 per cent over the next four years to US$24 billion.

GeoComply has been able to capitalize on this huge growth, boosted by a minority investment from Blackstone in March 2021 — from the firm’s debut US$4.5-billion growth-equity fund.

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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 Labs Inc. and Xpoint Services LLC raised about US$80 million in their most recent funding rounds in 2022.

Xpoint — which counts Raine Group LLC, an early backer of DraftKings, among its investors — last year won business from its first top-10 online betting operator, agreeing to a contract with United Kingdom-based Bet365 in at least one of the six U.S. states where it operates. Xpoint is now licensed in 16 states and has 19 clients, mainly startups.

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.

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GeoComply brought a patent infringement claim against Xpoint, but a judge in 2022 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.

Online gaming app BetMBM on a phone screen
GeoComply processes one billion geolocation on onine gamblers checks every month on average and charges a small fee each time. Its clients include FanDuel Inc., DraftKings Inc., BetMGM, Caesars Entertainment Inc. and ESPN Bet, which between them account for more than 90 per cent of U.S. online sports betting. Photo by BetMGM

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 US$4-million 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.

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Nick Patrick, chief executive of Radar, which processes billions of geolocation checks for brands such as telecoms group T-Mobile International AG, 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 GeoComply had seemingly gained its monopoly through “a superior product and business acumen. There is nothing unlawful in monopolies that emerge this way.”

However, “exclusivity clauses used by monopolies may amount to unlawful monopolization or unlawful restraints of trade under U.S. 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,” Peter Carstensen, a senior fellow at the American Antitrust Institute, said.

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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.

Dominant, for now

They added that the company has 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 US$7.8 million on the service, against net gaming revenues of US$842 million, 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.

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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 U.S. gambling industry, benefiting from its first-mover advantage.

Last year, new investors came on board including Arctos Partners Inc., 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.

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“No one predicted that (the U.S. online gambling industry) would get as big as it is now or successful,” GeoComply co-founder Briggs said 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.”

© 2024 The Financial Times Ltd.

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