It has been only a few weeks since the U.S. Supreme Court struck down the federal sports betting ban, but so much has happened it seems much longer.
The ink on the decision was barely dry when companies and jurisdictions already began taking advantage of their new freedom:
- Churchill Downs signed a deal with SB Tech to provide online sports betting in New Jersey.
- Stockholm-listed Kambi signed on to provide its sports betting platform to Rush Street Gaming.
- Paddy Power Betfair agreed to buy daily fantasy sports operator FanDuel, getting its 7 million sports-oriented customers.
- William Hill signed to operate the sports book at Ocean Resort, the former Revel casino in Atlantic City, due to open on June 28.
- Delaware became the first state to open full sports betting since the court ruling.
- New Jersey, as of this writing, had enacted legislation and was just the governor’s signature away from launching.
And these were just the major actions. Numerous other companies made moves to position themselves to join the party or made announcements of their intentions to do so.
So, aside from the excitement, how much potential is there for sports betting and what does it mean to investors?
A lot depends on whether sports betting can be allowed online under the 1961 Wire Act, and whether interstate pools will be allowed.
A lot also depends on how many states legalize sports betting and the tax rates they impose.
On the conservative side, states that allow just sports betting in casinos might find there is more excitement for players than profit for casinos.
Consider Delaware. Sports books are limited to the state’s three casinos. Assuming they generate the same 2.6 percent of all gaming revenue as in Nevada, a company like Dover Downs would generate sports betting revenues of under $4 million, compared to its overall gaming revenues of $152 million last year. Then the state and horsemen take their cuts, leaving the company with under $2 million.
That is fresh revenue, and the casino hopes to attract players who will spend money elsewhere in the property too, but it isn’t a game-changer.
Then there are taxes. If Pennsylvania follows through on a tax rate of 34 percent (plus 2 percent for host fees), it might find few takers for operating a business with revenue margins around 5 percent. Further, the tax rate could put licensed sports books at such a disadvantage to illegal books that the black-market operators just cruise along as before.
State lotteries also want to participate. Missouri Lottery Director May Scheve Reardon points out that there are only 13 casinos in her state to take sports bets but 5,000 lottery agents, and she cites a study that the state could generate many times more revenue by allowing the lottery to participate in sports betting.
On the other side, if sports betting is allowed online, potential revenues can be tremendous. But that depends on the interpretation of the Wire Act, which prohibits sports betting over telephone lines, and by extension, the internet.
Clearly, the Wire Act prevents interstate sports betting, but what about intrastate? Some legal scholars point out that the Wire Act makes no distinction and simply bars betting over phone lines. But Nevada has allowed digital sports betting within its borders without opposition from the federal government.
But even if online sports betting is allowed, the potential is limited in a nation of 50 states, many of which are too small in population to support a robust industry and a number of which will not legalize sports betting.
Then there is the question for investors of picking the winners.
Suppliers such as Scientific Games and IGT will support sports betting operations. Small European companies such as GAN and Kambi can find even a balkanized American market to be a needle mover. William Hill clearly has the model of operating sports books for casinos. Big regional casino operators like Caesars Entertainment, Penn National, Boyd Gaming and Eldorado Resorts will be able to offer sports betting in numerous jurisdictions. Churchill Downs and Paddy Power Betfair have account wagering operations that present a ready pool of players, especially if sports betting is allowed online. And there are others.
In addition, numerous privately owned companies will influence the market, such as odds-setter DonBest and sports information provider Sportradar.
In other words, there are so many unanswered questions that it is almost impossible to identify clear winners, or at least winners where additional revenues will be sufficient to move stock prices appreciably.
In this environment, a basket approach may be best for investors: buy a couple of prominent stocks in each segment of the industry; pick a couple platform and technology companies, pick a couple of regional operators, pick a couple experienced sports betting providers.
The theory is that there will be winners and losers in the basket, but in a growing industry, the impact of the winners will outweigh losses from the losers.
