As this article is being written, the U.S. Supreme Court is weighing the constitutionality of the Professional and Amateur Sports Protection Act (PASPA) based on a challenge brought by the state of New Jersey. This has created a flurry of activity among states, sports leagues, professional players’ associations, and service providers that see legal and regulated sports wagering as a gold mine.
Regulating sports wagering is good policy which can provide consumer protections, inherent systematic integrity and tax revenue, while depriving scofflaws a source of revenue. The current debates are being clouded, however, by many misunderstandings and myths that could result in misguided policies.
Myth 1: Sports Wagering, Yes or No
The first and most significant misunderstanding is a belief the debate is over whether to have sports wagering or not. The myth is that government or leagues can determine whether or not sports wagering occurs. The issue isn’t “sports wagering, yes or no;” it is “sports wagering, regulated and operated with integrity, or sports wagering illegal and operated by scofflaws.”
Nevada only accounts for between 1 percent and 5 percent of all sports wagering in the U.S., meaning the vast majority of sports wagering occurs despite current state and federal legal prohibitions.
This myth is dangerous, because if policymakers begin with the wrong premise, the policies that result may have unintended consequences. Policymakers must recognize the nature of the current illegal market and understand the pressures it creates in order to craft policies that support a viable legal, safe and regulated industry.
Myth 2: Sports Wagering is a Gold Mine
Sports wagering is unlike table games, slot machines, lotteries, bingo or parimutuel horse race wagering, in that there is no mathematical probability of profit. The house losing on slots, lotteries, table games, bingo and parimutuel sports is a near mathematical impossibility over time. Unlike other games, sports wagering is gambling in its truest form. It is bookie against bettor, and the house can lose—and often does. It requires skillful risk management and experience to be in a position to earn a profit.
In 2017, Nevada book operators had a house win of about 4.86 percent on standard bets. The federal government imposes an excise tax of .025 percent of all amounts wagered, or “handle,” regardless of win and loss, which can be devastating in a low-profit or loss reporting period. In Nevada, the wagering excise tax cost book operators about 5 percent of last year’s robust win. Additionally, Nevada taxes gaming revenue at 6.75 percent of win, and the net result is an after-tax hold of only about 3.28 percent on standard wagers for Nevada books.
It will be difficult for any operator without a long history of operations and honed sports wagering risk-management skills to exceed the profitability realized by experienced Nevada books. Many recent presentations and publications ignore the slim margins in sports wagering, which may lead to unrealistic expectations. Sports wagering is not a gold mine: It is a difficult, risk-filled way to earn revenue.
Myth 3: Legal Sports Wagering Jeopardizes the Integrity of Sports
All forms of wagering are subject to efforts by the unscrupulous to cheat. This is true for casino games and lotteries just as it is true for sports. Risks to the integrity of sporting events from wagering exists now. Today, that risk is heightened, because most sports wagering is currently conducted illegally.
In a regulated market such as Nevada, the regulatory framework is designed to address the potential of cheating by the bettor or the house. Essentially, regulated markets are efficient: the house is not incentivized to offer a wager where there is the slightest chance of match fixing. The reality is that the bulk of regulated U.S. wagers are placed on sports with reliable governing bodies. Experienced regulated books are able to pick up on anomalous betting patterns that indicate nefarious activity. Because regulated sports book operators base their risk-management strategies on an assumption of integrity, and marketplace-based pricing, they have a vested financial interest in rooting out corruption and legal and regulatory obligations to report such issues. When betting is conducted illegally, such anomalous betting information goes undetected and unreported.
The net result is that illegal sports wagering presents a risk to the integrity of sporting events, where regulated sports wagering presents a countervailing mitigation of such risk.
Myth 4: Running Your Own Sports Book is Just Another Casino Amenity
Sports books require dedicated space, constantly updated technology and unique, scarce and licensable human capital to manage wagering risk. Additionally, regulatory requirements and federal issues that face books are unlike other forms of gaming. Finally, a very close examination of an organization’s risk tolerance should be undertaken and tested before entering into this potentially rewarding but risk-inherent business. If not done right, a sports book can drain an organization’s finances and require inordinate resources to manage.
As the legalization and regulation of sports wagering is being addressed by governments, service providers and stakeholders, it is important to have a realistic understanding of the sports wagering business. Without such an understanding, there is a risk that policies based on misinformed or misunderstood information will be counter-productive to the goals of policymakers.