Lesson 2 of 4 Math checked Facts checked against sources on 16 June 2026 15 min

Games and betting economics: the store's cut, the player's value and the bettor's tax

A big publisher's cost structure, the app store fees and how court cases are changing them, the value of a free-to-play install, and a sportsbook's path from bets to profit in two tax regimes.

Industry brief, with a one-minute summary: Video games and betting

Key takeaways

A game costs most of its money before launch: years of development and a big marketing push.
Apple's standard App Store commission is 30 percent of each digital sale, cut to 15 percent for developers earning up to USD 1 million a year and for subscriptions after the first year.
A sportsbook sets odds so that, across many bets, it pays back a little less than it takes in.

Key idea

A game costs most of its money before launch: years of development and a big marketing push. After launch, each extra copy or item costs almost nothing to deliver, but the store keeps a share of every digital sale. So a publisher's profit turns on hits, on how long players keep spending, and on the share the platform takes. A betting operator is the opposite: it earns a thin slice of a very large amount bet, then pays tax, free bets and marketing out of that slice, so tax rates and promotion spending decide its profit.

Electronic Arts: where the revenue went, year to March 2025 (USD million)

So-what

Making games (research and development, about 34 percent of revenue) is the biggest cost, not delivering them. EA kept about 20 percent of revenue as operating income, a typical result for a large publisher with long-running series.

The store's cut, and why it is changing

Apple's standard App Store commission is 30 percent of each digital sale, cut to 15 percent for developers earning up to USD 1 million a year and for subscriptions after the first year. Google Play long used the same shape. Courts and regulators are now forcing changes. In the United States, a federal court found in April 2025 that Apple had broken an earlier order in its case with Epic Games and barred it from charging any commission on purchases players make through links to outside websites; an appeals court in December 2025 upheld that finding but said Apple may charge some commission, and the amount is still being argued. In the European Union, under the Digital Markets Act, Apple set new terms from 1 October 2026: 26 percent with its own payment system, 20 percent with another payment provider, 15 percent when the app links to the web, and 5 percent on apps sold outside its store. Google set new Play fees in the United States, the United Kingdom and Europe from 30 June 2026: a service fee of up to 20 percent on in-app purchases (10 percent on a developer's first USD 1 million a year and on subscriptions), plus a separate 5 percent if the developer uses Google's own billing.

Worked case

Is a new player worth what the game pays to win them?

The prompt

Lanternfox (a fictional studio in Singapore) runs a free-to-play mobile game. It pays USD 2.50 in advertising for each new install. 4 percent of new players ever pay, and a paying player spends USD 60 over their life in the game. The app store keeps 30 percent of in-game purchases. Ads shown to players who never pay bring USD 0.40 per install, and servers and live operations cost USD 0.20 per install. Should Lanternfox spend more on advertising, and what would change the answer?

Open this case to practice it with a partner

The structure

Value of one install against the cost to win it
- Money from players: share who pay x lifetime spend x share kept after the store fee
- Money from ads shown to players who do not pay
- Costs per install: live operations, and the advertising paid to win the install
- Levers: the store fee (a web shop), payer conversion, lifetime spend

Working it through

1. Player spending per install
4 percent of installs pay, and each payer spends USD 60.
In-game spending per install (USD):0.04 × 60 = 2.4
2. Share kept after the store fee
The app store keeps 30 percent.
Net in-game revenue per install (USD):2.4 × (1 - 0.3) = 1.68
3. Lifetime value per install
Add ad revenue and take off live operations.
Lifetime value per install (USD):1.68 + 0.4 - 0.2 = 1.88
4. Against the cost of an install
Each install costs USD 2.50 of advertising.
Profit or loss per install (USD):1.88 - 2.5 = -0.62
5. Half of spending moves to a web shop
Payments on its own website cost about 5 percent instead of 30 percent, for half of the spending.
Lifetime value per install with a web shop (USD):2.4 × (0.5 × 0.7 + 0.5 × 0.95) + 0.4 - 0.2 = 2.18
6. Web shop and better conversion together
If a better first session also lifts payer conversion to 5 percent, spending per install is USD 3.00.
Lifetime value per install, both levers (USD):0.05 × 60 × 0.825 + 0.4 - 0.2 = 2.67

The recommendation

Lanternfox should not raise its advertising budget yet, because each install brings back only USD 1.88 against USD 2.50 paid to win it, a loss of USD 0.62 per new player. First, moving half of player spending to a web shop lifts the value to USD 2.18, which is still short. Second, only both levers together, the web shop and payer conversion of 5 percent, lift the value to about USD 2.68, above the cost of an install. The risk is that web shop links push some players away and that store rules keep changing by country. As a next step, test the web shop and a better first session on a small group of players, and grow advertising only in channels where the install cost is below the measured value.

Risks: Store rules on links to outside payments differ by country and keep changing; Lifetime spend is an estimate until players have been in the game for many months.

Betting: from the amount bet to profit

A sportsbook sets odds so that, across many bets, it pays back a little less than it takes in. In 2025 US sportsbooks kept USD 16.96 billion of revenue on USD 166.94 billion of bets, according to the American Gaming Association, a hold of about 10 percent. Out of that come free bets and bonuses, which can be large in new markets, then state tax, then payments, data and technology, then marketing. DraftKings kept 7.1 percent of its USD 53.6 billion of 2025 handle as net revenue, and spent USD 1.38 billion on sales and marketing on revenue of USD 6.05 billion. Taxes differ hugely by state: New Jersey raised its online rate from 13 to 19.75 percent of gross revenue in July 2025, and Illinois added a charge of 25 cents per online bet (50 cents after the first 20 million bets a year) on top of its rates of 20 to 40 percent.

Worked case

Same bets, different tax: where should a sportsbook spend its marketing?

The prompt

Northline Bet (a fictional online sportsbook in the United States) takes USD 500 million of bets a month in each of two states and keeps 10 percent of the money bet. It gives away USD 10 million of free bets a month in each state, and payments, data and platform costs are 12 percent of net revenue. It spends USD 6 million a month on marketing in each state. State A taxes 51 percent of gross gaming revenue; State B taxes 20 percent. What does each state earn Northline, and where should its next marketing dollar go?

Open this case to practice it with a partner

The structure

Contribution per state = net revenue minus tax, variable costs and marketing
- Gross gaming revenue = handle x hold
- Net revenue = gross gaming revenue minus free bets and promotions
- State tax on gross gaming revenue, at each state's rate
- Variable costs and marketing
- Test: a month of bad luck when hold falls to 8 percent

Working it through

1. Gross gaming revenue
Handle times hold, the same in both states.
Gross gaming revenue per state (USD million):500 × 0.1 = 50
2. Net revenue
Take off USD 10 million of free bets.
Net revenue per state (USD million):50 - 10 = 40
3. Contribution in State A
Tax of 51 percent of USD 50 million, variable costs of 12 percent of USD 40 million, and USD 6 million of marketing.
State A contribution (USD million):40 - 50 × 0.51 - 40 × 0.12 - 6 = 3.7
4. Contribution in State B
The same sum with tax at 20 percent.
State B contribution (USD million):40 - 50 × 0.2 - 40 × 0.12 - 6 = 19.2
5. State A in a month with 8 percent hold
Gross gaming revenue falls to USD 40 million and net revenue to USD 30 million, while free bets and marketing stay the same.
State A contribution at 8 percent hold (USD million):30 - 40 × 0.51 - 30 × 0.12 - 6 = 0

The recommendation

Northline should put its next marketing dollar into State B, because the same USD 500 million of bets leaves USD 19.2 million there against USD 3.7 million in State A. First, State A's 51 percent tax takes USD 25.5 million before any other cost, so free bets and marketing there are paid mostly with money that would otherwise have been profit. Second, State A has no cushion: one month with an 8 percent hold instead of 10 percent wipes out its contribution. The risk is that cutting promotions in State A loses players to rivals that keep spending, and that State B raises its own tax, as several states did in 2025. As a next step, cut free bets in State A to the level that keeps active players, and measure the cost to win a new player in each state before moving budget.

Risks: Hold swings with sports results, so one month says little; States changed betting tax rates often in 2025 and 2026.

Timed math drill

Under Illinois rules from July 2025, an online sportsbook pays USD 0.25 per bet on its first 20 million bets in a year and USD 0.50 on each bet after that. What does it pay on 30 million bets, in USD million?

Where each pound of UK National Lottery sales went, April 2024 to March 2025 (pence)(%)

So-what

A lottery is a licence to sell a state-backed game: most of the money goes back to players and the state, and the operator's case is about growing sales and keeping costs within its small slice.

Check your understanding

A free-to-play game's revenue is growing 50 percent a year, but it loses money. What should you check first?

Terms in this lesson

Gross profit and gross margin Contribution Unit economics CAC (customer acquisition cost)CLV (customer lifetime value)Take rate Sensitivity analysis Breakeven

Sources for this lesson (17)

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Keep going: lesson 3 of 4

It builds on what you just read, in Video games and betting: publishers, platforms, sportsbooks and lotteries.

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