The Trojan Horse: sports betting

The overall gaming industry is in a period of dramatic expansion. In May 2018, the United States Supreme Court overturned a federal ban on sports betting. The decision did not legalize sports betting per se; it instead said that the federal law was unconstitutional, leaving it, like all other forms of gaming, a matter for states to decide. It concurrently opened the door to the fastest expansion ever seen in gaming. In two and a half years, thirty states have either introduced operational sports betting or will in the near future.

The speed of the expansion should not be surprising. Sports are popular. Very, very popular. It was estimated that over 200 million people attended a sporting event in the United States in 2013, generating more than $100 billion in revenue. And the number of people who watch games on television is much higher than those that attend in person. Advertising revenue from televised sporting events in any one year is many times that of in-person ticket and other stadium sales, like food and beverage. In the major cities, the local professional sports teams engender something close to religious devotion among their followers. People are passionate about “their” teams, and betting those passions has been common for a long time. It wasn’t legal, but it was common.

So when the Supreme Court opened the door, there was strong popular support. There are two ways that sports betting, or any other gambling, can become law: the state legislature can craft and pass legislation that is then signed by the governor, or a referendum can be called. In a referendum, the issue is placed on a ballot and voted on by the citizens of the state. The public referendum may have some organized opposition, but for the most part it is a popularity contest, and in our contemporary culture, sports will win a popularity contest every time.

The legislative method is a part of the normal political process. One of the two major political parties puts forward the proposition, and the opposing party objects to and fights against it. The crafting of the bill is the art of the deal, with just enough compromise included to pass the measure. During the debates, both sides makes their arguments. The party in favor usually makes a financial argument, something along the lines of “If we pass this bill, it will keep money at home that is now crossing the borders to other states. It will create jobs and investment and bring millions of dollars in taxes into the state’s treasury.” The revenue, job and tax projections are weighted to strengthen the bill, but they are rarely valid. In the last twenty years, it is unlikely that any revenue and tax predictions for new gaming options have been accurate.

That has certainly been the case with sports betting. In the initial flush of enthusiasm, lawmakers and lobbyists predicted major increases in casino and tax revenues. Take New York, for example. Advocates were sure that the state would make millions from taxing sports betting, enough, at least, to plug a budget hole or two. It has not quite worked out that way. In November, New York collected about $200,000 in taxes from $2.6 million in sports win. The state, the fourth-most populous in the country, has more people than any other state that currently has sports betting, and yet it is not colleting enough money to do much more than pay the salary of the taxman. In the same month, New Jersey had $6.2 million in tax revenue, Pennsylvania $10.3 million, Indiana $2.4 million, and Illinois $6.3 million. Why such disparity, then, when New York has the most people?

The answer, unsurprisingly, is availability. States with online betting are generating considerably more revenue than those with only retail options. Online wagering accounts for between 80 and 90 percent of the handle, and the handle in states with online wagering is double or triple that of states with only retail betting. The significance of online and mobile betting was not apparent in the beginning; in fact, it rarely was part of the public debate. However, some companies understood the potential. FanDuel and DraftKings certainly knew its importance, and Caesars, Penn, and MGM recognized it early on. The rest of the industry was slower to get it. The Rosetta Stone, so to speak, came in the form of the results from Pennsylvania and New Jersey. Every month for the last year – in other words, largely during the pandemic – the trend has become more pronounced; online revenues have grown exponentially, while retail betting has struggled. And then when Colorado, Illinois, and Indiana began reporting, the trend jumped off the page. Sports betting may be popular, but, restricted to the retail environment, it is no more inherently popular than any other casino game. When it’s available on every smartphone in a state, however, its popularity is virtually off the charts.

Until recently, lawmakers were not thinking about availability. They were focused on the legalization process and potential tax revenue. That is quickly changing. New York Governor Andrew Cuomo, realizing the importance, has suggested the state revisit the legalization and authorize online wagering to make up for its budget shortfalls, and California is currently in a sports betting debate. Mobile betting is not yet foremost in that debate, but it is creeping into the conversation. The state’s Indian tribes would like to retain control of the betting and are collecting signatures to put the issue on the ballot; the draft referendum would allow the tribes to conduct sports betting and expand their menu of casino table games. The tribes have not taken a stand on retail versus online; for them, control is the central issue.

California’s referendum will not be on the ballot before November 2022. In the meantime, the state legislature may take up the issue. In a conventional bill, the retail-versus-mobile issue is going to be important; and with data reflecting the experiences of 30 other states in hand, the debate will be more informed. Carlo Santarelli of Deutsche Bank had this to say: “In a retail-only market, we believe state gaming revenue forecasts would likely need to be reduced by anywhere from 30-50%, if not more.” That is as clear as it gets. The lawmakers will be listening.

The popularity of sports and sports betting in this country is clear, but for sports betting to be really profitable for the states and the operating companies, it needs to be mobile, and the success of that mobile wagering will act as a model for more online wagering. As mobile sports betting continues to gain steam, it is likely to pull other forms of gambling along with it. In both Pennsylvania and New Jersey, online gambling is successful. During the pandemic, it has been the salvation of both the states and the companies who operate there. New Jersey’s results in particular have inspired a trend in casino companies’ business models, and the list of gaming companies with an online division is growing. Golden Nugget, MGM, Wynn, Caesars, Penn, and Bally’s (formerly Twin River) are all preparing for expanded online options as they build their sports betting franchises.

A couple of years ago, online gaming was seen as a federal issue. Seemingly every session of Congress had a bill looking to ban it. But the 2018 Supreme Court decision has changed the narrative to a state’s rights issue. Sports betting is becoming an effective Trojan Horse, bringing mobile sports betting and online slot machines and table games into Troy. Sheldon Adelson and the other opponents of online gambling built a wall and guarded it carefully, but the Supreme Court allowed the Greeks to bring in their wooden horse. The cause is not yet lost, but the tide of battle has changed.

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