Sometime before the end of June the U.S. Supreme Court is expected to rule on Christie vs. NCAA and determine the legality of the Professional and Amateur Sports Protection Act (PASPA).
The case, originally filed in 2012, made its way on appeal to the Court, which heard arguments in December. Based on the tone and questions at that hearing, in which numerous justices cast a skeptical light on why the federal government allows sports betting in some states but not others, those with a stake in expanding the legal and regulated market for sports betting have their hopes up.
“You could not have been in the courtroom in December and not had a good feeling about it, but you don’t know how justices are going to vote based on the questions they’re asking,” said Joe Asher, CEO, William Hill, which operates 108 of Nevada’s 180 sports books. “It seemed to go pretty well for our side, but you don’t know.”
The industry faces one of three scenarios, according to Sara Slane, senior vice president of public affairs, American Gaming Association (AGA): PASPA is declared constitutional and the status quo holds, in which case a congressional repeal would be a prerequisite for states to proceed with sports betting legislation; New Jersey’s “partial repeal” of PASPA is in compliance and its model is upheld, but congressional action might be required to enable all states to move forward; or PASPA is declared unconstitutional and states can move forward.
That said, it’s not hard to find informed industry observers who are bullish on the prospects of widespread legalized sports betting in the U.S. whatever the Supreme Court decides.
“We are closer to legalized sports betting than we’ve ever been before; whether we get a solution through the Court or a solution through Congress,” said Quinton Singleton, corporate strategy and government, SG Digital. “The will to legalize sports betting exists across the U.S., including public consensus, tribal and commercial gaming, lotteries and the leagues.”
LEGISLATING SPORTS BETTING
By the end of April some 20 states had introduced legislation to create legal and regulated sports betting within their respective jurisdictions. In the process, the casino industry has been able to get its arguments across about what a successful commercial sports betting business requires, starting with some fundamental points about the business itself. In a nutshell, sports betting is a low-hold business that is already thriving in the U.S. courtesy of unregulated offshore operators. In order to profitably compete, brick-and-mortar casinos need access to customers and a low-cost business environment. That translates to mobile betting platforms; the opportunity to offer a wide range of betting products, in particular in-play wagers, which account for 25 percent of William Hill’s Nevada business; and an absence of extra costs, such as compliance and data fees that the professional leagues have pushed for.
“There is a very vibrant black market for bookmakers who don’t pay taxes and don’t have regulatory oversight or the infrastructure costs that we have,” said Asher. “They don’t have to get the customer’s social security number to open up a bank account or if he goes over $10,000 of cash transactions in a day like we do. They offer a form of privacy that we’re not permitted to offer under federal law. They offer credit. What made Monday Night Football the cultural icon in America that it became was illegal bookies settled up on Tuesday, so Monday was your chance to get even. That’s what we’re going to be competing with. This is not going to be a stroll in the park. The more burdens placed on legal operators, the harder it will be for them to change customer behavior patterns that have been entrenched for decades.”
So far, the industry message appears to be getting through. All but one (New York) of state sport betting bills includes a mobile component. And the leagues have yet to convince lawmakers that legal compliance related to the creation of new sports betting markets will create costs for them that should be absorbed by operators and paid out in the form of an “integrity fee.”
Of the five sports betting bills that have passed to date—Pennsylvania, Mississippi, New Jersey, New York and West Virginia—both Asher and Singleton point to West Virginia’s legislation as an example of what other states might emulate. “West Virginia advances a number of relevant and important topics in its legal framework and empowers the regulators to address further nuances at a later date through regulatory promulgation,” Asher said. “This is important for providing flexibility given the complexity of the sports betting space.”
Asher gave Pennsylvania’s bill low marks. “The margin on sports betting is about 5 percent and it’s not going to improve,” he said. “If anything, it’s trending downwards because of mobile and in-play, which are inherently lower-margin products. The more burdens that are placed on legal operators, the more difficult it becomes to migrate customers from the black market. Take Pennsylvania, with a 36 percent tax rate, and you have to pay $10 million up front for the privilege of paying that, and that’s on top of the 5 percent that gets paid to the IRS (the 0.25 excise tax on handle translates to about five percent of revenue) so how does the legal operator possibly compete with the black market operator in Pennsylvania under that tax structure?”
Another concern is the some of the items that the sports leagues have been trying to get into legislation that are problematic from the casino operator point-of-view. “We and others in the gaming industry oppose efforts to impose legislatively-mandated payments and commercial benefits to the sports leagues, such as integrity fees and getting results from a league-approved data source,” said Asher. “But what’s that going to cost us?
“We also oppose the leagues getting to approve the types of bets that are offered. So far none of the states have implemented those items. The most successful sports league in the world is the English Premier League, and they don’t receive any statutorily-mandated payments. What they do get is massive sponsorship money; about half of the league has betting companies on their jerseys and of course you see it all around the fields. There are mandated payments to the leagues in France and the legal betting market there has been unable to compete with offshore operators and is basically a non-factor. Mandated payments are not unprecedented, but it’s a model that has proven to be problematic. The other country that the leagues cite is Australia, which is another very challenged sports betting market.”
William Hill’s operation has thrived in Nevada, where sports betting revenue has grown substantially over the last five years, from $202 million in 2013 to $248 million in 2017. “That’s because of the proliferation of mobile and more in-play betting and just the growing popularity of sports betting,” Asher said. “Mobile just makes it that much easier for customers to access your product. In-play is the big change. We’ve got people who bet $1,000 an inning on whether a run will be scored. You’re able to take a three-hour baseball game and make it a 20-minute game. It has been incremental revenue.”
Singleton also points to the UK as an example of how U.S. brick-and-mortar operators might approach sports betting. “It’s the largest regulated sports betting market in the world and we are the number one player there,” he said. “We are delivering those products and services to our U.S. customers. They will be able to operate their sportsbooks in land-based casinos, digital environments or even through a lottery-driven market using OpenBet. We’re already integrated with tribal, casino and lottery operators through gaming and lottery divisions. When you combine all of these product offerings into a single, integrated solution, operators can have a seamless solution across digital and land-based operations. This is what we do in New Jersey for iGaming and it is a formidable solution.”
AN INDUSTRY CONVERSATION
Sports betting was of course a hot topic at last month’s National Indian Gaming Association (NIGA) show in Las Vegas. What follows are some highlights from a panel discussion that was led by Brian Wyman, principal, The Innovation Group:
Michael Grodsky, director of marketing, William Hill Race & Sports Book: A sports book is more than just buying an odds feed, putting some TV’s on the wall and buying an NFL or premium cable package. It’s about getting the optimal time, having the product offerings right, making sure you’re offering the right sports, a bit of player management, risk operations and liability management, and different marketing offers.
Sports betting typically is a lower margin product than anything else offered in the casino. In Nevada in 2017, sports betting held only 5.1 percent. Out of $4.8 billion in handle, $249 million was won. Partnerships are structured based on what works best for the property partner.
It could look like a smaller revenue number for your property, but look at the ancillary benefits. You’re bringing in a new audience that typically wouldn’t come to your property all the time, and they might be bringing in other people who will come in and game. It definitely spills over to food-and-beverage revenue, we see that time and time again, and to slots and tables as well. It’s a great amenity to have in your property.
Joe Brennan Jr., CEO, Sport Analytics & Data (SportAD): One of the things we’re seeing in New Jersey, where we have spent a lot of time, is that one of the key questions that you’re going to have to ask about sports betting is what does it mean to your core business? If there’s a lesson to be learned from New Jersey’s iGaming market it is how you go from legalizing it to improving your core business. You have to be insistent with your partners that you want that piece to be formalized. It’s not enough to say this new form of gaming will bring in new customers and that will carry over; you have to be rigorous. That’s something that has not been handled well in New Jersey with iGaming. It has been a pretty good revenue stream, but nobody has done a particularly good job at bringing the online players they have acquired and turning them into a core customer.
So be more demanding of potential partners when they approach you. With sports betting, there isn’t a product or content category that crosses more demographics than sports, which is why everyone on The Strip has a sports book. There isn’t an empty room during the Super Bowl or the NCAA tournament.
Charles Cohen, vice president of North American sports betting, IGT: Sports betting is actually an incredibly complicated and difficult business to run. If you think about how complicated it is to run a slot floor or a bingo room, multiply that by 10. That’s the same reason why it is appealing to plyers: it’s about things that are happening outside the casino. Unlike a slot tournament, a sporting event is going to happen at a specific time whether you like it or not. Think about going into this with your eyes wide open, and you can do it multiple ways. If you do it right, it absolutely is the most tremendous opportunity that there will be in gaming in this country in the next 10 years.
Conrad Granito, general manager, Muckleshoot Casino: Bottom line, sports betting doesn’t offer big numbers, it clearly is about what it brings as an experience to your property. This is pure risk; it’s not a slot machine or a table game that will hold X amount. The hold on the Super Bowl was 1.67 percent; that’s all the entire city of Las Vegas got. It has swings more than any other game you have on your floor.
The challenge for Indian Country in the event of a Supreme Court repeal means the issue goes back to the states, which means tribes have to go back to their compacts. This will be Class III gaming, unless you can structure something under Class II; under IGRA, it is defined as “everything else.” Sports betting by its own nature is “everything else,” it follows more of an OTB line. If you have off-track betting in your operations it follows similar operational lines. The challenge will be what your current compact allows and if a negotiation is necessary. I was actively involved in negotiating for five of the compacts in New Mexico. That’s one state where you might not need a renegotiation because the definition of gaming is so broad. Basically is provides for whatever is allowed in Nevada.
Product mix and mobile…
Brennan: The diversity of the product offering is really key. Everybody read about the Super Bowl, but rounding out the narrative was most of the shops in town were taking close to 50 percent of their handle in derivative or proposition bets. “Tom Brady is going to have plus or minus three touchdown passes,” or, “It’s going to be heads or tails on the coin flip.” Which are more entertainment-oriented.
We’re the only legal, real-money sports product in New Jersey (Sport AD is a fantasy sports book operator). What we’ve found is our players are probably more like your casino high roller players. We have players that will bet $1,000 or $2,000 on parlay product; we had one cash in for $25,000. They will play just about every dollar back in because they like the game. We’re net positive against all of our high roller players. You aren’t setting yourself up to be robbed by sharks. In our experience, we find the players to be tremendously loyal. They like playing their wins back into the game.
Cohen: The great thing about mobile is that it increases velocity, so people can place more wagers. That helps the operator because volume smooths out the ups-and-downs of payouts. Instead of a player only being able to make one or maybe two wagers on a game, i.e., when it starts and at halftime, now they can make 20 or 30. The wagers are settled within minutes, they go straight into an account and they can re-wager. Technology exists that allows you to operate the mobile device only within the premises. Also, you can have kiosks and screens. Giving customers the convenience to wager more often on more things, even if it’s just within the property, could transform the potential of this…
Grodsky: In Nevada, we’ve had the mobile app since 2012. It’s now 58 percent of our business, that’s up from 13 percent in 2013. The exciting thing that we’ve seen is that it has not cannibalized our retail sports betting. A lot of it is complimentary to a product called In-Play Wagering. Right now, a baseball game could be a three-hour game. One of our most popular bets is a yes/no proposition, “Will there be a run in the first inning?” What that does is consolidate a three-hour event into a 20-minute game. When you’re in the casino and you want to enjoy the amenity and watching at the sports bar or the hotel and you want to get a wager in, the mobile app is perfect for that because the lines change is so dynamic.
Currently in Nevada, if you want to sign up for a mobile app, you have to come into a physical location where your ID is verified. There’s no remote registration so you can’t sign up from your house. Those are decisions that new jurisdictions are going to have to make; whether they want remote registration or in-property.
What the market could look like…
Granito: We have had some discussions about sports betting in the state of Washington. We would have to change state law to allow for us to have that. I have spoken with other tribes in other jurisdictions and they are of course consulting with their attorneys and looking at their compacts, particularly in states that are looking at passing sports betting legislation; at that point it’s a negotiation or would open the door immediately depending on the verbiage of their compact.
Mobile will make a huge difference for tribes. They’re also wrestling with whether to bring in a partner, do it themselves or lease out the space like a restaurant. It’s not going to bring in huge dollars, but it enhances the whole flavor of what’s in your casino. Sports betting on those big days will be no different than Triple Crown races when you have an OTB; it’s a lot different than a Tuesday afternoon betting on dogs.
Strategic planning/first steps…
Cohen: I would suggest that the first phase is to look at your business and decide whether sports betting could fit into your overall business strategy and then talk to suppliers. There are two routes: give up a portion of your floor to an entity like William Hill who could come in and run the whole thing for you; or you could partner with somebody and run more of it yourself so you could control more of the experience. That’s a very big operational decision.
You also need to get with your regulators to make sure that any regulations that do get passed are regulations that can work for you. It’s not just whether you can use a mobile device or not, but are there going to be restrictions on what you can bet on. If amateur athletics are restricted there’s a huge part of the market gone right there. If you can’t do live betting, or you can’t have a parlay with more than five items in it, you’re not going to make any money. Having a commercially realistic set of regulations is a requirement.
Brennan: If you are going to offer sports betting, what’s your aspiration for it? Are you looking at a big Vegas-style sports book or, if you’re space-constrained, are you looking at more of a convenience where you’re offering a few kiosks and a customer-service person? And then start to look at regulations before you decide on a partnership or not.
Integrity of operations…
Grodsky: Our regulatory department is such a critical part of our operation. When we’re talking about KYC, we’re talking about what we can do with respect to responsible gaming. During the Super Bowl, we got a lot of press because over the course of the week leading up to the game we took four seven-figure bets from different customers and we had to do our due diligence on each of them. But we do that for all of our customers.
When you register for a mobile gaming account in Nevada, you present a Social Security number. If you’re someone we don’t want to do business with we don’t do business with you. We’re very important in the state of Nevada, because no one customer is too important for us. Within our mobile app we are able to set deposit limits; customers can enroll in self-exclusion programs; there are tome-out periods. Customers can decline to receive marketing from us.
Cohen: It is actually probably harder to bet fraudulently or engage in collusion at a sports book desk than it is at a craps table.
Granito: Tribes would like to see some form of exclusivity as we do in our tribal operation. And you don’t want to have regulations that are so oppressive that you’re not operating a viable business. In any state where tribes are involved, you’re going to have non-tribal interests that are going to want to be involved. Uniquely in Washington, there is only one licensed race track but it is owned by the Muckleshoot tribe.
One of the questions that I keep asking is where the lottery in these discussions? They haven’t been anywhere. And I ask that because in the UK, the accessibility of sports betting is why it has worked very well. What if the lottery comes in and says, “We’re now going to offer a sports book at every single lottery terminal tomorrow.” It’s an interesting thought because they already have the infrastructure.
Cohen: Those discussions are happening. It will be up to casinos to create a really great experience.
The upside of sports betting…
Grodsky: We’re in 108 locations in Nevada and some of them didn’t have a sports book previously. It creates energy on the gaming floor and it brings people in. You talk about a Wednesday or Thursday in the middle of March leading up to March Madness where you’re hotel occupancy might not have been 100 percent before… if you get sports betting and you have a hotel, you’re going to have 100 percent occupancy because people are going to want to be there. Casinos already do such a great job with special evets; how many more can you sprinkle into your calendar with sports betting? We have the Kentucky Derby coming up and then the World Cup, which gives you the chance to talk to customers you don’t traditionally talk to that time of the year. A big fight on Cinco de Mayo weekend... there’s always something going on.