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Penalty Box for Leagues

The need for legalized sports betting and its complicated enactment.

Penalty Box for Leagues

It’s really immaterial what the U.S. Supreme Court decides about legalizing sports betting this spring. It’s clear that the Professional and Amateur Sports Protection Act (PASPA), passed in 1992, is a complete failure. Rather than prohibit sports betting, it has driven it underground so billions of dollars have been wagered each year with organized crime. That spawns such crimes as money laundering, racketeering, terrorism and even murder.

So it’s only common sense that Congress needs to act, no matter what the Supreme Court decides. Of course, “common sense” and “Congress” rarely go together, so you never know. What is happening now, however, is the attention of states to legalized sports betting if the court decision is positive or Congress acts. And that’s going to be a patchwork of laws that work and other laws that don’t.

So let’s start with the most obvious problem: the business model of sports books.

Legislators are rarely businessmen, so don’t really understand the margins under which sports books operate. Last year in Nevada, which is the only U.S. state with full-blown sports betting, the state’s sports books retained only 5 percent of the wagers—before rent, personnel and other costs. And that was a good year. Nevada pays 0.25 percent of the handle to the federal government (something all U.S. sports books will have to do) and a 6.25 percent gaming tax on the win.

But in Pennsylvania, for example, the law taxes sports betting at the same rate—36 percent—as they do regular casino revenue. That renders sports betting ineffective and profitless. New Jersey will tax it at the current 9.25 percent that is applied to all casino revenue, a reasonable figure that makes sports betting viable.

The thing that will really kill sports betting completely in any state will be the so-called “integrity fee” that is currently being demanded by the National Basketball Association and Major League Baseball. They want 1 percent of the handle (that’s all the bets made!), which will translate into at least 20 percent of the profits of any sports books even before taxes are taken out. Layer that onto a state with a high tax rate, and it effectively kills any opportunity to make money on sports wagering.

The leagues are taking this very seriously but may be somewhat late to the game. Sports betting laws are already on the books in Pennsylvania and New Jersey (not to mention Nevada) without integrity fees, so the leagues are scrambling to catch up. Lobbying in West Virginia failed to produce the integrity fee (there are no professional sports teams located in that state) but may have better luck in Missouri, which hosts two MLB teams.

But “integrity” is the last thing these payments are all about. In fact, by paying these fees, the states would actually damage the leagues’ integrity, because the leagues would have a vested interest in how many bets are made. The more money wagered, the more money the leagues make. So how can you trust any decision that might impact that amount?

For example, if the league suspends a valuable player, it will always be in the back of the gambler’s mind that it’s a manipulation of the betting scheme in favor of one team or another to boost betting revenue. It’s a plain and simple money grab, and it’s anything but transparent.

And let’s not forget about the Wire Act. In states that are going to allow online sports betting, the Wire Act, which was implemented in the early 1960s to prevent organized crime from taking and conveying sports bets by telephone, there can be no interstate compacts like you see with online casinos. You will not be able to share liquidity, so players will have to be within the confines of the state border. While that doesn’t necessarily kill sports betting, it does make it very much less profitable. So to create interstate online sports betting, the Wire Act would have to be repealed or amended.

So you see that a positive ruling by the U.S. Supreme Court or action by Congress won’t create the “silver bullet” that will allow sports betting to spread unchecked across the U.S. It’s going to be a long and complicated process in both technical and legal terms to get sports betting up and running in a large portion of the United States.

Roger Gros is publisher of Global Gaming Business, the industry's leading gaming trade publication, and all its related publications. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its fourth edition. Gros was named "Businessman of the Year" for 1998 by the Greater Atlantic City Chamber of Commerce, and received the Lifetime Achievement Award from the American Gaming Association in 2012.

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